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Bank of China

BOCHK short sellers may return as holes appear in capital plans

PUBLISHED : Thursday, 15 July, 2004, 12:00am
UPDATED : Thursday, 15 July, 2004, 12:00am

Traders speculating on a fall in the share price of Bank of China (Hong Kong) appear to have taken their bets off the table - for the moment at least - after weeks of sustained short-selling of the stock.


In an abrupt turnabout yesterday, shares in the locally listed unit of the mainland's second-largest lender went entirely unshorted after routinely ranking as one of the most heavily shorted counters on the market.


The event on which the BOCHK short bets depended for a payout was another big placement of shares at a discount by its mainland parent, the Bank of China. On December 15 last year, as part of a recapitalisation programme, the parent placed 1.07 billion of its shares in BOCHK at $13.70 each - a discount of 12.18 per cent to the prevailing share price.


The placement raised $14.66 billion in equity capital for the mainland lender and came with an undertaking that it would not return to the market with another placement from the six billion BOCHK stock inventory it holds.


That lock-up period ended on June 15 and on the same day short-traffic in BOCHK peaked at 10.88 million shares valued at $142.89 million - almost 20 per cent of the total short selling on the market.


Heavy shorting continued until Friday when $86.39 million worth of shares were shorted, but in contrast to this activity the stock went entirely unshorted on Tuesday.


The change in sentiment could be partly due to BOC's statement last week that it plans to boost its regulatory capital by way of a 60 billion yuan subordinated debt issue - relieving expectations of immediate equity capital raising.


But a rough calculation based on existing shareholder equity in the bank, and its last-disclosed risk weighted assets, suggests that before it can expect support from international investors for its proposed foreign listing, it will need to raise significantly more equity.


At 153.76 billion yuan, existing Tier 1 capital is just 6.2 per cent of risk-weighted assets. Raising that to a level that would offer comfort to investors in the bank - say about 8 per cent - would require another 45.2 billion yuan of equity.


The quickest route to that capital injection could be another large placement of BOCHK shares.


The short sellers may be gone for the moment but they are likely to return.