Thursday, 24 January 2019

Equity Issue

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Hang Seng Bank’s sale of a Rmb12.73bn (US$2bn) stake in Industrial Bank broke new ground in China’s equity capital markets, offering a fresh template for major A-share disposals and introducing international standards to the mainland’s still developing stock market.

The block trade offered an alternative way for foreign investors to monetise their A-share investments, and proved that innovation remained possible even in a restricted, and often unpredictable, capital market.

Hang Seng, of which HSBC owns 62%, was looking to trim its stake in Shanghai-listed IB to minimise punitive capital charges on minority investments, and spotted a window in China’s booming A-share market. When it launched on February 10, Shanghai stocks had gained 28% from November 2014.

Instead of a bilateral trade, however, the Hong Kong lender hired Goldman Sachs Gao Hua Securities as sole placing agent for the biggest distributed block trade in China’s A-share market at the time.

It was a bold move. China’s domestic market infrastructure is not set up for block trades involving multiple buyers. Shares must be crossed manually in a tight 30-minute window on the Shanghai Stock Exchange’s block-trade platform, which was primarily designed for small broker-to-broker unilateral blocks.

All individual investors had to input buy orders through their own brokers, while Shanghai Industrial Securities (a unit of IB) was responsible for keying in the sell orders.

Blocks in China have to be priced against the closing a day before, while the shares can only be crossed a day after the deal, adding to the complexity.

Accessing investors under the QFII scheme was another challenge, but the implementation of Stock Connect had freed up some quotas as QFII fund managers shifted to the scheme.

Compared to a bilateral sale, the wider distribution gave Hang Seng much better pricing power. It sold 952m shares in the Fuzhou-based lender at Rmb13.36 each to a group of fewer than 10 domestic and international investors. The price represented a discount of 7% to the pre-deal spot, well inside the maximum discount of 10% that Chinese regulations allow.

IB shares continued to rise after the trade in the buoyant A-share markets. Riding on the success of the first block, Hang Seng sold another 4.99% stake in IB on May 12 at Rmb17.68 each, raising Rmb16.81bn.

Hang Seng pocketed a profit of almost Rmb28bn for its IB investment from the two blocks. It paid Rmb1.7bn for the shares in 2004. Hang Seng still holds a 0.88% IB stake.

To see the digital version of this report, please click here.

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