Written By Stock Fanatic on Tuesday, January 14, 2014

OCBC has announced its plan to increase its stake in Bank of Ningbo, its strategic partner since 2006, from 15.34% to 20%. This is in line with its intention to build a bigger presence in Greater China, which it has identified as one of its core overseas markets. We also hear that it is in talks to acquire Wing Hang for as much as HK$38.3bn (1.9x P/BV). 

We maintain our target price (GGM, implying 1.24x P/BV) and Reduce rating, with de-rating catalysts expected from a potential overpayment for Wing Hang.

What Happened

Increasing its stake in Bank of Ningbo to 20%. OCBC has agreed to subscribe to 207.5m new ordinary shares in Bank of Ningbo for Rmb8.85/share. The total consideration of Rmb1.8bn (S$383m) will be funded internally. The transaction, which is expected to be completed in 3Q14, will increase OCBC?s stake in Bank of Ningbo from 15.34% to the maximum 20.00% permissible for foreign investors.

Wing Hang acquisition likely to be priced at 1.9x P/BV. OCBC is also believed to be in discussions to acquire Wing Hang Bank at a valuation as high as 1.9x P/BV. This implies a price tag of HK$38.8bn (S$6.3bn). OCBC is said to be in talks with several lenders to finance its acquisition with short-term debt, with possible plans to raise funds through equity to repay the loans.

What We Think

Bank of Ningbo. We are positive on any increase in its stake in Bank of Ningbo, as the latter has been helping OCBC tap the Chinese market. Bank of Ningbo is a well-run bank with strong ROEs of 19.9%, and a presence in the major cities of China. It is strong in servicing SMEs and providing trade finance in China, which will complement OCBC?s operations in the region.

Wing Hang Bank. At 1.9x P/BV, we believe OCBC could be overpaying for Wing Hang as the latter?s forecasted ROEs of 9-10% are lower than OCBC?s 11-12%, yet OCBC is trading at a lower P/BV of 1.2x. OCBC will have to issue shares to fund the acquisition, which could result in earnings dilution. Its CET1 ratio will also be pushed below the regulatory minimum of 9.0%.

Technical Analysis

Daily Chart

What You Should Do

Maintain Reduce. Although value is starting to emerge after its recent underperformance, fears of dilution and a share overhang could cap its share-price recovery, when it is still in talks to buy Wing Hang.  (Read Report)

DOYDD

 

options to fund planned acquisition of WHB.

(OCBC SP/BUY/S$9.74/Target: S$12.45)

FY13F PE (x): 12.6

FY14F PE (x): 11.8

OCBC has entered into an exclusive agreement with the substantial shareholders of

Wing Hang Bank (WHB) on 31 Dec 13 to finalise the terms for a possible transaction

until 31 Jan 14. There is no binding agreement at this stage and discussions between

OCBC and the substantial shareholders of WHB are ongoing.

Our views. We agree that OCBC has slightly overpaid for the planned acquisition of

WHB. It would also be tough to achieve revenue or cost synergies envisioned by

management. However, we recognise it is difficult to find an acquisition target, especially

one that provides management control. It is possible to fund the acquisition fully through

debt if capital is replenished over time through its scrip dividend scheme.

Maintain BUY. Our target price of S$12.45 is based on 1.71x P/B, derived from Gordon

Growth Model (ROE: 12.0%, required return: 7.8% and growth: 2.0%). We will lower our

target price accordingly if OCBC concludes a binding agreement to acquire WHB.

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