Chong Hing Bank Ltd. shares tumbled the most in five years as the stock resumed trading after Yue Xiu Group offered $1.5 billion for a majority stake in the Hong Kong lender.
Chong Hing sank 8.3 percent to HK$34.30 as of the city’s noon trading break, the biggest intraday drop since Oct. 23, 2008, after Yue Xiu bid HK$35.69 a share for 75 percent of the bank. Chong Hing wants to sell its headquarters to its parent, following which it will pay a HK$4.5195 per-share dividend to investors accepting Yue Xiu’s bid, according to a joint statement on Oct. 25.
The stock more than doubled since Lau Wai-man was named as the first chief executive officer from outside the founding Liu family on Nov. 28, valuing Chong Hing at 69 percent more than the average for the largest banks listed in Hong Kong. The first acquisition of a Hong Kong lender since 2009 will give Yue Xiu, controlled by the Guangzhou city government in southern China, a network of 53 branches.
“The stock’s seen a massive push as there were expectations the new CEO would be an agent for change,” Gavin Parry, managing director of Hong Kong-based brokerage Parry International Trading Ltd., wrote in an e-mail today. “With Yue Xiu buying 75 percent, its hard to see any more premium to come as expectations for a bidding war subside.”
Chong Hing Bank shares resumed trading today after a two-day suspension. The stock surged 7 percent on Oct. 23 after Bloomberg News reported the bank was nearing a deal. Nomura Holdings Inc. is advising Yue Xiu, according to the statement. UBS AG is Chong Hing Bank’s adviser.
Yue Xiu’s offer values Chong Hing at 2.08 times book value as of June 30, based on data compiled by Bloomberg. Including the special dividend from the property sale, the lender is worth 2.35 times, according to a Barclays Plc report yesterday.
At the end of last week, the bank traded at 2.2 times its book value, more than the average multiple of 1.3 for the 16 largest bank stocks listed in Hong Kong, data compiled by Bloomberg show.
“We believe that Chong Hing Bank’s share price will return to levels consistent with normal banking operations” without any merger premium, Steven Chan, a Hong Kong-based analyst at Maybank Kim Eng Securities Pte, wrote in a report today. The stock may fall to HK$18.31, he said.
Yue Xiu, founded in 1985 by Guangzhou as a trading company for Hong Kong and Macau, needs approval from the Hong Kong Monetary Authority to buy the stake in Chong Hing Bank, according to the statement. Companies controlled by the Liu family will sell shares equal to about 51 percent of the bank.
The Chinese firm, which operates in businesses including real estate, securities and transportation infrastructure, said it intends to keep Chong Hing’s stock exchange listing.
Hong Kong’s role as an international center for trade in yuan has attracted Chinese financial institutions seeking to expand abroad. China Merchants Bank Co. paid $4.7 billion for the Wu family’s Wing Lung Bank Ltd. in a deal completed in 2009.
The increasing integration of Chinese and Hong Kong firms was driven by increased cooperation between the city and the mainland’s economy, the internationalization of China’s currency and Hong Kong’s development as an offshore yuan center, according to a section in the Oct. 25 statement explaining the reasons for Yue Xiu’s offer.
Outstanding loans in Hong Kong denominated in the mainland’s currency surged to 115.4 billion yuan ($19 billion) in August from 1.8 billion yuan in 2010, HKMA data show. Yuan-denominated debt securities, known as Dim Sum bonds, jumped to 294 billion yuan at the end of June from 55.8 billion yuan in 2010.
Chong Hing Bank will sell its headquarters on Des Voeux Road in Hong Kong’s city center to Liu Chong Hing Investment Ltd., according to the statement. The building was valued at HK$2.23 billion, or more than eight times its HK$264 million carrying value on the bank’s books, the statement showed.
The lender’s properties are carried at historical values on its balance sheet, meaning they may not represent the buildings’ current market value.
The lender, founded in 1948 as Liu Chong Hing Bank Ltd., dropped the family name in December 2006 to “more accurately reflect the public nature of the bank,” according to its website. Lau replaced Liu Lit-chi, a family member who had spent more than 50 years at the bank.
Chong Hing’s network of 51 branches in Hong Kong compares with more than 260 at BOC Hong Kong Holdings Ltd., the Bank of China Ltd. unit that’s the biggest local lender. Chong Hing also has one branch each in Macau and mainland China.
The number of publicly traded family-run banks in Hong Kong has fallen to four from six more than a decade ago after China Merchants bought Wing Lung and Public Bank Bhd. of Malaysia took over Asia Commercial Bank. In addition to Chong Hing, Bank of East Asia Ltd., Dah Sing Banking Group Ltd. and Wing Hang Bank Ltd. are the family lenders.
Wing Hang’s stock surged 37 percent in Hong Kong trading through last week from Sept. 16, when the bank said its largest investors were in talks to sell their equity. The Fung family, its affiliates and Bank of New York Mellon Corp. together own about 45 percent of the shares, which lost 1.2 percent today.
Oversea-Chinese Banking Corp., Southeast Asia’s second-largest lender, is considering a bid for Wing Hang, people familiar with the matter said Oct. 24. Singapore-based OCBC had been studying an offer for the Hong Kong bank for more than two weeks, one of the people said.
News flow on mergers and acquisitions “will continue and should be a positive catalyst” for smaller bank stocks, Franco Lam and Tracy Yu, Hong Kong-based analysts at Deutsche Bank AG, wrote in an Oct. 25 report. Dah Sing Bank and its parent Dah Sing Financial Holdings Ltd. “stand out as the most inexpensive M&A plays in the market,” they wrote.
Dah Sing Bank traded for 1.2 times book after an 87 percent surge in its shares this year to last week, data compiled by Bloomberg show. Dah Sing Financial, which has risen 48 percent in 2013, has a multiple of 1. The two stocks dropped more than 5 percent today.