【Company Research】China Pacific Insurance (2601 HK) – Potential GDR issuance unlocks global access
- What’s new? Market responded negatively to CPIC’s plan to issue GDR, for fear of potential discount of GDR pricing to its A-share and likely share dilution after 120 days of listing when GDRs are allowed to be converted into A shares. Adding to uncertainty is the resignation of President HE Qing due to work arrangement, who will become Head of Guotai Junan Securities. CPIC’s A/H share price declined 2.7%/4.3%, respectively, on 24 Sep.
- While the above are indeed risk factors, we think investors should not over-react because 1) listing details have not been determined, still waiting for regulatory approval. Offer size and pricing will be contingent on market environment at the time of listing. Moreover, discount to A-shares does not necessarily imply discount to H-shares because of ~30% H-to-A discount; 2) conversion into A shares, or arbitrage is allowed theoretically, but could prove difficult in reality. HTSC’s GDR will not offer a precedent to judge from until Oct, i.e. 120 trading days after its debut on 20 Jun 2019; 3) work arrangement and entrepreneur rotation is quite normal in SOEs. Chairman Kong Qingwei will be in charge temporarily to make smooth transition.
- Potential issuance of GDR implies at least the following catalysts, all boding well for long-term development. 1) To establish global footprint and be acknowledged by global investors. If the issuance of GDR is well accepted by global investors, it will also boost value of the Company’s H-share. 2) To jumpstart and promote internationalization of the Company. 3) To pilot Shanghai’s SOE reform and financial sector opening-up.
- Will also capture opportunities in Shanghai and Yangtze River Delta. Besides a potential GDR listing, we think the Company will also benefit from 1) Shanghai’s deepening opening-up to global investors and enterprises. The City has recently expanded the Pilot Free Trade Zone to embrace the Lingang New Area; and 2) further integration of the Yangtze River Delta. Regional development plans will present business opportunities in pensions, alternative investment and etc. for CPIC, which is headquartered and deeply-rooted in Shanghai and the YTD.
- CPIC as sector top pick. The H-share is now trading at 0.63x FY19E P/EV with ~6% dividend yield. Market overreaction to potential GDR issuance offers good opportunities to accumulate. Maintain BUY and TP at HK$37.12.
