Yue Xiu Said Nearing Deal to Buy Hong Kong’s Chong Hing

Yue Xiu Group, a trading arm of China’s Guangzhou city government, is nearing an agreement to acquire Hong Kong lender Chong Hing Bank Ltd., according to three people with knowledge of the matter.

An announcement may come as early as this week, said the people, who asked not to be identified because the discussions are confidential. Chong Hing jumped 7 percent to a record HK$37.40 at the close of trading in Hong Kong yesterday, giving it a market value of HK$16.3 billion ($2.1 billion).

The first acquisition of a Hong Kong lender since 2009 would give Yue Xiu a network of 53 branches, providing a platform to provide offshore financing for Chinese companies. Chong Hing, which named Lau Wai-man as the first chief executive officer from outside the founding Liu family last year, said in August it had been approached by prospective bidders.

“If Yue Xiu can gain a bank, it will be easier for them to offer cross-border financing,” said Samuel Ng, an analyst at Daiwa Capital Markets Hong Kong Ltd. “There’s room to expand that business.”

Two calls and an e-mail to Yue Xiu’s Guangzhou office went unanswered yesterday. Edith Chan, a Hong Kong-based spokeswoman at Chong Hing, declined to comment.

Hong Kong’s role as an international center for trade in the yuan has attracted Chinese financial institutions seeking to expand abroad, including China Merchants Bank Co., which paid $4.7 billion for the Wu family’s Wing Lung Bank Ltd. in a deal completed in 2009.

Wing Hang Talks

Hong Kong retail lenders’ exposure to non-banking companies on the mainland increased 11 percent to HK$2 trillion at the end of June from the start of this year, according to the Hong Kong Monetary Authority’s half-yearly report released last month.

The Liu family controls about 60 percent of Chong Hing, exchange filings show. The lender said Oct. 8 that its controlling shareholder was in talks with Yue Xiu and “certain other independent third parties.”

Wing Hang Bank Ltd., another family-owned Hong Kong lender, said last month its shareholders were in talks to sell their stakes, without identifying any buyer. The Fung family, its affiliates and Bank of New York Mellon Corp. together hold about 45 percent of the company.

Chong Hing, with a larger family stake, is smaller and easier to acquire, said Daiwa’s Ng.

‘Ridiculous’ Valuations

Lau replaced Liu Lit-chi, a family member who had spent more than 50 years at the bank. 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.

Chong Hing has jumped more than 150 percent in Hong Kong trading since Nov. 28, 2012, when Lau’s appointment was announced. The stock trades at 2.18 times historical book value, according to data compiled by Bloomberg. Wing Hang, with a market value of HK$35.1 billion, has a price-to-book multiple of 1.72.

China Merchants Bank’s purchase of Wing Lung Bank, completed in 2009, valued the lender at 3.1 times book value, data compiled by Bloomberg show. Australia & New Zealand Banking Group Ltd.’s Chief Executive Officer Michael Smith, who lost out to Merchants Bank in the bidding, called that ratio “crazy.”

Hong Kong banks remain overpriced, Smith said Oct. 8, describing a ratio of two times book value as “ridiculous at these times.”

Short-Term Loan

Yue Xiu Group, founded in 1985 by the Guangzhou city government as a trading company for Hong Kong and Macau, operates in businesses including real estate, securities and toll roads. It is getting a $1 billion short-term loan to finance a potential Chong Hing bid, Bloomberg News reported Oct. 11.

The Hong Kong Monetary Authority announced changes to the city’s banking regulations this month as it sought to tighten oversight of shareholders in local lenders.

Last year, Guangzhou Securities Co., a member of Yue Xiu Group, set up a joint venture advisory company with Hang Seng Bank Ltd., Hong Kong’s second-largest local lender.

Chong Hing’s network of 51 branches in the city -- it also has one each in Macau and China -- compares with more than 260 at BOC Hong Kong Holdings Ltd., the Bank of China Ltd. unit that’s the biggest local lender.

Nomura Holdings Inc. is working with Yue Xiu on the deal, while UBS AG is advising Chong Hing, the people said.