Convertible bonds have become increasingly popular with Chinese companies lately, and Ping An Insurance is the latest company to have announced that it will raise a $3.5 billion in a convertible bond deal.
According to the term sheet and announcement made by the company which you can find the link here, the bond will have a coupon of 0.875% per annum. This is still cheap considering the high interest rate that is prevalent everywhere around the globe. For comparison purpose, Alibaba’s recent announcement of their recent $4.5 billion convertible bond deal pays a coupon of 0.5%, while JD’s recent $1.5 billion convertible bond deal pays a coupon of 0.25%. This is the cost of borrowing to the company.
There is a conversion premium between 25% to 30% above Ping An’s Hongkong listed share price, which is around HK$43.7 per share.
Assuming full conversion of the bonds at the initial conversion price of HK$43.71 per share, the bonds will be convertible into approximately 625,203,614 shares, representing approximately 8.39% of the number of existing issued H Shares and approximately 3.43% of the existing issued share capital of the Company as at the date of this announcement.
According to management, they intend to use the money raised to strengthen its capital position and fund growth in the healthcare and aged sector.
So, if things are good, then why is the market jerking with this announcement?
I believe this follows the same trajectory as both Alibaba and JD that the market is not favorable to the issuance of the convertible bonds as the bonds might be issued at a low price valuation that would be detrimental to the long term’s enterprise value of the company. Not only will dilution will happen, but the convertible bond will continue to remain a sticky problem till maturity date of July 2029.
| No. of Shares | % of Total Issued Shares | No. of Shares | % of Total Issued Shares | |
| Holders of A Shares: | 10,762,657,695 | 59.10% | 10,762,657,695 | 57.14% |
| Holders of H Shares: | 7,447,576,912 | 40.90% | 7,447,576,912 | 39.54% |
| Bondholders: | – | – | 625,203,614 | 3.32% |
| Total Issued Shares: | 18,210,234,607 | 100.00% | 18,835,438,221 | 100.00% |
Personally, I find this a good arbitrage tool for companies like Ping An because it shows that it can tap into the market easily at cheap borrowing costs when the need arises and they can use to strengthen and grow their other parts of the business.
The dilution effect is expected to be small, as per the table above, if and only if the company moves up 30% premium from here. I think that’s a pretty good deal to both bondholders and shareholders.
Given the high cash level and strong cashflow generating ability of Ping An, there should be no concern that the company is over-leveraging on its debt to fund their growth. Convertible bonds, if converted, will become an equity component, so this naturally helps them to “deleverage” should it be exercised and converted in the future.
| Ping An’s Financial Data | |
| Price / Sales (TTM) | 0.84 |
| Price / Sales (FWD) | 0.78 |
| Price / Cashflow (TTM) | 3.41 |
| EV / Sales (TTM) | 3.00 |
| EV / EBITDA (TTM) | 17.38 |
| EV / EBIT (TTM) | 19.08 |
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