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New China Life Insurance has raised $1.9 billion after becoming the first of three companies to successfully price a billion dollar plus IPO this week. It is expected to be followed today by Chow Tai Fook Jewellery and Haitong Securities, which are seeking up to $2.8 billion and $1.7 billion respectively from their Hong Kong listings.
New China Life’s IPO is split between Hong Kong and Shanghai, with close to 70% of the total proceeds raised in Hong Kong. The company overcame a poor 2011 performance by its peers and the fact that investors already have several Hong Kong-listed Chinese life insurers to choose from if they want exposure to the sector and got its IPO across the line, but it did fix the price near the bottom of the range.
The outcome was similar for China Polymetallic Mining and Baoxin Auto Group, which also completed their Hong Kong IPOs yesterday; their deals got done, but were priced at the bottom. All three companies also attracted lacklustre demand from retail investors, as volatile market conditions continued to keep investor confidence in check.
New China Life, which was 15% owned by Zurich Financial Services before the IPO, sold 358.42 million H-shares at HK$28.50 apiece to raise HK$10.21 billion ($1.3 billion) from the Hong Kong portion of the deal. The Shanghai portion comprised 158.54 million shares that were sold at Rmb23.25 each to raise Rmb3.69 billion ($581 million). The prices on the H- and A-share tranches are the same after adjusting for the exchange rate.
The initial price ranges were HK$28.20 to HK$34.33 for the H-share tranche and Rmb23 to Rmb28 for the A-share tranche.
Interest in the deal was supported by quite a cheap valuation but also by the fact that its two closest comparables, China Life Insurance and China Pacific Insurance (CPIC), traded up during the bookbuilding, making New China Life look relatively more attractive.
There was also strong demand for the A-share portion of the deal — one source said the 20% offered to institutional investors was 57 times covered, while the 80% targeted primarily at retail investors was 45 times subscribed. This prompted some of China’s qualified domestic institutional investor (QDII) funds to make use of their right to invest in Hong Kong-listed stocks, which pushed up the demand for the H-share tranche as well, sources say.
Overall, more than 140 institutional investors came into the H-share tranche, including long-only accounts and hedge funds from Asia, Europe and the US, one source said. Excluding the cornerstone tranche, which accounted for $780 million or 60% of the Hong Kong offering, the H-share tranche was multiple times covered. As reported earlier, New China Life had signed up four cornerstone investors: DE Shaw & Co, Great Eastern Holdings, Khazanah Nasional and MBK Partners.
However, the 5% retail tranche was only about 60% subscribed, which means that the size of the retail offering will be reduced to 3%. Some observers have noted that retail investors may have chosen to focus on Chow Tai Fook Jewellery, which is a better known name. Also, the insurance sector is generally not a favourite with retail investors as it is quite difficult to evaluate.
Other investor groups showing modest interest included corporates, private wealth and the Hong Kong tycoons. One source said that only about 20% of the deal will be taken up by retail, corporates and private banks, which are typically viewed as early sellers. Hence, their relative absence could actually help support the stock when it starts trading.
Even without the support of the Hong Kong retail community, New China Life’s IPO will be one of the biggest listings in Hong Kong this year. At the total size of $1.9 billion (including the A-share tranche), it ranks as the third largest after Prada’s $2.5 billion IPO in June and Shanghai Pharmaceutical’s $2.1 billion IPO in May. However, it looks likely to be surpassed by Chow Tai Fook Jewellery later today, since its IPO will raise $2 billion even if it is priced at the bottom of the range.
New China Life’s H-share offering features a 15% greenshoe that could boost the H-share tranche to $1.5 billion and the total deal size to about $2.1 billion.
The IPO price values New China Life at 1.09 times its estimated embedded value for 2012, which compares with about 1.25 times for CPIC, a source said. Embedded value is an estimate of future profits from existing policies plus adjusted net asset value.
Chinese insurers have been hurt by the rough market conditions this year as they tend to invest a large part of their income in the financial markets. And Nomura analysts wrote in a report last week that the prospect of new business growth also remains murky. The bank cited high interest rates and uncertainty about inflation as key reasons for the poor outlook, but added that the cut in China’s reserve requirement ratio in late November may stimulate a recovery in the A-share market.
Indeed, China Life gained 10.1% and CPIC added 5.2% during New China Life’s bookbuilding, which kicked off on November 29. Even including these gains, the two stocks are down 32.9% and 29.1% year-to-date.
New China Life said in the listing prospectus that it expects to benefit from further growth in the country’s insurance market, which is experiencing a series of economic and demographic transformations.
New China Life’s H-shares will start trading in Hong Kong on December 15, with the A-share debut in Shanghai scheduled for a day later on December 16.
CICC, Goldman Sachs and UBS are joint global coordinators for the H-share tranche. The list of bookrunners has changed a few times during the process, but the latest line-up listed in the prospectus comprises the global coordinators plus Bank of America Merrill Lynch, BNP Paribas, China Merchants Securities, Deutsche Bank and HSBC.
The A-share portion is arranged by CICC and UBS.
China Polymetallic Mining
Meanwhile, Chinese lead, zinc and silver miner China Polymetallic has raised HK$1.11 billion ($143 million) from its IPO after fixing the price at the bottom of the range at HK$2.22 per share.
A majority of the transaction went to metals and mining specialists and long-only accounts, including SAIF Partners, which committed $30 million as a cornerstone investor, a source said. SAIF is a private equity fund that focuses on growth companies in Greater China and India.
The overall institutional tranche was likely between 1.5 and two times covered, while the 10% retail tranche was significantly undersubscribed. The final allocation to retail investors will be no more than 3%, the source said.
China Polymetallic sold 500 million new shares, or 25% of the equity capital. The shares were marketed in a range between HK$2.22 and HK$2.54 apiece. The IPO price of HK$2.22 translates into a 2012 price-to-earnings ratio of 4.7 times and a 2013 P/E ratio of 3.4 times.
The company has no direct comparables, but investors compared it to other prominent players in the China commodities sector, such as Zijin Mining, China’s largest gold producer, and China Gold International Resources, a mineral development company. At the final price, China Polymetallic comes at a discount of close to 60% to the mean P/E ratio of these companies, the source said.
Previously the mining company also secured a round of pre-IPO funding from four investors: Deutsche Bank Asset Management, Morgan Stanley Private Equity, Baker Steel and KR Lenders. These investors and SAIF are all subject to a six-month lock-up.
The listing is scheduled for December 14. Citi was the sole global coordinator and a joint bookrunner together with Bocom International and Renaissance Capital.
Baoxin Auto Group
The third company to price a Hong Kong IPO yesterday was Baoxin Auto, a luxury auto dealer specialising in BMWs. As noted, it too fixed the price at the bottom of the range, at HK$8.50, for a total deal size of HK$3.22 billion ($414 million).
According to a source, the institutional tranche was “well covered” by more than 70 accounts and about 60% of the shares were allocated to long-only funds. Specifically, there was good interest from investors who met with the management during the roadshow. The 10% retail tranche was about 70% covered, which means that 93% of the deal was allocated to institutional investors.
China is viewed as a significant growth market for cars, and when it comes to dealerships investors are said to particularly like the luxury car segment as it has better margins than the mass market-focused dealers. Among the other Chinese dealerships listed in Hong Kong, China ZhengTong Auto Services is the only one focusing on the luxury segment, and consequently it was viewed as a key benchmark. Zheng Tong is the second largest BMW dealership in the mainland.
Zheng Tong fell 8.7% during Baoxin’s roadshow and when the latter priced yesterday Zheng Tong was quoted at a 2012 price-to-earnings multiple of 9.3 times. Baoxin priced almost flat to that at 9.2 times next year’s earnings. However, syndicate analysts argue that this is warranted as Baoxin has superior growth and margins compared to Zheng Tong. Its stores are also younger, which supposedly suggests that it has more room to increase its sales capacity and to introduce more after-sales services, which have wider margins.
The company sold 379.32 million shares, of which 87% were new. The deal accounts for 15% of the enlarged share capital and comes with a 15% greenshoe that could increase the total proceeds to as much as $477 million. The shares were offered in a range between HK$8.50 and HK$10.80.
Baoxin is one of the largest BMW dealerships in China but also sells other brands, including Audi, Cadillac, Land Rover & Jaguar, Toyota, Honda, Nissan, Volkswagen and Hyundai.
The trading debut is scheduled for December 14, the same day as China Polymetallic. The IPO was arranged by China Merchants Securities, J.P. Morgan and Morgan Stanley.
