There's More Upside for China's PICC – Here Is Why

Hong Kong Stock Exchange
Mike Clarke | AFP | Getty Images
Hong Kong Stock Exchange

Shares in Chinese state-owned insurer the PICC Group rose almost 7 percent on its debut in Hong Kong on Friday, the biggest initial public offering (IPO) in the city for two years, and analysts said the stock has further to climb given expectations for strong growth in China's insurance sector.

Some analysts said they were disappointed with the 3.2 percent initial gains in the stock price, which often provides a gauge of investor appetite for new shares.

Still, they added that the long-term growth prospects for the industry bode well for PICC's stock.

"I am quite bullish on the stock over the middle to longer term," said Dickie Wong, executive director of Kingston Securities in Hong Kong. "If you want to participate in the growth story of the life insurance business in China, then you have to buy (the stock). I think it can gain 10 to 15 percent within the month."

PICC Group opened 3.2 percent higher on Friday from its IPO price of HK$3.48 ($0.449) per share, and that disappointed some analysts, including Wong, who had expected initial gains of between 5 and 10 percent.

But the stock continued rising and closed the day up almost 7 percent while the benchmark Hang Seng Index was down 0.3 percent.

PICC's closely-watched $3.1 billion IPO is the biggest offering in Hong Kong since the $20.5 billion listing of AIA Group in October 2010 and the biggest mainland listing since the Agricultural Bank of China's $22.1 billion deal, also in 2010.

The PICC Group had hired a record number of underwriters and secured $1.82 billion in commitments from 17 cornerstone investors including insurance giant American International Group and state-owned Zijin Mining. Meanwhile, the retail tranche of the offering was more than 17 times oversubscribed.

Observers had said PICC's IPO would be a test of appetite for big new listings as sentiment in stock markets remains cautious and subdued. Upcoming IPOs are also small, with a $200 million listing by natural gas producer China's AAG Energy, a $300 million IPO by private Chinese engineering company Wison Group and a $150 million listing from Canadian thermal and coking coal miner Century Energy.

(Read more: Is IPO Fever Returning to the Hong Kong Market?)

According to Scott Russell, head of insurance research, Macquarie Securities in Hong Kong, PICC's stock should do well over the longer term because the insurance sector will grow at double-digit rates for the next 10 to 20 years.

"The simple statistic is that with such low penetration the protection gap in China is getting wider. And the property and casualty (insurance) industry continues to grow currently at double digits," Russell said. "Year to date, the top-line growth is 15 percent and that's something that it will continue for the next 10 years. That's what we are forecasting."

However, Philippe Espinasse, author of 'IPO: A Global Guide' and a former investment banker, advises investors to be cautious about the stock.

"PICC's IPO debut is encouraging, although one needs to bear in mind the rather subdued response from international institutions to the deal, and also the lineup of the cornerstone investor tranche, which took some two-thirds of the institutional offer," he said. "These were by and large insurance companies, Chinese state-owned enterprises, and a couple of Chinese hedge funds."

He said despite good demand from retail investors, the success of the IPO will ultimately be judged over the longer term.

Jackson Wong, vice president of Tanrich Securities thinks PICC stock is a long-term play.

"If investors can hold on, it will have the potential to gain up to 15 percent over the next few months," he said. "It is a longer term play."