Cathay clears out treasury shares

Taiwan''s largest financial holding company by assets raises $495 million from GDR issue.

Cathay Financial Holdings returned to the GDR market for the first time in over a year yesterday (November 11) with a $495 million GDR via its house bank JPMorgan. After marketing the 254.9 million share deal at a 2% to 4% discount to spot, pricing came towards the cheaper end - 3.8% to the stock's NT$66.5 close. One GDR equals 10 shares.

The deal represents 3% of the company's issued share capital and a fairly slim 12 days trading volume. Pre-deal, the group had a freefloat of 45%. It has now cleared out all the treasury shares created as a result of the establishment of a financial holding company structure in 2001.

Books are said to have closed about one-and-a-half times covered with participation by about 50 accounts. This is a far more concentrated order book than July 2003 when the group last accessed the GDR market, pricing a $522 million deal at $11.63 - a 0.5% premium to spot.

Then books closed two times covered with participation by about 150 accounts. In terms of pricing, the stock fell 7% on the day Cathay priced its 2003 deal, whereas it was flat during trading yesterday. Year-to-date it is up 24.3%.

By geography, about 70% of the deal went to Asia, 20% to Europe and 10% to offshore US accounts.

The deal was cleverly timed to take advantage of an MSCI re-balancing, which has been driving up the Cathay's price in recent weeks. As of November 30, Taiwan's Limited Investability Factor will rise from 50% to 70% and then to 100% in May next year. This means that 70% of Cathay's market cap will be eligible for the MSCI indices.

The group represents the third largest index constituent from Taiwan with a 4.7% weighting, while the country itself will become the largest weighting in the MSCI Emerging Markets Free Index and the second largest in the MSCI All Asia Free (ex-Japan) index.

However, the fact that the order book was comfortably rather than heavily oversubscribed suggests investors believe much of this rally may have already been priced into the share price. Cathay historically trades at the top of the valuation band for Taiwan's financial sector and it is currently the most expensive stock on a price to book basis and second most expensive on a P/E basis.

In terms of price to book, the group is valued at 2.9 to 3 times, with only one other FHC (Chinatrust) valued at over two times book. Where P/E is concerned, the group is trading at 16 to 17 times consensus 2005 earnings. Only CDIBH is more expensive at 20 times.

Analysts main concern centres on whether the share price is peaking. At issue is the speed of interest rate rises given that an uptick will benefit an earnings base dominated by insurance. So too, some analysts have queried the sustainability of strong earnings growth, which has been underpinned by NPL write-offs and property disposals.

However, other analysts believe volume growth, particularly on the life insurance side of the business, continues to generate strong momentum.

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