News Hong Leong Bank ('HLBANK') is considering to raise its shareholding in its China subsidiary, Bank of Chengdu Co Ltd ('BOC'), through an initial public offering (IPO), said its CEO, Datuk Yvonne Chia.
BOC, a Sichuan-based city commercial bank, is planning an IPO on the Shanghai Stock Exchange A-share market as it moves to replenish its capital to boost future growth. The IPO aims to issue 800m shares. The cash proceeds will help raise BOC's capitaladequacy ratio (CAR), which has declined on the back of its strong growth in 2010.
Comments We understand from management that HLBANK would like maintain its 20% stake in BOC post IPO. CBRC has a policy that caps single foreign bank ownership at below 20% (19.99%). Hence, any rise in the stake will probably need CBRC approval and hence, is an unlikely move for HLBANK at this juncture.
The listing application has been sent to the regulatory authorities. However, the timeline of the listing is unknown as it may take a year or two for final approvals.
We believe HLBANK has the financial capabilities with an excess capital of RM2.0b-4.4b, and hence has the extra funds for further investment in BOC.
We believe BOC will offer a long term growth story for HLBANK given that Chengdu is located at the centre of Sichuan.
Sichuan is the powerhouse of China's southwest and has gained increased attention since the implementation of the 'Go West' policy back in 2000.
Sichuan (including Chongqing) has a total market of some 120m people, the same size as France and 4.2x bigger than that of Malaysia.
The province has benefited from lower operating costs compared to the eastern and central regions, with the added attraction of a massive population.
Outlook Outlook for BOC is positive. At this juncture, BOC has contributed 10-12% to HLBANK's PBT.
Forecast No earnings impact at this juncture.
Rating MAINTAIN MARKET PERFORM
Valuation We are maintaining our TP at RM10.90 with an unchanged valuation of 1.7x FY13 BV of RM6.42.
Risks An unexpected higher dividend payout could drive up the valuation.