Wednesday, September 12, 2007

[MORGAN STANLEY] ASIA/PACIFIC MORNING MEETING SUMMARY & KOREA EXCHANGE BANK & S.KOREA FIN. SERVICES & ASIA/PACIFIC STRATEGY

KOREA EXCHANGE BANK: HSBC IN BID TO ACQUIRE 51% OF KEB: VERY POSITIVE - CHAN HWANG

Conclusion: HSBC has agreed with Lone Star to buy a 51% stake of KEB at W18,045 per share, which is at the low end of our calculated M&A value for KEB (see Oversold, In Our View - Stick with Fundamentals, June 29, 2007). The proposed deal is still subject to receiving the necessary regulatory approvals. However, we believe that the announcement itself is very positive for KEB's minority shareholders and KEB's share price.
Minorities to benefit from buyout or deployment of KEB's excess capital: HSBC has said that KEB would remain a listed entity even after the completion of the proposed transaction. However, we think that HSBC may be very tempted to acquire 100% of KEB given: 1) KEB's strong fundamentals, 2) its excess capital, and 3) additional accretion to HSBC's earnings. Even if HSBC kept KEB listed on the KOSPI, minorities could benefit from the potential deployment of excess capital.
What if HSBC fails to get regulatory approvals?If HSBC fails to receive FSS approval, any potential bidders in any subsequent auction may have to pay more than W18,045. Investors should also bear in mind that Korean banks are expected to decide on their 07 dividend payments in February 08, which makes it possible that Lone Star could pay a large dividend for 2007 if the situation remained unclear.
1.4-2.5% accretive to HSBC's 2008E earnings: Anil Agarwal, MS's HK banks analyst, has run a pro-forma analysis for the transaction. Based on our estimates for KEB and assuming funding at 5.5%, we estimate that the transaction as constituted would be accretive to 2008 earnings for HSBC by about 1.4% without any positive synergies (HSBC Holdings: Acquisition of KEB - Impact Analysis, September 3, 2007). According to Anil's analysis, however, the accretion to HSBC's earnings could increase to about 2.5% if KEB increased non-interest income to assets to 1.9% (avg. for HSBC in Asia) from the current 1.3%.

S. KOREA FIN. SERVICES: HSBC'S PURCHASE OF KEB - POSITIVE FOR KEB, HFG, & IBK - CHAN HWANG
Conclusion: HSBC has agreed to buy KEB at W18,045 (based on KRW939.9 = US$1.0), which is the low end of our calculated M&A value for KEB (See "Oversold, In Our View - Stick with Fundamentals", June 29, 2007). We believe HSBC may face difficulties in winning FSS approval for the acquisition due to complications with Lone Star and KEB. Nevertheless, in our view, the announcement of the deal should be very positive for KEB, positive for Hana FG and IBK, and neutral for KB.
Very Positive for KEB: First, if the FSS approves the transaction, we think HSBC will be very tempted to acquire 100% of KEB (even though HSBC says it intends to keep KEB listed on the KOSPI). Second, even if HSBC dose not buy out minority shares, it may have to release excess capital of KEB, and minority shareholders will benefit. Third, if HSBC failed to receive FSS approval, any subsequent bidders were there to be any) might have to offer more than W18,045 considering fierce competition for KEB. Fourth, Lone Star may pay a large dividend for 2007 (decision to be made in Feb 08) if the situation remains unclear.
Positive for Hana FG and Industrial Bank of Korea: Given limited excess capital, Hana's intention to buy KEB has been a dilution risk to existing shareholders. Hence, HSBC's announcement will likely be positive for Hana's share price as its overhang issue has been removed. In addition, as we think that IBK could be the next target for any further industry consolidation (based on the government's intention to privatize the bank), any deal is also positive for IBK, in our view.
Disappointing, but Neutral to Kookmin Bank: Initially, it should be a disappointing for Kookmin's shareholders. However, we think downside risks on KB should be limited because 1) any positives from KEB have never been reflected in KB's current valuations, 2) there is still a possibility that KB could eventually acquire KEB, and 3) the anticipation of high dividends will provide its share price with downside protection.

ASIA/PACIFIC STRATEGY: MONTHLY UPDATE: A V-SHAPED REBOUND - MALCOLM WOOD

While Asia-Pac ex-Japan equities fell just 1.9% (in US$-terms) in August, they tumbled 15% until August 17, followed by a V-shaped 15.1% rebound. The China A- (+17.3%) and H-shares (+7.6%) significantly outperformed, while Malaysia and Thailand lagged. At a sector level, the defensive Telecoms (+5.1%) led, while the cyclical Consumer Discretionary and Tech lagged.
Asia-Pac market fundamentals: Consensus bottom-up MSCI AP ex-Japan 2007 earnings forecasts increased by 2.5 ppts to 15.1% YoY. Asia's forward P/E moderated to 14.9x from 15.7x in mid-July, but remained at a premium (4.5%) to the US. Liquidity conditions remained positive, with strong money growth. Sentiment soured, with foreigners record equity sellers.
Global equities were largely unchanged (-0.2%) in August, with the US rising 1.3%. Emerging markets fell 2.3%, with most market declining, expect China. Sector performance was mixed, with the defensive Consumer Staples and Utilities sectors relatively resilient.
Asia-Pac and Global macro update: Our global lead indicators point to a moderating outlook. However, our Asian lead indicators, led by China, remain strong.
Global bonds rallied: 10-year bond yields declined in the US (-21 bps) and Euro zone (-11 bps). In Asia, bond yields declined in Hong Kong, Taiwan and Australia, but rose in Indonesia, the Philippines, and Korea. The Central Banks in India, Australia, Korea, and China raised reserve requirements or their policy rates.
Currencies and commodities: The Thai Baht (-8.1%) and the high-yielding Kiwi (-7.4%) and Aussie (-3.7%) dollars fell sharply against the US dollar. Among commodities, WTI oil prices declined a sharp 5.3%, as did Zinc (-14.6%) and Copper (-7.1%).