Citigroup raises HSBC's target price to HKD 120.9, long-term investors believe that the privatization of Hang Seng shows confidence in the Hong Kong market

Citi released a report on the banking industry in the UK and Hong Kong, stating that last week it held meetings with 39 financial investors distributed across Australia, Singapore, and Hong Kong. Australian investors appear to be gradually increasing their international asset allocation, initially focusing mainly on UK domestic banks. In contrast, Singaporean investors generally hold relevant positions and have shown significant interest in Italian and Spanish banks as well as UBS. However, the focus of the meetings in Hong Kong (not surprisingly) centered on HSBC (00005.HK), Standard Chartered (02888.HK), and Bank of China Hong Kong (02388.HK), with the recently proposed acquisition of Hang Seng Bank (00011.HK) minority shareholder rights becoming a major topic of discussion.

Regarding hedge funds, Hong Kong hedge funds hold a pessimistic view on HSBC's privatization of Hang Seng Bank, describing the transaction as "disappointing." The acquisition price is considered unattractive (acquiring a business with a return on equity of only 10% at 1.8 times the price-to-book ratio), and the timing seems strange (before potential further write-downs of Hong Kong commercial real estate losses). The expected synergies are extremely limited, and it will eliminate technical buyback support (which accounts for 10% to 20% of daily trading volume). Most importantly: is this really the best use of funds? Hedge fund investors pointed out that choosing to buy Hang Seng shares instead of HSBC shares, even if it releases funds internally within Hang Seng, still requires paying a premium. Some Hong Kong hedge fund investors may suffer losses due to their positions (according to the bank's communication with investors, the consensus trade seems to be long HSBC and short Hang Seng).

Citi also found that long-term investors in Hong Kong have a more pragmatic attitude. One investor stated that while the transaction is "not the best, it is understandable." Although investors also believe the acquisition price is too high, long-term investors pointed out that this move simplifies the group structure, eliminates bureaucratic procedures within Hang Seng Bank, and demonstrates management's confidence in the Hong Kong market, which is undoubtedly a positive signal (the bank noted that, aside from office commercial real estate, local investors' sentiment in the region has indeed improved). Furthermore, the profit impact is at most neutral, and may even be slightly positive, with some revenue synergies expected. Meanwhile, the current valuation is still considered relatively low.

The bank stated that it has incorporated this transaction and the factors for suspending the buyback into its model, deciding to raise the target price for HSBC from HKD 118.2 to HKD 120.9, reiterating a "Buy" rating