Investor endorsement reflects a long-term view

PUBLISHED : Saturday, 07 August, 2004, 12:00am
UPDATED : Saturday, 07 August, 2004, 12:00am


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Despite caution, the deal brings far more than immediate numbers suggest

The market liked it. And the market, as the saying goes, always gets it right - if not at the first bite, then soon enough.

Official confirmation yesterday of the Bocom deal and its 14.46 billion yuan price tag triggered an immediate jump of 4.5 pence in the HSBC's share price to 841.5 pence when trading opened in London after the announcement.

That came on top of a post-results' bounce and hopes of a statement on Bocom, that together had driven the share price up 30 pence from its close on Friday last week, to 837 pence on Thursday.

'Trust them. They know what they're doing,' shareholders seemed to be saying before having second thoughts. Within an hour of trade, punters content to buy the rumour and sell the fact had taken their profits and left, hauling the price back to 837 pence.

The caution is understandable. As one fund manager told South China Morning Post yesterday: 'It's no use scrutinising the numbers that come out of China - rubbish in, rubbish out.'

No doubt the HSBC team responsible for scouring Bocom's books before settling on a price will take a less cynical view. But after all the number-crunching, investing in a mainland bank is an act of faith.

Taken at face value, the 1.8 times stated book value HSBC paid for its Bocom stake, was a richer premium than rivals Newbridge Capital and Citigroup paid for their stakes in Shenzhen Development Bank and Shanghai Pudong Development bank.

After adjusting for unsecured NPLs, however, the premium could emerge at well above two times, some analysts argued - which means the immediate returns likely to be delivered on the investment will fall well short of the normal 10-12 per cent hurdle HSBC sets for itself. Perhaps only half of that.

Valuing the deal in purely financial terms will also require more detail on the 'separate agreements to provide technical assistance and services to Bank of Communications' yet to be signed and shareholders and analysts will want to know whether those agreements include the authority to move credit managers into Bocom.

'Board representation is not enough,' remarked one.

For all the outstanding questions, however, investors were content to drive the share price almost 4 per cent higher before the announcement and yesterday's gyrations left those initial gains intact.

That's because the market is looking beyond the numbers and at the strategic significance.

HSBC directors appointed to the Bocom board will get to rub shoulders with fellow shareholders the Shanghai Ministry of Finance, the Shanghai city government, and Bao Steel (the largest steel manufacturer in China). Relationships established with principals who will directly or indirectly be bringing IPOs to the market will be invaluable when securing advisory and underwriting mandates.

HSBC will also get to combine with Bocom to market a host of retail products to its depositors including insurance policies and unit trusts and take a cut of the fees and commissions - accumulating market intelligence it can put to use when it is free to sell its own products after 2007.

In short, the immediate financial benefits of yesterday's deal will be modest. But investors are betting on the longer-term benefits.