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AIA's Strong Debut in Hong Kong Reflects Investor Optimism in Asia

Source: WSJ

Posted on 29 Oct 2010

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Reflecting investor optimism about Asia's economic growth and AIA's strong position in the region's insurance markets, shares of AIA Group Ltd. rose as much as 17.6% on their Hong Kong debut Friday.

AIA, the pan-Asian life unit of American International Group Inc., raised US$17.8 billion from its IPO, after exercising an option to sell an extra 1.17 billion shares on top of the planned 5.86 billion shares. If it exercises an overallotment option to sell an additional 1.05 billion shares, AIA's IPO—already the biggest in Hong Kong—will raise a total of US$20.5 billion for AIG, which needs the money to repay U.S. taxpayers forr a 2008 bailout.

AIA closed at 23.05 Hong Kong dollars, up 17.1% from the IPO price of HK$19.68 and just off the earlier high of HK$23.15. The benchmark Hang Seng Index was down 0.49% at 23,096. Trading volume in AIA's shares totaled HK$49.4 billion, about 36% of the market's total of HK$135.9 billion.

AIA Executive Chairman Mark Tucker declared at the company's listing ceremony that there is no better place to list than Hong Kong, "where we have our oldest and most successful operations." Hong Kong accounted for 25% of its total weighted premium income in the 2009 fiscal year. He added he sees enormous growth opportunities in Asia, and AIA aims to continue to build its business there.

Analysts expressed optimism about AIA's share price, saying the insurer is positioned to benefit from Asia's brisk economic growth. It has leadership positions in six of the 15 markets in the Asia Pacific region and 100% ownership structure in all markets except India.

"AIA has a scale and scope in the Asia Pacific region that its competitors may find difficult to replicate, especially in developed markets," said an Oct. 18 report from Core Pacific-Yamaichi.

AIA should also benefit from its size, analysts said, because that means it is bound to be a component of benchmark indexes.

"As AIA looks set to join the Hang Seng Index and become an index stock, interest in it will continue to be strong, " said Ben Kwong, associate director at KGI Asia. "It's not unreasonable to expect AIA to trade 20% higher than its IPO price, thus matching the valuation of other insurance companies which are trading at more than two times embedded value,"

AIA's IPO price translated to 1.3 times its 2010 embedded value. China Life Insurance Co. Ltd., the country's biggest life insurer by premiums, traded at 2.7 times, according to a report from CLSA on Oct. 6. Embedded value represents the future profits an insurer's existing life-insurance policies are expected to generate.

If AIA exercises its overallotment option and raises US$20.5 billion, its IPO would become the second-largest in the world this year and the third-largest ever, after Agricultural Bank of China Ltd.'s US$22.1 billion dual listing in Hong Kong and Shanghai in July, and Industrial & Commercial Bank of China Ltd.'s US$21.93 billion offering in 2006.

For AIG, the completion of the AIA offering would be a milestone in the U.S. insurer's restructuring. Its record bailout used more than US$120 billion in taxpayer funds.

AIA last week priced its IPO at the top end of the HK$18.38-to-HK$19.68 range, in line with expectations, after the share sale closed two days ahead of schedule due to strong demand from large investors. They were keen to buy into one of the few pan-Asian insurers available for sale. The retail tranche of the IPO was 9.62 times subscribed and the institutional tranche almost eight times subscribed, according to people familiar with the deal.

Earlier in the IPO process, AIA secured commitments for US$1.9 billion from five cornerstone investors, including $1 billion from the Kuwait Investment Authority. The others were property and financial-services firms Guoco Group Ltd. and Hong Leong Group, both controlled by Malaysian tycoon Quek Leng Chan, which committed a total of $420 million; Malaysia's state-owned retirement fund, which committed $200 million; Chow Tai Fook Enterprises Ltd. and New World Development Co., both controlled by Hong Kong tycoon Cheng Yu-tong, which committed total of US$100 million; and Hong Kong conglomerate Wharf (Holdings) Ltd., which committed US$100 million.