Buffett's rejected US$500 million bid for a Chinese stock - Part 2

I wrote an article on 27 August 2008 to see what can we get out from Buffett's rejected US$500 million bid for a Chinese stock.

Here is the link.
http://financial-information-updates.blogspot.com/2008/08/buffetts-rejected-us500-million-bid-for.html

I have been reading around and here are more on what I found out.

At times when the stock market is bad, rumors will start to fly. We have seen the how the rumor has spread that says Buffett was interested in buying CITIC Bank of China. But it was later clarified that it was not true.

CITIC Bank's spokesman said that they only saw the news from the internet and have heard nothing of it previously. On 28 August CITIC Bank's Board of Directors representative said that the rumour has been clarified and there is nothing like what the rumour mentioned.

Actually, after Buffett's announcement, the first to think that Buffett was interested in CITIC Bank was an analyst named '潘大'. When the media first reported that Buffett was interested in CITIC Bank, it merely quoted what 潘大 concluded from his analysis on his article published on the internet. But no one really know who 潘大 is or was.

One of the people from an investment agency who previously owns shares of CITIC Bank thinks that with Buffett's 500 million US dollars and CITIC Banks share price before the rumour, the number of shares that can be bought is about 600 million shares and is only about 1.5% of the total holdings. According to Buffett's past investments, he will normally go for majority share holdings (PetroChina was an exception as the total number of shares were too huge). This 1.5% looks too stingy for him.

Another private equity person says that Buffett could have bought CITIC Banks directly fro the Hong Kong share market's H shares as the share price in the Hong Kong market at that time is lower than that in the China stock market. Buffett would not have picked the more expensive price to purchase.

Analyst from a China bank also thinks that it cannot be CITIC Bank. Globally, how the price of a bank was evaluated was using PB and not was normally used in China PE. Banks trade currencies and the risks involved are great so it would be more suitable to use net assets to calculate. CITIC Bank's asset quality is only normal and even if were to buy, the timing is also not then. Buying at the secondary market, banks prices are at about the SSE index 2700 level, it is not cheap, normally Buffett will buy only at a very safe price level. The analyst also mentioned that Buffett could be looking at companies which have market monoploy in consumer products, financial stocks and media related stocks could be what Buffett is looking at.

The guessing has also been spreading. From China Life Insurance (中国人寿) to China Vanke (万科) till the not yet listed CICC. Looks like the answer can only be answered by Buffett himself.

Regarding the guess about China Life Insurance, its management during the result announcement in Hong Kong recently has said that they do not have any contact with Buffett although the rumour has not ended yet.

About Vanke, currently the China macro economic policies are not too good for it. Although Chinese investors do not see it perform, but when people fear it is when Buffett's greed for it starts. This statement has been spreading through investors in China. But there were also analysts to point it out quickly that Buffett does not like companies that gives dividends and equity incentives and so refute the possibility about Vanke.

On 26 August, CITIC Bank's share price opened low but went high during trading hours and stopped trading at about 10:05 am because price has reached the upper trading limit, making the stock trading index turn positive. The stock price performance since the start of the rumour was much better then the stock trading index and trading volume was at a 7 month high. CITIC Bank share performance has been declining since August last year with seldom big price jumps.

To a lot of institutions, this presents a great opportunity to dump their CITIC Bank shares. From trading data on the 26 August, most funds and QFII dump their holdings during that time. From trading data, there were 6 accounts that have the biggest selling transactions. 4 were from funds which sold about a total of 25 million RMB. Another account is a QFII which sold close to 10 million RMB topping the sellers list. Buyers were mostly floating capitals and private equities.

After the rumours were clarified, the short term performance for CITIC Bank stock came to an end. On 28 August, CITIC Bank share price went down.

In fact, in the eyes of China institutions, CITIC Bank is not what they think was the target of Buffett's interest. CICC in its research report gave a neutral rating for CITIC Bank A-shares in China. A China brokerage firm, HaiTong Securities (海通证券) thinks that after 2009, CITIC Bank can grow within 20%. Long term wise it sees potential in faster growth of its scale.