Thursday, June 05, 2008

The Hong Kong acquisition of China Merchants Bank

The deal cost $4.66 billion, and valued the target at 29 times of the 2007 book value. People call this crazy, and Standard & Poor downgraded China Merchants Bank to Watch Negative, but I will say this is a good move.

S&P quoted the reason of downgrading as "CMB is short of managing practice in Hong Kong", but I will argue that CMB management is already prepared for it. Roughly one year ago, the management of CMB was asked if they want to expand in Hong Kong. A funny quote was "The number of bank branch in Hong Kong is higher than the number of restroom, it will be hard for us to make the progress". To me, the deal of this time represents the CMB's confidence in the future expansion.

Beyond the management confidence, there are still three other reasons for me to pro this acquisition.

First, the origin of CMB. CMB is originated from Shenzhen, a neighbor city of Hong Kong. Considering a lot of Hong Kong citizen residing in Shenzhen, CMB is already familiar with the customer culture in Hong Kong. Plus, CMB is the best in terms of retail banking in China, which will make it competitive in Hong Kong, a retail banking-dominated city.

Second, the RMB service of CMB. Currently, a lot of Hong Kong residents are saving RMB because of the continuous appreciation. CMB can provide a better service based on its RMB reserve from its mainland China branches. This is hard for the other Hong Kong banks because of their limitation in operating in mainland China.

Third, the increasing middle class in China. taking a survey on mainland Chinese who shop in Hong Kong, it will be amazing to see a high percentage of using CMB credit card. It will be much more convenient for them to enjoy a local service if they travel in Hong Kong. I believe this is only the first step for CMB. More and more overseas acquisition will happen because of the demand from Chinese consumers.

All in all, it is a high valuation, but it is a valuation after careful consideration. I look forward to a succesfull integration between CMB and Wing Lung.

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