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China Life seen pricing at the top
Chinese life insurer set to make biggest debut this year
By Allen Wan, CBS.MarketWatch.com
Last Update: 10:14 AM ET Dec. 11, 2003
TOKYO (CBS.MW) - China Life Insurance's blockbuster $3 billion initial public offering is expected to price at the very top of its range later on Thursday in Hong Kong, analysts say.
China's biggest life insurance company has already seen incredible demand from both institutional and retail investors - enough so that it will easily become the largest global IPO this year.
China Life's IPO is also coming in the heels of strong debuts for Chinese companies that recently listed in the Hong Kong and U.S. stock markets. It'll be the second biggest Chinese IPO ever after China Unicom's (CHU: news, chart, profile) massive $5.25 billion debut back in June 2000.
China Life, which set a range of HK$2.98 to HK$3.65 a share for the sale of a quarter of its stock, has reportedly attracted enough interest from institutional buyers to cover its order book by nearly ten times.
"Will it price at the top of its range? Of course," said Ben Kwong, director at Hong Kong's KGI Asia.
Already, Hong Kong's three wealthiest tycoons, including property giant Cheung Kong's (CHEUY: news, chart, profile) Li Ka-shing, have snapped up $500 million worth, or 18 percent of the H shares on offer, through their listed vehicles in a show of faith that will all but guarantee a successful market debut for the company.
Another 2.6 million applications have been distributed to Hong Kong's retail investors -- or an application for every two to three residents -- in a bid to stave off the near riots that ensued following heavy demand for another upcoming Chinese IPO - Great Wall Automotive. Chances are that many individual investors will come up empty handed as only 20 percent of the offering of 324 million H shares will be slotted for them.
"China Life should garner a premium valuation in light of its expected growth rate, and investor sentiment toward China is strong," added Renaissance Capital. Read why China Life is their IPO of the week.
China Life will begin trading in New York on Dec. 17 and in Hong Kong the following day.
The U.S. portion will price in a range of $15.35 to $18.80 as part of the offering of 161.8 million American Depositary shares.
The global offering of 6.47 billion shares is being managed by Citigroup (C: news, chart, profile), China International Capital, Credit Suisse First Boston (CSR: news, chart, profile) and Deutsche Bank (DB: news, chart, profile).Read IPO report.
Bonnie Lai, analyst at Hong Kong's Core Pacific-Yamaichi, thinks China Life (LFC: news, chart, profile) (HK:2628: news, chart, profile) also deserves a higher valuation due to its strong growth potential in the Chinese life insurance industry.
"Given the enormous growth potential of China's life insurance market, which is still at an early stage of development, we believe China Life should trade at a higher premium to life insurance companies with heavy exposure to mature markets," she told clients.
For instance, Chinese life insurance premiums have grown sharply over last few years, soaring to 227.5 billion yuan in 2002 from 87.2 billion yuan in 1999, according to the China Insurance Regulatory Commission. As of 2002, life insurance premiums accounted for 75 percent of all insurance premiums.
Lai said fair value for the stock would be between HK$3.72 and HK$5.54. Her own target price is HK$4.93 -- equivalent to a price-earnings ratio of 25.5 times fiscal 2003 earnings.
China Life's offering is important for several reasons. It's the biggest IPO this year globally after British company Yell's $1.9 billion offering and a successful debut could pave the way for other Chinese insurance companies to quickly follow suit in going public, including Ping An Insurance and People's Insurance Co. of China.
The hardest part is figuring out what this company is about. It has cornered the market for life insurance in China with a near 50 percent share but is also opaque like many state-owned Chinese companies.
It could also face problems with future payouts after agreeing to honor older policies from its parent that guaranteed overly rosy rates of return even in the face of declining interest rates.
Benny Wong, analyst at PrimAsia in Hong Kong, said that the problems arose back in the early 1990s when the Chinese insurers offered high guaranteed returns to entice customers. Rates have since fallen dramatically in China and the insurers haven't been allowed to invest overseas to reap higher returns.
Still, Wong sees several positive factors driving growth for China Life: a rising Chinese middle class; social welfare reform as responsibility shifts from the government to the private sector; more flexibility for insurers to design their own insurance products as they set their own prices; and the fact that insurers offer better returns than banks.
He said in a note that the opening of the Chinese insurance sector from Dec. 2004 as part of China's accession into the World Trade Organization won't hurt the local insurers too much as there are still barriers to entry. Foreign firms must still seek local partners in order to operate and they are the ones with the wide distribution networks.
China Life's American debut ought to do just as well given the incredible interest in companies coming out of the mainland. Shares of Shanghai-based travel Web site Ctrip (CTRP: news, chart, profile) jumped 90 percent in its stock market debut on Tuesday. See full story.
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