Bankers start pre-marketing New China Life Insurance

New China Life Insurance yesterday started marketing for its dual listing in Hong Kong and Shanghai, with the management getting on the road in China and bankers starting pre-marketing to international institutions. The Chinese insurer aims to raise between $1.5 billion and $2.5 billion through the H-share offering in Hong Kong and as much as $1 billion through an A-share offering in Shanghai, according to sources.

However, given the continued volatility in global equity markets and the large number of IPOs set to fight for investors’ attention in Hong Kong in the coming few weeks, the base deal is expected to be capped towards the low end of the target range. That suggests an H-share offering of about $1.5 billion and an A-share offering of $700 million to $800 million. The company has earlier indicated that the H-share portion will be about twice the size of the A-share portion. The H-share tranche also comes with a 15% greenshoe option, which could skew the issuance even more in favour of international investors. The combined A- and H-share offering is expected to account for about 17% of the issue share capital.

The launch comes as the Hong Kong stock market fell for a fifth straight day yesterday and amid talk that PCCW-backed HKT Trust was struggling to attract enough investors to its Hong Kong IPO. And there was no sign of relief for issuers and bankers who are rushing to push their deals out before year-end as US stocks tumbled overnight after reports that the so called super committee, made up of congressional lawmakers from both parties, was about to fail in its efforts to come up with a proposal of how to cut the US deficit. The Dow Jones index fell as much as 2.9% intraday and finished the session 2.1% lower.

There have been 62 IPOs in Hong Kong so far this year, a decline from 76 during the same period last year, according to Bloomberg data. Eleven deals have been either withdrawn or postponed, which is almost three times as many as this time last year when four deals had been postponed.

Still, companies that want to list before the Christmas holidays no longer have the option to wait for a better window; they pretty much have to start bookbuilding by next week. And as noted earlier, a range of issuers are lining up to try and meet that deadline.

New Chine Life hasn’t set a definitive timetable yet, but sources say the bookbuilding for both the A- and the H-share tranches is expected to start on November 29. The deal is likely to price after the US markets close on December 7 and the listing is currently planned for December 16. As noted, the roadshow for the A-share tranche is already underway and bankers will also start to build a shadow order book for the A-share offering from Wednesday onwards, which will give them a good sense of the A-share demand by the end of this week. The international roadshow will overlap with the bookbuilding for the H-share tranche.

In an effort to overcome the difficult market environment and increase the certainty of execution, New China Life is in the process of securing cornerstone investors for the H-share portion of the deal. According to one source, some have already signed up and the conversation will continue until the printing of the prospectus next week. Depending on the interest, as much as 40% of the H-share offering could be set aside for cornerstones, other sources say.

The size of the retail offering will be determined once the cornerstone tranche has been finalised, but at the moment it is expected that 7.5% of the H-share offering will be earmarked for the Hong Kong public. All shares on offer will be new.

According to sources, Goldman Sachs has been added as a joint global coordinator and bookrunner for the A- and H-share tranches alongside CICC and UBS. Bank of America Merrill Lynch, BNP Paribas, Deutsche Bank, HSBC and J.P. Morgan are joining them as bookrunners for the H-share tranche.

With three other large Chinese life insurance companies already listed in Hong Kong, a key challenge for New China Life will be to convince potential buyers to invest in yet another name. Many believe the company will have to compete mainly on price and say the IPO is likely to come at a significant discount versus its sector peers.

However, one source said the list of big name global investors in New China Life will be a reassuring sign for potential investors. Zurich Financial Services invested in the Chinese life insurer alongside three other international companies in 2001 and currently owns 15%. The fact that New China Life is a private sector company may also make it more interesting for large investors who are looking to get a foothold in the Chinese insurance sector.

New China Life is the third largest life insurance company in China in terms of premiums after China Life Insurance and Ping An Insurance Group. China Life and China Pacific Insurance (CPIC) are viewed as the closest comparables – China Life because it has a similar business mix and CPIC because it is close in size. New China Life generated $13.8 billion of gross written premiums in 2010, which was up from $9.6 billion in 2009, according to data from the China Insurance Regulatory Commission (CIRC) quoted on Zurich Financial’s website. Gross premiums have increased at a compound annual growth rate of 40% in US dollar terms from 2005 to 2010 and the company had an 8.9% share of the Chinese life insurance market last year.

Since insurance companies tend to invest a large portion of their premium income in the financial markets, they have obviously suffered as equity markets have fallen in the past three months. In the past five days alone, China Life has lost 11.6%, Ping An has dropped 16.3% and CPIC is off 13.4% — clearly not the best backdrop for a company looking to raise a couple of billion dollars.

Indeed, in a sign that the IPO of HKT Trust is struggling to line-up external buyers, PCCW announced yesterday that a company wholly-owned by PCCW chairman Richard Li has applied for excess shares through the preferential offering. This suggests that Li is keen to get the deal across the line and will do whatever he can to make sure that happens.

Li’s company, called Eisner Investments, is entitled to apply for 964,200 preferential shares, or about 0.05% of the IPO, but on top of that it has applied for a further 200 million shares, PCCW said. The additional shares account for 9.74% of the IPO and if allocated in full, Li’s investment will amount to about $140 million at the top end of the price range (just like retail investors, applicants to the preferential offering have to pay the maximum price when they submit their orders). Companies linked to Li-controlled Pacific Century Regional Development will buy another 2.7% of the IPO, as per their entitlements under the preferential offering.

The preferential offering accounts for 10% of the IPO to begin with, but if there are a lot of applications for excess shares, it can be increased to as much as 30%. HKT Trust is aiming to raise between $1.2 billion and $1.4 billion. The deal is scheduled to close at the end of US trading today. CICC, Deutsche Bank, Goldman Sachs, HSBC and Standard Chartered are global coordinators and bookrunners for the offering. DBS and J.P. Morgan are joint bookrunners.

Among the other deals in the market, Sitoy Group yesterday kicked off the roadshow for an IPO of between HK$736.3 million and HK$985.9 million ($95 million to $127 million). The Hong Kong-based manufacturer of handbags and other leather goods for luxury brands like Prada, Coach and Tumi is offering 249.6 million shares at HK$2.95 to HK$3.95 apiece with the usual 90-10 split between institutional and retail investors.

The price range translates into calendar 2012 price-to-earnings ratio of 6.9 to 9.2 times, which at the bottom of the range suggests a significant discount versus other original equipment manufacturers like Stella International, a shoe manufacturer that trades at about 9.5 times next year’s earnings.

Prada and venture capital firm IDG have agreed to buy a combined 41.6% of the deal, which seems to have boosted the confidence of other investors too. According to a source, the deal was covered after the first day of marketing. The deal will remain open until November 29 and the listing is scheduled for December 6. Bank of America Merrill Lynch is the sole bookrunner.

Also yesterday, Shanghai Baoxin Auto Sales & Service, a dealership for BMW cars in China, started pre-marketing for a Hong Kong IPO of $500 million to $800 million, according to sources. The plan is to start a formal roadshow next week. J.P. Morgan and Morgan Stanley are joint bookrunners.

Market participants are also keeping an eye on Haitong Securities. The Chinese brokerage, which is already listed in Shanghai, was due to meet with the Hong Kong listing committee yesterday and assuming it gets the approval, it may kick off pre-marketing for a Hong Kong IPO mid-week. Haitong is aiming to raise about $1.5 billion from the listing and will be the second Chinese brokerage to list in Hong Kong after Citic Securities, which raised $1.7 billion in a well-received IPO in October.