Temasek Holdings last night raised $2.48 billion by reducing its holdings in Bank of China (BOC) and China Construction Bank (CCB) through two separate block trades. The size of the sell-down was split equally between the two banks, but the CCB shares were offered at a more aggressive price and the belief in the market last night was that the bookrunners had been unable to find enough buyers to cover that entire trade. The BOC trade appeared to have gone a lot more smoothly.
A source acknowledged that a discount below 3% is always a bit more challenging, but said both blocks were allocated in full. They were, however, priced at the bottom of the indicated ranges.
The combined sell-down comes just two weeks after Temasek bought $2.3 billion worth of shares in Industrial and Commercial Bank of China (ICBC) from Goldman Sachs, and there had been some speculation that the Singapore investment company may fund that purchase through the sale of shares in BOC, and potentially also in CCB. A bounce in the share price of both stocks on Monday and yesterday (the Hong Kong market was closed on Tuesday for May Day) supposedly provided the window that Temasek was looking for and the concurrent block trades were launched at around 7pm Hong Kong time yesterday.
Temasek offered 3.079 billion H-shares in BOC at a price between HK$3.13 and HK$3.18 each, which translated into a discount of 2.5% to 4% versus yesterday’s close of HK$3.26. The final price was fixed at HK$3.13 for a 4% discount and a total deal size of HK$9.64 billion ($1.24 billion).
The shares on offer accounted for 3.7% of the BOC’s H-share capital and will reduce Temasek’s holdings to about 3.4% from 7.1%. Based on yesterday’s closing price, its remaining 2.84 billion shares are valued at about $1.2 billion.
It also offered 1.611 billion H-shares in CCB at a price between HK$5.99 and HK$6.10, which corresponded to a discount of 1.0% to 2.8% versus yesterday’s close of HK$6.16. The price was fixed at HK$5.99 for a 2.8% discount and a deal size of HK$9.65 billion ($1.24 billion).
The CCB block was significantly smaller as a proportion of the company, accounting for only 0.6% of the outstanding H-share capital. However, relative to the turnover it was still quite chunky at about eight days of trading (versus 11 days for the BOC block). The sell-down will trim Temasek’s share of the H-share capital to 8.8% from 9.4%. It still holds about 21 billion H-shares, which based on yesterday’s close are valued at approximately $16.7 billion.
Temasek’s remaining shares in both banks will be locked up for 90 days following last night’s trades.
The source said more than 40 investors participated in each of the two deals, with some overlap between the two stocks. The buyers included sovereign wealth funds, institutional investors and hedge funds. BOC in particular also attracted decent interest from private wealth-type investors.
The late launch of the two deals in combination with some weakness in European and US markets meant the deals were off to a pretty slow start, but momentum picked up during the evening. One observer noted that the expectation of a potential sale has acted as a bit of an overhang and both BOC and CCB have underperformed in recent weeks while ICBC has outperformed. The bounce in the share price in the past couple of sessions was explained by the fact that the first quarter earnings reports from the Chinese banks that were out late last week didn’t contain any negative surprises which made investors more confident to take advantage of what analysts argue are fairly compelling valuations.
BOC in particular is looking pretty attractive as it is trading at a gross dividend yield of close to 5.9% and a 2012 price-to-earnings ratio of just 5.7 times. It is also quoted at just 0.9 times book, which makes it one of the cheapest among the Chinese banks that are listed in Hong Kong. CCB is trading at a gross dividend yield of 4.7% and at a 2012 P/E multiple of 6.75 times.
Investors who bought into last night’s transactions will be eligible to receive the final dividends for the 2011 calendar year that have already been announced and are due for distribution in June. BOC will pay Rmb0.155 per share and will go ex-dividend on June 6, while CCB is set to pay Rmb0.2365 per share and will go ex-dividend on June 14.
Temasek has been trading its positions in both BOC and CCB — particularly in the latter — quite actively in recent years and has shown good timing in the sense that it has generally sold shares at a higher price than it has bought them. Last night’s trade was similar to the combined sell-down that it did in both banks in July last year when it offloaded $2.4 billion worth of shares in BOC and $1.2 billion worth of shares in CCB.
A month later it bought about one-third of the shares when Bank of America (BoA) cut its stake in CCB, spending about $2.8 billion, and in November last year it spent another $2.4 billion to buy shares in a second sell-down by BoA. Its investments have been important for helping to remove the overhang on the stock that was created in anticipation that the US bank was going to sell.
Temasek also bought a small number of shares in BOC in August last year, which took its stake above 7%, although that investment didn’t set it back more than about $40 million.
The fact that it trimmed its stakes in BOC and CCB so quickly after buying the ICBC shares — and the fact that the two deals virtually offset each other — suggests that Temasek isn’t really looking to increase its exposure towards Chinese bank stocks, but rather is happy with its current position.