* CLSA says AIA's strong cash generation a stand-out
* Says share offering "not a screaming buy" (Adds details, background)
HONG KONG, Oct 7 (Reuters) - CLSA has recommended that investors participate in AIA Group's initial public offering at the low end of the indicative price range, in the first independent research report from a brokerage not involved in the transaction.
AIA's IPO could raise as much as $20.5 billion, including a rare upsize option, according to a term sheet seen by Reuters. At the top end, AIA will be valued at $30.5 billion. [ID:nLDE69328B].
"It's not a screaming buy," CLSA analyst Patricia Cheng said in a report dated Oct. 6. "We recommend participation at the low end without any overweight."
AIA is offering shares in an indicative range of HK$18.38-19.68 each, which translates into a price to embedded value multiple of 1.23 to 1.32 times for the fiscal year ending November 2010.
Some fund managers who had participated in the road shows said the valuation was appealing.
AIA, which has more than 23 million in-force policies, operates in 15 Asian markets. It has an embedded value of $22 billion and is forecast to earn a pre-tax operating profit of at least $2 billion in fiscal 2010.
Embedded value is a measure commonly used to gauge the value of insurance companies and includes the present value of future profit from long-term insurance contracts.
Cheng said AIA's strong cash generation was a stand-out.
"The solvency position as a result is ahead of rivals. The company enjoys a solvency margin in excess of 300 percent, allowing it to better plan growth ambitions," she said.
AIA's pan-Asian presence and low insurance penetration in many Asian countries are among the key selling points of the offer.
Although AIA is the only foreign life insurer to operate a 100 percent-owned unit in China, its market share in China fell from 1.51 percent in 2004 to about 0.69 percent in the first eight months in 2010, according to China Insurance Regulatory Commission (CIRC) data.
"The appeal of Asia lies in growth, which is what the AIA today seems to lack," Cheng said. "The IPO will establish a new identity, allowing it to explore acquisitions with the potential retreat of global insurers. We do expect a turnaround upside, but its biggest rivals are actually local plays and banks," the report added.
The IPO had gotten off to a good start, according to people familiar with the process, and the deal was fully covered.
Asia-Pacific life insurance premiums are forecast to grow at a compounded annual 12.3 percent between 2009 and 2014, according AIA's IPO prospectus, on top of 13.5 percent growth achieved between 2004-2009.
American International group Inc