Investor education underway for PICC, but who’s leading it?

Bankers yesterday kicked off the investor education for the highly awaited IPO of state-owned Chinese insurance company PICC Group.

The company, which is actually called The People’s Insurance Company (Group) of China, is aiming to raise somewhere between $3 billion and $4 billion, which will make it the largest listing in Hong Kong this year. It could even be the largest in Asia if it exceeds the $3.3 billion raised by palm oil, rubber and sugar producer Felda Global Ventures in Malaysia. Hence it will help to improve the numbers for what has otherwise been a pretty dismal year for IPOs, particularly in Hong Kong.

However, the enthusiasm for the offering is somewhat dented by the fact that the banks working on the transaction still don’t know what role they will have on the deal. In late May, PICC named a list of 17 banks and let it be known that it would mandate global coordinators and bookrunners based on how much demand they were able to bring in from cornerstone investors.

Six months later, sources say the company is close to signing agreements with a number of cornerstones that may take up about $1.5 billion worth of shares. But even though the investor education has now started and the management roadshow is scheduled to kick off in less than a week (on November 22), the line-up of the banks is still not clear.

This means that the banks are now approaching investors trying to market the company and the deal without being able to say with any certainty what their role in the deal will be. And investors don’t know whether the bankers they talk to now will eventually be involved with building the book. With 17 banks working on the deal, the process also becomes highly inefficient.

Another key problem is that no bank seems to have the full picture of what is going on and that means it is difficult for the banks to take full responsibility for the transaction at this point. PICC has mandated four sponsors, which was necessary in order to file the listing application, but it has yet to appoint any global coordinators or bookrunners, which will be the ones actually running the transaction.

The sponsors are CICC, Credit Suisse, HSBC and Goldman Sachs. The first three have been working on the deal for a long time as advisers to the company and were also involved in drafting the prospectus. These four are expected to be named global coordinators, but haven’t yet received a formal mandate from PICC. In addition to them, Deutsche Bank is also believed to be close to getting a key role, but again, nothing is official.

PICC isn’t the first Chinese company to dish out mandates late. Agricultural Bank of China also didn’t name the global coordinators until the investor education was already under way, but it had at least drawn up the list of bookrunners in advance. Given the unruliness of having 17 banks on a deal, it is widely believed that some of the banks that were named in May will not end up as bookrunners, but will be given other roles, such as lead managers.

Insurance company IPOs tend to be fairly complex, given the amount of assumptions that goes into calculating the embedded value and the difficulty in forecasting the amount of new business — two key measures for valuing insurance companies. But the listing of PICC is likely to be a lot more straight forward.

The reason is that the company owns about 69% of PICC Property & Casualty (PICC P&C), which is already listed in Hong Kong and therefore well known by investors following the sector. In the first half of this year, PICC P&C accounted for 84% of PICC’s net profit, according to a source, while 12% came from the life and health business and the remaining 4% from asset management and some other small financial businesses.

This means that investors will look at PICC more as a relative value play and will most likely want the price of the group to value PICC P&C at some kind of discount. Otherwise they may as well buy that company directly.

PICC P&C is the dominating non-life insurer in China with a 35% market share, based on premiums. However, looking ahead, the key growth is expected to come from the life insurance business, which was set up as recently as 2005, but has already captured a market share of 7.4%, according to one research report citing data up until the end of September.

This business is expected to have huge growth potential as the entire life insurance market in China continues to expand and as it starts to focus more on multi-premium products, which have higher margins. It is also expected to shift more towards agency selling from today’s bank assurance model and should continue to benefit from increased cross-selling with PICC P&C, which has 74.5 million individual and institutional customers.

PICC will be selling 16.7% of the company through the Hong Kong IPO in the form of approximately 6.90 billion new shares. There will also be a 15% greenshoe.

Five percent of the deal will be set aside for Hong Kong retail investors, while the remaining 95% will be offered to institutional accounts. However, there will also be a public offering without listing to Japanese retail investors, which will come out of the institutional tranche. The retail portion of the deal could increase to 20% in case of strong demand.

The other international banks that are working on the IPO are Bank of America Merrill Lynch, Citi, Daiwa, J.P. Morgan, Macquarie, Morgan Stanley and UBS. They are joined by the international arms of a number of Chinese banks, namely ABC International, BOC International, CCB International, Haitong International and ICBC International.