Dah Sing chooses tough day to sell new shares

While it is widely anticipated that more Asian banks will approach the equity capital markets to re-capitalise their balance sheets in the coming months, it was a surprise that someone chose to do so yesterday. Not only were Asian markets down almost across the board, but they were led lower by financial stocks in a sell-off that spilled over from the US the night before. This shift in sentiment was sparked by renewed concerns about loan losses at the US banks and the sustainability of their first quarter earnings, which have so far been above expectations -- at least on the headline numbers.

But Dah Sing Banking Group wasn't deterred. The bank had been planning for some time to do a top-up placement early this week to strengthen its capital base and may have felt that the positive momentum in its share price over the past three weeks would enable investors to see beyond yesterday's 3.7% drop. And when the futures started to indicate that the US market would have a better session yesterday, the window to go ahead was there.

Also helping was the fact that the placement, according to sources, was anchored by a couple of large funds and that existing investors were keen to participate to avoid dilution. And of course, at a size of only HK$302.4 million ($38.8 million) it didn't exactly require huge commitments to get done.

That said, the shares on offer represented a massive 90-days worth of trading volumes, based on the activity over the past three months, which meant investors required a significant discount to come onboard.

"The market is not receptive to illiquid stocks at the moment and investors need to get an appropriate discount to compensate for the additional risk that they may not be able to exit at short notice," one source says.

The shares were offered in a discount range of 13.6% to 15.9% versus yesterday's close of HK$6.60, which translated into an absolute price range of HK$5.55 to HK$5.70. After a couple of hours of bookbuilding, the price was fixed in the lower half at HK$5.60 for a 15.2% discount. HSBC was the sole bookrunner for the deal.

Being a top-up placement, the 54 million shares on offer, representing 5.8% of the existing share capital and 23% of the free float, were existing shares sold by parent Dah Sing Financial Holdings, who will later subscribe to the same number of new share at the same price to ensure the money ends up with Dah Sing Banking Group. Because of the dilution caused by the issuance of new shares, the parent's stake will drop to about 71% from 75% before the transaction.

The deal attracted about 25 investors, including some European accounts, and was covered throughout the price range. According to the source, the allocation was focused and a large part of the offering went to either the anchors or to existing shareholders.

Before yesterday's drop, Dah Sing's share price had rallied 60% since the beginning of April, outperforming both the 16% gain in the Hang Seng Index and the 19.2% rise in the Hang Seng Finance Index. However, the stock is still well below its highs of HK$17.94 from early June last year and it also trades below its book value -- according to some estimates it is currently valued at about 0.7 times book.

The bank had total assets of HK$112 billion ($14 billion) at the end of 2008 and made a profit of HK$188.6 million last year, down 76% from 2007. The decline was primarily due to weaker fee and commission income, higher operating expenses and a substantial increase in impairment charges on loans. It also suffered significant losses on its securities investments, mainly caused by the bankruptcy of Washington Mutual Bank, and took further markdowns on its remaining leveraged and structured investment portfolio. This portfolio has now been marked down, on a cumulative basis, by 91% to a carrying value of HK$146 million ($19 million) at the end of 2008. After adjusting for an intra-group transaction in March, the company's core capital ratio was 8.1% at the end of December, while its total capital ratio stood at 15.2%.