IPO Preview: PICC
People's Insurance Company (Group) of China, otherwise known as PICC, is set to hit the market in Hong Kong this month in what could be the largest IPO in Asia (excluding Japan) this year. The deal was initially scheduled for last July as a larger, dual listing in Hong Kong and Shanghai, although the mainland portion of the offer has been discontinued.
The mooted fundraising of up to US$4 billion is daunting. Listings for US$500 million have proven challenging recently; one can only guess how a float this size might fare.
If I were a betting man, though, I'd wager that PICC will get done - but the army of bookrunners will have their work cut out.
Investors may remember how well they did with the float of PICC P&C (a subsidiary 69 per cent owned by PICC), which listed in Hong Kong in 2003. It was the first big mainland insurer to list offshore and came to market after a huge state-led overhaul of the sector.
People viewed the mainland insurance market as high growth, but its profits were overly dependent on the mainland % equities market and also undermined by products with guaranteed rates of return - and were therefore erratic.
Long story short, PICC P&C was a hit. Its share price is up 5.7 times since listing, and it also paved the way for other successful Hong Kong offerings of mainland insurance stocks, such as Ping An and China Life. Investors took a chance on this stock and it paid off.
Certainly, the growth story still rings true.
In 2010, China's insurance market pulled in about US$215 billion in premiums, up almost a third compared with 2009, and recorded some US$780 billion in assets under management. Observers believe that China's insurance market will be the world's third largest by 2015.
Importantly, at under 4 per cent, insurance penetration in China is about half to one third that seen in markets such as Japan, France or Britain, providing plenty of upside in the years to come.
PICC has scale, too, with 120 million individual and 2.5 million corporate customers.
With a market share of 36.3 per cent, it ranks as China's No 1 property and casualty insurer, and as the No 5 life insurer.
PICC is an early entrant (having been established as far back as 1949) in a growing market, and controls a significant slice of the insurance pie in China (especially in the non-life sector). It has diversified revenue sources and a nationwide network. Other investment highlights include an asset management platform that looks after investments of almost US$50 billion, and a brand that's widely recognised.
Growth is also quite healthy, net earned premiums having increased at almost 21 per cent per annum, and net profit at more than 112 per cent, both over the past three years.
Stocks of Hong Kong-listed insurers China Life, Ping An, and especially AIA, have done well this year, too. But New China Life, which floated in a US$1.3 billion Hong Kong IPO that also included US$780 million pledged by cornerstone accounts last December, is still trading more than 8 per cent below its offer price. This could temper enthusiasm.
The market is screaming for a large, liquid deal to give it some much needed impetus.
But to achieve this, the offer will need to be fully covered soon after launch. This implies a strong list of cornerstone investors, marketing to which has been going on for months, with mixed results - at least over the previous quarter.
PICC needs to offer value. This will be measured in part with reference to its price-to-embedded value (a methodology used to value life insurance companies). But if the price is right (cheap), this could perhaps be the smoking hot offering investors have been craving for.
Philippe Espinasse, a former investment banker, is the author of IPO: A Global Guide (HKU Press)