RHB Bank Buys Bank Mestika Dharma

FinanceAsia & Business Times:

Malaysia's RHB Capital will buy 80% of Indonesia's Bank Mestika Dharma for Rp3.118 trillion ($329 million). RHB will fund the deal through a RM$1.3 billion ($384 million) rights issue.

RHB Capital is paying 3.5 times Bank Mestika's book value of Rp1.114 trillion as per December 31, 2008, and 23 times the Indonesian bank's earnings for calendar 2008.

RHB Capital is the
holding company of RHB banking group, the fourth-largest financial services provider in Malaysia. RHB Bank is the largest entity in the group. In 2008 RHB Bank earned RM$1.3 billion before tax, registering growth of 45% over the previous financial year.

Malaysia's Employees Provident Fund (EPF) is the largest shareholder in RHB Capital with a 57% stake. Following a sell down by EPF last year, Abu Dhabi Commercial Bank (ADCB) owns 25%.

RHB Capital was advised on the Bank Mestika acquisition by RHB investment bank and Rothschild. It will be advised by RHB investment bank and CIMB on the rights issue.

RHB said in a Bursa Malaysia filing yesterday that the price took into consideration "the strategic importance of Indonesia as a key market in RHB Capital's regional expansion strategy, in view of its attractive macroeconomic factors, strong cultural similarities and economic inter-connections with Malaysia, as well as its close geographical proximity to Malaysia".

Bank Mestika is headquartered in Medan in Indonesia and has been operating since 1956. It obtained a foreign exchange banking license in 1995, although it has not yet started foreign currency banking. Bank Mestika has a network of 50 branches across Indonesia. It offers trade finance, home loans, automobile loans and commercial loans. On the corporate side, it serves primarily small and medium-sized enterprises.

RHB has also negotiated an option to buy another 9% of Bank Mestika for Rp351 billion plus a performance-related payment of up to 15% per annum, compounded annually but adjusted for dividends earned by RHB. RHB can exercise the option any time between three and seven years from the closing of the acquisition. The acquisition is expected to be completed by the second quarter of 2010.

RHB has not yet decided at what price it will offer existing shareholders rights shares. RHB indicated that the price will be at a discount of between 20% and 30% to the theoretical ex-rights price (Terp), based on the five-day volume-weighted average price of RHB's shares just before the board meeting to fix the rights price. The rights issue will be launched only if the acquisition proceeds according to plan. The rights shares being offered are renounceable, thus could be a way for ADCB to further consolidate its stake in RHB Capital. ADCB has said it is keen to enhance its presence in new markets.

RHB Capital's director Tan Sri Azlan Zainol said Thailand is next on its regional expansion, though its immediate plan is to grow via the only branch there and buying a Thai lender is "not yet on its radar". RHB Capital also has branches in Singapore and Brunei and plans to apply for a full banking licence in Vietnam.
It aims to boost overseas earnings contribution to 40 per cent over the long term and aspires to be among the top three lenders in the region by 2020.

RHB Capital currently earns 4 per cent of profits from abroad and the purchase of Bank Mestika will double this. There are more than 100 banks in populous Indonesia, but the market is under-served with a low penetration rate of banking services. Indonesian lenders consistently enjoy high net interest margin of over 5 per cent, more than double that of their peers in Malaysia.

The bank is well-managed, profitable and well-capitalised with more than 15 per cent of return on equity (ROE) in the past four years, Azlan said. ROE is a measure of how well profits are being reinvested.

Last year, Malayan Banking Bhd paid 4.3 times book for Bank Internasional Indonesia in a highly criticised deal, while HSBC Holdings plc forked out slightly more than four times book value for Bank Ekonomi, 12th biggest by market value, last October.

RHB Capital has agreed to buy 80 per cent of Bank Mestika from tightly-held PT Mestika Benua Mas after a competitive bidding. The purchase is expected to be completed by the second quarter of next year, and is conditional upon the successful listing of Bank Mestika on the Indonesian bourse. Bank Mestika has 50 branches and six cash outlets, almost all in Sumatra. The lender made a net profit of RM63 million last year.



p/s photos: Yu Takahashi

Need To See Genuine Recovery in China Exports

The bulk of the emerging markets bull run was precipitated on the China story. Aggressive bank lending in China kick started the process. There were other factors including Chinese state firms restocking their inventory and piling up the buying in commodities across the board. Both factors were criticised as being artificial, and may be only temporary. We needed to see Chinese exports stabilising and even growing for the fiscal measures to be worth its salt. If Chinese exports started showing signs of life, it also means the recovery will be more genuine, and also other countries are starting to come to life. As long as genuine demand starts filtering through, the entire process of recovery will be viewed as more solid. Signs are appearing that the China story is becoming more believable.

Overview: Chinese exports have been contracting on a y/y basis for nine months but may now be showing signs of stabilization, growing on a seasonally adjusted monthly basis in June and July 2009. Imports have also begun to increase on a monthly basis, reflecting the increase in commodity prices since the beginning of 2009 but also the increase in production and domestic demand. Export weaknesses are expected to be a drag on growth in H2 2009, after subtracting from growth in Q2 2009.

• Chinese exports contracted 23% y/y in July 2009, slightly worse than the 21.4% y/y contraction experienced in June but an improvement from May's 26.4% y/y. July's decline, the ninth consecutive monthly fall, makes this the longest string of export declines recorded, topping 1995-96. Imports fell 14% y/y in July 2009 from 13% in June (a continued improvement from the 20% rate of contraction in early 2009), leaving a trade surplus of US$10.3 billion, up from the US$8.54 billion of June.
  
• On a seasonally adjusted monthly basis, exports rose 5.2% and imports 3.5%, a continued improvement.
• Other economic data released for July 2009 reflect a deceleration in the pace of investment growth, a significant reduction in bank lending, continued y/y deflation, a slight increase in value-added industrial production and still robust retail sales.
• Exports and imports both rose on a m/m basis in July 2009--increasing by 10% or US$10 billion and 8.5% or US$7.6 billion respectively. Exports to the U.S. increased US$2.5 billion to only 14% below July 2008 levels, indicating that an improved external environment could support trade. Import volumes of oil and products, iron ore and steel rose from June levels, but those of copper and aluminum ores fell.
  
• In June 2009, exports rose 4.5% on a seasonally adjusted basis m/m from May, and imports climbed 2.2%.
  
• Analysts point to the export order sub-index of the purchasing managers' index (PMI) to point to a recovery, but the improvement could be sluggish given weak external demand.

Are Imports Picking Up?

• Raw material imports picked up before manufacturing imports. The volumes of raw materials imports rose substantially after February 2009, even though price declines led to falls in nominal terms. However by May and June 2009, imports used in Chinese domestic economy - so-called "normal" imports began picking up and are now higher than in 2008. Imports of goods for the processing trade continue to be weak however.
• Despite sharp y/y declines, Chinese exports have remained relatively flat or increasing in m/m terms after falling sharply in January 2009. In normal times, y/y figures paint a more accurate picture, but they may obscure trends in fast-changing times.
• Imports have lagged behind the investment rebound. The government extended export incentives again in June 2009, the seventh export tax rebate increase in less than a year.
• Exports have stabilized on a seasonally adjusted basis. China's export rebound supported partial recovery in Asia and boosted Latin America as well. China’s exports appear to have bottomed out as domestic demand picks up. China’s trade surplus is likely to decline substantially, and China’s accumulation of FX reserves should ease markedly.
  

Changing Composition of Chinese Trade

• China has been taking the opportunity to purchase commodities at cheaper prices. The increase in scrap-metal purchases suggests Chinese purchases may be price-sensitive.
• Processing trade has been falling as a share of imports and exports. In Q1-Q3 2008, processing trade accounted for only 40.8% of total trade value, compared with 45.4% in 2007. This trend, which reflected higher prices, was in line with the government’s policy of discouraging the exports of products that are energy- and resource-intensive, highly polluting and both labor-intensive and low value-added. The share of processing trade fell again in Q1 2009 to 40% of trade from 42% in Q4 2008.
  

Leading Indicators of Exports Suggest Stabilization

• The total trade volume in the Canton Fair in early May was US$26.23 billion, down 16.9% from fall 2008, a leading indicator of weaker trade. Trading volume fell 17.5%.
  
• The U.S. and EU still absorb over 50% of total exports and tend to be the final destination of goods in Asia. Intra-Asia trade plunged in Q4 2008 but has rebounded on restocking.

p/s photos: Yu Takahashi

AmInvestment Bank Launches Put & Call Warrants

AmInvestment Bamk took advantage of Bursa’s new guidelines, which took effect on Aug 3, which allows put warrants to be issued in addition to call warrants. The HKEC put and call warrants are issued at 20 sen and 18.5 sen respectively. They are European-style cash-settled, which means investors can only exercise the right until maturity date. The exercise price is HK$143.90, which was the closing price of HKEC on Wednesday. The warrants have a tenure of 18 months with an exercise ratio of 125 warrants to one HKEC share.

AmInvestment Bank chose HKEC for its long-term prospects and short-term trading volatility. The stock historically had price movements of up to HK$16.95, or 27%, a day.

AmInvestment Bank has also introduced its warrant trading portal, AmWarrants.com, as a tool for the public to source for term sheets and prospectuses of its issued warrants, as well as access live pricing of all the warrants listed in the country and the underlying shares of these warrants.

My worthless views:

a) excellent move to allow put warrants by Bursa (after screaming my head off so many times in the past)

b) excellent move by the team at AmInvestment Bank to launch a pair of put and call instead of just a put warrant as this will allow for same-same comparison, peer-to-peer valuation, instead of just one directional bet. This will give investors more confidence in terms of valuing and trading the put warrants as it is new to the market place.

c) the put and call pairing will reduce "manipulation excesses by investment banks launching call warrants" as investors themselves can hedge the volatility and mispricing if one of the warrants get out of whack in valuation - previously the 'banker' will rub their hands gleefully when the call warrants traded at excessive premiums in the first few days... allowing the banker to keep selling call warrants and locking in great premiums.

Looks like the market place is growing up, good sign all around, the guys at OSK warrant issue desk may be bitching about this however, no more easy profits.



p/s photo: Yu Takahashi