An 11.6% rally in China Merchants Bank’s Hong Kong-listed shares over the past two sessions has greatly improved the chances that the Chinese lender will finally be able to complete its long-awaited rights issue. At the very least it has removed one of the potential hurdles for the transaction.
The bank has proposed to raise up to Rmb35 billion ($5.68 billion) from the sale of A- and H-shares to its existing shareholders. About 82% of the offering will be in the form of Shanghai-listed A-shares, while the remainder will be offered to the holders of the bank’s Hong Kong-listed H-shares, which is in line with the current split of its share capital.
For the first time in three months, its Hong Kong-listed H-shares closed at a very slight premium to its Shanghai-listed A-shares on Tuesday after gaining 7.2%. The A-shares rose by only 0.9%. This means that if the rights offer price were to be set right now, the discount versus the market price would be largely the same for both classes of shares.
Previously, as the A-shares have been trading at a significantly higher price – according to Bloomberg data the premium reached almost 20% in June – there was a risk that the discount versus the market price for the H-share portion of the deal would have been too thin to be attractive.
The A- and H-share offers will be done simultaneously and at the same issue price after adjusting for the exchange rate.
The issue is further complicated by the fact that mainland-listed Chinese companies are not allowed to sell new shares at a price below their latest audited net asset value, or book value. For companies trading close to their book value, this greatly limits their ability to offer shares at an attractive discount to the market price.
As of yesterday, China Merchants Bank was quoted at 1.2 times its book value at the end of December last year, which would imply a maximum discount of 20%. However, as seen by the movements in the past couple of sessions, share prices of the Chinese banks can fluctuate quite substantially from day to day. Last Friday, China Merchants Bank’s A-shares were trading at 1.15 times its book value at the end of 2012, while the H-shares were quoted at about 1.1 times book.
An attractive discount is important since the subscription level for the A-share portion, which will be done on a non-underwritten basis, has to be at least 70% in order for the issue to be completed. Rights that are not taken up will lapse.
By comparison, the H-share portion of the deal will be fully underwritten and shareholders who don’t want to exercise their rights may sell them in the open market to other investors who do.
China Merchants Bank first proposed the rights offering in July 2011, but has not been able to launch the deal as it has been waiting for approval from the Chinese and Hong Kong regulators. China’s banking regulator approved the deal in October 2011, and the China Securities Regulatory Commission issued a preliminary approval in April 2012.
However, China Merchants Bank did not receive a written approval from the latter and was forced to seek an extension on the approval from its own shareholders in September last year.
Then finally, on July 23 this year, the bank issued a statement saying it had received the go-ahead from the CSRC to issue up to 3.07 billion new A-shares to its existing shareholders. The approval is valid for six months, and the bank said it will launch the A-share offering as soon as possible.
It does also need approval from the listing committee of the Hong Kong Exchanges and Clearing (HKEx) to list the new H-shares on the Hong Kong stock exchange and to trade the nil-paid rights, although that is viewed as fairly easy to obtain once the CSRC approval is in place.
China Merchants Bank is currently also in a share issue blackout ahead of its first-half earnings release, which is due on Friday. However, once that is out of the way, it should finally be able to go ahead.
According to sources, China Merchants Bank’s international shareholders are generally positive towards the proposed rights issue as they feel the lack of a capital-raising has been a restraint on the growth of the bank. They also want it to recapitalise ahead of what is expected to be abundant supply in the financial sector in the final four months this year.
The fact that a deal seems to be getting closer may therefore have been part of the reason for the sharp jump in the bank’s H-shares on Tuesday – although all Chinese banks have performed well in the past few days after a string of encouraging economic data out of China.
The Apple Daily reported on Tuesday that China Merchants Bank will announce the terms of the rights issue in connection with its earnings release on Friday. According to the local Chinese language paper, the bank will offer 1.74 new shares for every 10 existing shares, which is slightly less than the earlier indication of up to 2.2 new shares for every 10 existing shares.
The paper also noted that the price for the A-shares will be at least Rmb9.29 each, which is equal to the book value at the end of last year. Hence it cannot technically be below that, at least not until the bank gets an updated audited net asset value. And given that it would want to maximise the discount, the final price could well end up at or near that level.
However, other media, including Bloomberg, quoted a China Merchants Bank spokesperson saying that the report about the rights issue was market speculation and that that bank would not make any comments about it.
China Merchants Bank has earlier said that the purpose of the rights issue is to improve its core capital adequacy ratio to support the continuing development and growth of its business. At the end of March this year, its core tier-1 capital adequacy ratio was 8.6%, slightly up from 8.34% at the end of 2012. Its overall capital adequacy ratio remained unchanged at 11.41%
The bank’s H-shares closed at HK$14.24 on Tuesday, while the A-shares closed at Rmb11.15. Adjusted for the exchange rate, that leaves the H-shares at a 0.8% premium to the A-shares.
The rights issue will be arranged by CICC, Citi, Goldman Sachs and UBS.
