Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Equity Bottom-Up

On the 25 October 2013, <a href="https://www.smartkarma.com/entities/chong-hing-bank-ltd" target="_blank" data-smartkarma-citation="entities:344:1" rel="noopener">Chong Hing Bank (1111 HK)</a> ("CHB") <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2013/1025/ltn20131025786.pdf" target="_blank" rel="noopener">announced</a> an agreement with Yue Xiu (the investment arm of the Guangzhou municipal government) to acquire a maximum of 75% of the bank for a consideration of HK$11.5bn (HK$35.7/share, a 2.1x P/B).  The deal was subject to approval from the HKMA. It was Yue Xiu's intention to maintain the bank's listing.
That Offer was widely seen as supportive for the remaining family-owned banks in Hong Kong such as <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia (23 HK)</a>, <a href="https://www.smartkarma.com/entities/dah-sing-banking-group-ltd" target="_blank" data-smartkarma-citation="entities:342:1" rel="noopener">Dah Sing Banking (2356 HK)</a>, and Wing Hang Bank, the latter of which was taken out by <a href="https://www.smartkarma.com/entities/oversea-chinese-banking-corp" target="_blank" data-smartkarma-citation="entities:114:1" rel="noopener">OCBC (OCBC SP)</a> in 2014 at 1.81x P/B in a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2014/0629/ltn20140629025.pdf" target="_blank" rel="noopener">US$4.9bn deal</a>.
The partial Offer for CHB closed on the <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2014/0205/ltn201402051310.pdf" target="_blank" rel="noopener">5 February 2014</a>. Shares closed yesterday at HK$10.56/share (and 0.4x P/B), down ~70% from the Partial Offer Price. BEA and DSB have similarly languished, down 33% and 42% respectively in the last five years.
<h3>The New News</h3>
CHB was suspended at <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0506/2021050600453.pdf" target="_blank" rel="noopener">10.45am</a> this morning, but not before gaining 30% to close at HK$13.76/share. That's worth a second look.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/204/617/original/image_68039818121620283783177.png?1620283785" class="editor-image img-responsive" data-smartkarma-image-id="204617"></figure>

On the 25 October 2013, Chong Hing Bank (1111 HK) ("CHB") announced an agreement with Yue Xiu (the investment arm of the Guangzhou municipal government) to acquire a maximum of 75% of the bank for a consideration of HK$11.5bn (HK$35.7/share, a 2.1x P/B).  The deal was subject to approval from the HKMA. It was Yue Xiu's intention to maintain the bank's listing.
That Offer was widely seen as supportive for the remaining family-owned banks in Hong Kong such as Bank of East Asia (23 HK), Dah Sing Banking (2356 HK), and Wing Hang Bank, the latter of which was taken out by OCBC (OCBC SP) in 2014 at 1.81x P/B in a US$4.9bn deal.
The partial Offer for CHB closed on the 5 February 2014. Shares closed yesterday at HK$10.56/share (and 0.4x P/B), down ~70% from the Partial Offer Price. BEA and DSB have similarly languished, down 33% and 42% respectively in the last five years.
The New News
CHB was suspended at 10.45am this morning, but not before gaining 30% to close at HK$13.76/share. That's worth a second look.


Chong Hing Bank (1111 HK): Takeover Talk As Shares Pop

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*Much Better Than Expected: Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] posted 3Q20 net profit of SGD 1.0 bn, an SGD 298 mn (40.8%) increase on a linked quarter basis – well ahead of consensus. Two factors pushed the outperformance: 1) a somewhat justifiable SGD 400 mn (53.3%) decline in loss provisions (unlike DBS Group Holdings [DBS.SP]), as OCBC witnessed “negative”growth in net new NPLs; and 2) a 290 bp decline in its tax rate to 13.1%, which was additive to the bottom-line by SGD 36 mn or 3.6%;*Credit Improving In Reality: By our calculation, given the SGD 99 mn in net recoveries, we find that new new NPL growth was actually negative on an annualized basis at 2.3%. While we are ecstatic to see negative growth in net new NPLs on the back of strong net recoveries of previously charged off loans, we continue to believe that credit risk will remain elevated. As such, we find that reserves should be bolstered by SGD 288 mn – 25% of pre-tax results, which is a far cry from where currently DBS is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. New Business Embedded Value (NBEV) margins continued their descent to 37.0%  - down 1.1% linked quarter due a weaker Malaysian component. Management’s confidence is low and it anticipates the weaker economic environment to pose continued headwinds, and will reassess the dividend.

*Much Better Than Expected: Oversea Chinese Banking Corp. (OCBC.SP) [OCBC] posted 3Q20 net profit of SGD 1.0 bn, an SGD 298 mn (40.8%) increase on a linked quarter basis – well ahead of consensus. Two factors pushed the outperformance: 1) a somewhat justifiable SGD 400 mn (53.3%) decline in loss provisions (unlike DBS Group Holdings [DBS.SP]), as OCBC witnessed “negative”growth in net new NPLs; and 2) a 290 bp decline in its tax rate to 13.1%, which was additive to the bottom-line by SGD 36 mn or 3.6%;*Credit Improving In Reality: By our calculation, given the SGD 99 mn in net recoveries, we find that new new NPL growth was actually negative on an annualized basis at 2.3%. While we are ecstatic to see negative growth in net new NPLs on the back of strong net recoveries of previously charged off loans, we continue to believe that credit risk will remain elevated. As such, we find that reserves should be bolstered by SGD 288 mn – 25% of pre-tax results, which is a far cry from where currently DBS is; and*Insurance Weakness: Great Eastern Holdings (GE.SP) [Great Eastern] reported 3Q20 bottom-line results of SGD 287.9 mn, declining SGD 9.6 mn (3.2%) linked quarter. On an operating basis excluding market-related gains, the decline in profits was even more pronounced at SGD 24.6 mn or 9.4% over the period due to new business strain. New Business Embedded Value (NBEV) margins continued their descent to 37.0%  - down 1.1% linked quarter due a weaker Malaysian component. Management’s confidence is low and it anticipates the weaker economic environment to pose continued headwinds, and will reassess the dividend.

*Earnings Not What They Appear: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] reported 3Q20 results of USD 1.8 bn, a USD 1.4 bn (3.7x) increase on a linked quarter basis. The linked quarter earnings rebound is solely attributable to management cutting loss provisions by USD 3.0 bn (79.5%), which seems incongruent with the continued degradation in credit quality – especially as the globe enters its second and third wave of this economy destroying pandemic;*Credit Melt-Up: While the stated increase in NPLs on its face do not appear alarming, the rate of net new NPL growth actually is at USD 1.7 bn or 46.3% on an annualized basis. By our calculation, we find that reserves at 3Q20 were light by 100% or USD 14.6 bn which amounts to over two years of bottom-line performance  - if we assume that HSBC’s bloated 3Q20 numbers are correct; and*Don’t Hold Your Breath: The Board will consider whether to pay a dividend for 2020. How is that possible with credit worsening and coverage being so weak – not to mention the weak NIMs and challenges on the cost management front.

*Earnings Not What They Appear: HSBC Holdings Plc (5.HK/HSBA.LN) [HSBC] reported 3Q20 results of USD 1.8 bn, a USD 1.4 bn (3.7x) increase on a linked quarter basis. The linked quarter earnings rebound is solely attributable to management cutting loss provisions by USD 3.0 bn (79.5%), which seems incongruent with the continued degradation in credit quality – especially as the globe enters its second and third wave of this economy destroying pandemic;*Credit Melt-Up: While the stated increase in NPLs on its face do not appear alarming, the rate of net new NPL growth actually is at USD 1.7 bn or 46.3% on an annualized basis. By our calculation, we find that reserves at 3Q20 were light by 100% or USD 14.6 bn which amounts to over two years of bottom-line performance  - if we assume that HSBC’s bloated 3Q20 numbers are correct; and*Don’t Hold Your Breath: The Board will consider whether to pay a dividend for 2020. How is that possible with credit worsening and coverage being so weak – not to mention the weak NIMs and challenges on the cost management front.

HSBC Holdings Plc – Chronic Underperformer

*Major BEA Shareholder Under Stress In Front Of Merger: CaixaBank SA (CABK.SM), an 17.3% holder of Bank of East Asia’s (23.HK) [BEA] shares, has significant capital concerns. Combined with the acquisition of Bankia (BKIA.SM), pro forma CaixaBank’s (surviving entity) core CET1 target is 11.0%-11.5%. With CaixaBank's restructuring charge only sufficient to fund EUR 1 bn in cost cuts, CaixaBank will need to find additional ways to manufacture capital in order to fund restructuring  - including asset sales, lower dividends, and/or capital raise; and*Expecting A BEA Offload: With an ownership value at EUR 786 mn, a capital charge of EUR 1.6 bn at pro forma CaixaBank under Basel III, the aforementioned solvency constraints at Caixabank, a fundamentally struggling BEA, and a resurgent mainland China, CaixaBank would have to finally be looking for an exit – which would be a massive overhang on the shares of BEA. The key terms of the CaixaBank/BEA Shareholder  Agreement likely cannot be upheld by the former given that its financial problems prevent it from fulfilling its responsibilities.

*Major BEA Shareholder Under Stress In Front Of Merger: CaixaBank SA (CABK.SM), an 17.3% holder of Bank of East Asia’s (23.HK) [BEA] shares, has significant capital concerns. Combined with the acquisition of Bankia (BKIA.SM), pro forma CaixaBank’s (surviving entity) core CET1 target is 11.0%-11.5%. With CaixaBank's restructuring charge only sufficient to fund EUR 1 bn in cost cuts, CaixaBank will need to find additional ways to manufacture capital in order to fund restructuring  - including asset sales, lower dividends, and/or capital raise; and*Expecting A BEA Offload: With an ownership value at EUR 786 mn, a capital charge of EUR 1.6 bn at pro forma CaixaBank under Basel III, the aforementioned solvency constraints at Caixabank, a fundamentally struggling BEA, and a resurgent mainland China, CaixaBank would have to finally be looking for an exit – which would be a massive overhang on the shares of BEA. The key terms of the CaixaBank/BEA Shareholder  Agreement likely cannot be upheld by the former given that its financial problems prevent it from fulfilling its responsibilities.  

Bank of East Asia – Caixa Shake-Out Very Likely

BOC Hong Kong (BOC HK) / Equity Bottom-Up

* Weak Quarter: BOC (Hong Kong) Holdings (2388.HK) [BOCHK] reported 2Q20 profit before taxes (PBT) of HKD 9.2 bn, decreasing HKD 1.5 bn (13.9%) on a linked quarter basis. The linked quarter PBT drop was driven by: a) declining net interest income of HKD 2.4 bn (22.8%) as the NIM contracted 22 bp to 1.39% despite loan growth of HKD 36.3 bn (2.5%); b) a HKD 200 mn (34.3%) increase in loss provisions, pushing NPL cover higher; and c) a HKD 247 mn (6.7%) increase in operating expenses which pushed the C/I ratio modestly higher to 28.3% (up 3.6%); and* Credit Improves, But Reserve Cover Challenged: NPLs declined HKD 1.4 bn (35.7%) HOH  - decreasing 9 bp over the period to a very light 16 bp of total loans. We are also encouraged by BOCHK’s net new NPLs which declined HKD 95 bn or 5.0% on an annualized basis. While reserve cover of NPLs increased 18% HOH to 239%, we believe BOCHK needs to fortify reserves close to HKD 9.2 bn  - or about a quarter’s worth of PBT.

* Weak Quarter: BOC (Hong Kong) Holdings (2388.HK) [BOCHK] reported 2Q20 profit before taxes (PBT) of HKD 9.2 bn, decreasing HKD 1.5 bn (13.9%) on a linked quarter basis. The linked quarter PBT drop was driven by: a) declining net interest income of HKD 2.4 bn (22.8%) as the NIM contracted 22 bp to 1.39% despite loan growth of HKD 36.3 bn (2.5%); b) a HKD 200 mn (34.3%) increase in loss provisions, pushing NPL cover higher; and c) a HKD 247 mn (6.7%) increase in operating expenses which pushed the C/I ratio modestly higher to 28.3% (up 3.6%); and* Credit Improves, But Reserve Cover Challenged: NPLs declined HKD 1.4 bn (35.7%) HOH  - decreasing 9 bp over the period to a very light 16 bp of total loans. We are also encouraged by BOCHK’s net new NPLs which declined HKD 95 bn or 5.0% on an annualized basis. While reserve cover of NPLs increased 18% HOH to 239%, we believe BOCHK needs to fortify reserves close to HKD 9.2 bn  - or about a quarter’s worth of PBT.  

BOC (Hong Kong) Holdings – Negative Operating Jaws

Hong Kong

Dah Sing Financial Holdings Ltd through its subsidiaries, offers general banking services. The Company also invests in properties and provides insurance broking and nominee services.

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Dah Sing Financial (440 HK)

Chong Hing Bank (1111 HK): Takeover Talk As Shares Pop

A 30% gain ahead of suspension suggests there is evident news leakage of something big afoot, which would have a positive read-across for the other...

David Blennerhassett

Oversea Chinese Banking Corp. – Solid

OVERSEA CHINESE BANKING CORP.: Credit Showing Signs Of Recovery With Negative NPL Growth - Offsetting Weakness In NIMs and Insurance.

Thomas J. Monaco

HSBC Holdings Plc – Chronic Underperformer

HSBC HOLDINGS PLC: Artificially Lower Provisions As Credit Spikes Is Not Conservative Banking. Challenges Remain on NIMs and Costs. Start Expecting...

Thomas J. Monaco

Bank of East Asia – Caixa Shake-Out Very Likely

BANK OF EAST ASIA: Pro Forma CaixaBank Is Under Severe Fundamental Pressure Prior To Its Bankia Merger And In Need of Capital. BEA's Stake Likely...

Thomas J. Monaco

BOC (Hong Kong) Holdings – Negative Operating Jaws

* Weak Quarter: BOC (Hong Kong) Holdings (2388.HK) [BOCHK] reported 2Q20 profit before taxes (PBT) of HKD 9.2 bn, decreasing HKD 1.5 bn (13.9%) on...

Thomas J. Monaco

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