CICC: HSBC HOLDINGS (00005) privatizes HANG SENG BANK (00011) dividend + repurchase return rate decline or short-term drag on stock price.

CICC released a research report stating that HSBC HOLDINGS (00005) announced last Thursday (the 9th) that it would acquire 6.8 billion shares of HANG SENG BANK (00011) at a price of 155 Hong Kong dollars per share in cash, with a total acquisition price of 106 billion Hong Kong dollars (about 13.6 billion US dollars). After the acquisition, HSBC's stake in Hang Seng will increase from the previous 63% to 100%. The acquisition can proceed only if 75% of minority shareholders of Hang Seng agree and less than 10% of shareholders disagree. If the progress goes smoothly, the company expects to complete privatization gradually by mid-2026. CICC has given a "outperform industry" rating to HSBC and a target price of 111.9 yuan. CICC stated that considering the increase in dividend yield and the decrease in share buyback return rate, the equity return rate for the 2026 fiscal year has decreased from 9.4% to 7.5%, and the equity return rate from the fourth quarter of 2025 to the third quarter of 2026 has decreased from 9.3% to 6.2%. CICC further pointed out that after the acquisition is completed, the per-share earnings of HSBC common stock, used as the basis for dividends, will increase because the profits attributable to minority shareholders of Hang Seng will no longer be deducted. The company has committed to maintaining a 50% dividend payout ratio, which means that the per-share dividend of HSBC common stock is increased, and the dividend yield is increased. The bank calculated that adding back the net profit attributable to Hang Seng minority shareholders to the net profit of HSBC common stock would increase the dividend yield by about 3%, equivalent to an increase in the dividend yield from 5.3% in the 2026 fiscal year to 5.4%; but it is expected that the buyback amount for the 2026 fiscal year will decrease from the previous 10 billion US dollars to 5 billion US dollars, equivalent to a decrease in the buyback return rate from 4.1% to 2%. CICC also pointed out that in the short term, the decrease in dividend and buyback return rate may drag down the performance of HSBC stock price. In the medium and long term, attention will be focused on whether the synergies brought about by the acquisition can sustainably boost earnings per share and the resumption of buybacks three quarters later. The report states that based on the discounted cash flow models for dividends and buybacks, without considering changes in ROE and return ratios three years after the merger, this acquisition has slightly increased dividends, while reducing buybacks in the short term, dragging down the company's valuation by about 5%. Looking at the price-to-book (P/B) valuation method, this acquisition has led to a decrease in net assets by about 4%. Assuming a P/B valuation level of 1.6 times for the company, this will further drag down the company's valuation by about 4%. Considering that the stock price has already fallen by 6% on the trading day after the announcement, CICC believes that the stock price has already adequately reflected the short-term impact of the acquisition. In terms of dividends and buyback return rates, the acquisition has led to a decrease in HSBC's dividend + buyback return rate to 7.5% for the 2026 fiscal year (reduced to 6.2% from the fourth quarter of 2025 to the third quarter of 2026), compared to STANCHART (02888)'s 8.8%, indicating a potential reduction in cost-effectiveness. CICC stated that the above calculations do not consider the changes in HSBC's long-term earnings per share and return on equity (ROE) brought about by the acquisition. They will continue to focus on the long-term effects of the acquisition. Upside risks include post-acquisition synergies driving ROE and dividend buyback return rates to perform better than expected within three quarters. Downside risks include HSBC's ROE and dividend buyback return rate post-acquisition falling below expectations in the medium to long term, as well as underperformance in the Hong Kong property market dragging down HSBC's and Hang Seng's performance below expectations.