Dah Sing's price surge renews takeover talk
A flurry of buying yesterday drove the share price of Dah Sing Financial Holdings up 2.32 per cent, renewing talk of an imminent merger or takeover of the mid-tier bank.
Punters, be warned. The siren call of Hong Kong banking consolidation in general, and the Dah Sing group in particular, has been sounding in the marketplace for more than three months and there is not much news in the latest noise.
Sure, a takeover or merger could be in the offing - and by consensus, principal subsidiary Dah Sing Bank is a prime target for either a local or foreign buyer looking to grow its presence in Hong Kong.
But that prospect has loomed long and large in the marketplace, and in the past 10 weeks or so, Dah Sing's share price has vastly outperformed other banking stocks.
After tumbling from a year's high of HK$43.90 on May 6 last year to $32.60 on September 24, it has now risen to $39.60 - a 21.47 per cent gain over the period, against a rise of just 5.21 per cent in the Hang Seng finance sub-index.
The stock is already trading on a rich multiple of 1.64 times forecast book value for last year, against 1.09 times for Bank of East Asia. And as the best prizes are picked out by predators, takeover prices are falling - in April 2001, DBS Group Holdings paid 3.1 times book value to take over Dao Heng Bank Group and six months later Citic Ka Wah Bank paid 1.4 times for Hongkong Chinese Bank.
So, the question that arises now if takeover talk is already factored into the share price - which seems likely - is has the market correctly priced Dah Sing's earnings' prospects in the new year?
One of the bank's most bullish supporters, Warren Blight of ABN Amro, thinks not. He has revised the target price for Dah Sing to $47.50. Dah Sing's forecast return on equity for this year of 16.46 per cent is beaten only by Hang Seng Bank (21.09 per cent), because of the latter's cost-saving relationship with parent HSBC Holdings. It massively outstrips the 9.74 per cent forecast for Bank of East Asia.
That is mainly because Dah Sing Bank is heavily focused on higher-yielding consumer business, and Mr Blight takes a positive view, expecting a robust recovery for Hong Kong's economy, falling charge-off rates on credit cards and a benign interest-rate climate.
'A recovery, albeit gradual, is imminent and will benefit Dah Sing most [because of its relatively higher exposure to consumer lending]. While the bull Hong Kong economic recovery view is not [yet] consensus, we believe Dah Sing is best-placed in the financial-related areas most likely to do well first,' he said.
Analysts at ING, JP Morgan, and UBS all included Dah Sing among their picks for this year, with ING rating it as its 'top recovery play'.
'Our rationale is based on Dah Sing's ability to leverage on its dominant position in credit card and personal lending,' ING said. 'This will allow it not only to maintain a high net interest margin under the current low interest rate environment, but also enable it to profit from a pick-up in loan demand when the economy recovers. The high charge-off and delinquency rates of its consumer loan portfolio should also improve as the unemployment rate eases.'
Clearly, the key assumption underlying this rosy view is a return to strong growth for the Hong Kong economy.
But voicing caution is Simon Ho of Macquarie Equities Asia. Dah Sing's credit-card portfolio had been a big contributor to profit and question marks remained over whether bankruptcy levels and charge-off levels across the industry would continue to weigh on profits this year, he said.
Revenues and takeover talk aside, cost savings present another justification for rerating Dah Sing's share price and news that it has laid off 120 employees as part of a merging process of its Dah Sing Bank and Mevas Bank units will have had as much to do with the spike in the share price as speculation on a takeover.
Graphic: card11gbz