AIA gains 17.1% on day one, greenshoe exercised

In light of the offering price and the massive demand for the initial public offering, AIA Group’s 17.1% gain on the first day of trading was perhaps not a huge surprise, but still noteworthy for a listing of this size. And the bookrunners were so confident that the gains will be sustainable that they decided to exercise the greenshoe in full after the close.

This means the deal size was increased to $20.5 billion, making the pan-Asia life insurer the third largest IPO in the world ever, behind Agricultural Bank of China and Industrial and Commercial Bank of China, which raised $22.1 billion and $21.9 billion respectively. The deal had already claimed the records as the largest insurance sector IPO, the largest Hong Kong listing and the largest listing on a single exchange – both ABC and ICBC listed part of their shares in Shanghai, leaving the Hong Kong portion of their offerings at $12 billion and $16 billion respectively.

AIA opened at HK$22, which was already 11.8% above the IPO price of HK$19.68. This led to some profit-taking from hedge funds and retail investors, but as the buy orders from traditional asset managers who wished to top up their allocations outweighed that selling, the price continued to edge higher throughout the morning session. And once the selling abated and some investors realised that the price was moving away from them, there was a flurry of renewed buying just before the lunch break, pushing the share price to around HK$23.

Sales people said the buying came from a broad range of institutional investors, including some hedge funds, although most were long-only accounts that had been scaled back in the IPO. Many of them may have had to buy to meet internal requirements for the minimum percentage that they need to own of a stock once they include it in their portfolio. The joint global coordinators were all active in the market on Friday, according to reported trading volumes tracked by Bloomberg, with Deutsche Bank handling the most volume followed by Citi, Goldman Sachs and Morgan Stanley.

There also appeared to be some rotation from other Hong Kong listed insurance companies into AIA, as China Life Insurance fell 3% and Ping An Insurance (Group) lost 2.5%. A key reason for that would have been AIA’s cheaper pricing and expectations that the valuation gap between it and the Chinese insurers was bound to shrink. 

A key reason for the continuing interest, sources say, is that many investors regard AIA as a core holding in their Asian portfolios. For one, its large size means it will go into several key indexes, which makes it almost a “must own” for fund managers who are benchmarking against those indexes. But it will also provide liquid exposure to the Asia growth story across markets, which is a rarity – at least on this scale. While it may have lost market share in mature markets like Hong Kong and Singapore in recent years, it still has a dominating position in six of the 15 Asian markets that it operates in. Investors are also banking on new CEO Mark Tucker to be able to shake off the shadow of the troubled parent company and achieve faster growth again.

The exercise of the greenshoe means that the free-float will increase to 67.1%, which suggests there should be sufficient trading in the stock, even if many investors will buy and hold and $1.92 billion of the shares are tied up with five cornerstone investors for six months. All the shares were sold by parent company American International Group, which is raising money to repay the US government for the $182.3 billion bailout it received in 2008. AIG is expected to sell its remaining 32.9% stake once the lockups expire. It can sell 50% of the shares after 12 months and the rest after 18 months.

The trading volume in the stock on Friday was extremely high at about $6.4 billion, or 27.4% of the 8.083 billion shares allocated in the IPO (including the shoe), and helped pushed the total turnover on the Hong Kong exchange to $17.5 billion – the second largest daily turnover year-to-date.

Most of the trading in the AIA name, or nearly 70% of the total volume, happened in the morning session but while the activity eased off, the support for the stock remained firm and the share price didn’t budge much from the levels reached in the morning. It then made another push higher into the close reaching its intraday high of HK$23.15 in the final minute before the bell. The closing price was set at HK$23.05.

The gains were even more impressive since the broader Hong Kong market fell 0.5%. The HSI had also dropped 1.9% between the pricing of the AIA IPO in the early morning of October 22 and the trading debut.

The gains pushed AIA’s valuation to 1.54 times its 2011 embedded value, based on the joint bookrunner consensus, which is in line with what most analysts regarded as fair value in their pre-deal research reports. Since the IPO price, while fixed at the top of the range, was set at just 1.32 times the embedded value, observers had expected the share price to edge towards the perceived fair value and several sources said on Friday that there is no reason to believe it will go back to the IPO price again. A source at one bank estimated that the volume in AIA that went through their sales desk on Friday was five to 10 times skewed towards the buy-side.

Prior to the trading debut, AIG had sold 5.857 billion AIA shares, or 48.6% of the company, as part of the base offering and another 1.17 billion shares through a 20% upsize option that was exercised in full, resulting in a free-float of 58.4% on day one. The shares were priced at the top of the HK$18.38 to HK$19.68 price range for a total market value of $30.5 billion. After the first day, that has now increased to about $35.7 billion.

In addition to the four global coordinators, Bank of America Merrill Lynch, Barclays Capital, CIMB, Credit Suisse, ICBC International, J.P. Morgan and UBS participated were involved in the deal as joint bookrunners.