Today's Markets: HSBC and the great stumble forward – Investors Chronicle

There’s a fishing expedition underway. Ping An, the Chinese insurer and HSBC’s (HSBA) largest shareholder believes that a demerger would unlock as much as $35bn (£28.9bn) in value for shareholders. It also accused HSBC of exaggerating the potential difficulties involved in spinning off its Asian business. 
There is obviously a political dimension bound-up with the proposal – if that’s the right word – and the UK government has previously drawn the ire of Hong Kong investors when UK regulators blocked the country’s banks from paying dividends due to the financial crisis that followed the initial outbreak of Covid-19.
UK parliamentarians had previously criticised the bank for supporting China’s national security legislation in Hong Kong and, by extension, the heavy-handed way in which it was applied by Chinese authorities. This extended to freezing the accounts of pro-democracy activists. And despite any protestations to the contrary, Ping An is certainly in thrall to Communist Party hacks in Beijing. Calls for the break-up of the bank are every bit strategic as they are financial, especially given the increased US congressional attention over the bank’s corporate governance in Hong Kong.  
But the bank is no stranger to controversy, as evidenced by the $1.9bn fine it incurred for facilitating the laundering of money by the Mexican drugs cartel headed by Joaquín “El Chapo” Guzmán. It has also been criticised by Chinese state media for its alleged role in the arrest of Huawei chief financial officer, Meng Wanzhou, who was accused by the US of trying to evade sanctions on Iran.
Asia now accounts for around 60 per cent of the banking group’s reported pre-tax profits, so it’s easy to understand the rationale on that basis alone, let alone relative growth prospects. However, it would be disingenuous to suggest that the spin-off of the Asian arm of the business wouldn’t be without its costs. HSBC has compiled a 14-point list of reasons why changing the bank’s structure could harm its corporate performance, ranging from the length of time it would take to the loss of direct access to US dollars. 
The bank estimates a break up would take up to five years due to its complex structure, so there is certainly the potential for value destruction. Indeed, the aggregate value of the bank’s customer accounts is split more of less evenly across its Hong Kong, UK and rest-of-the-world segments. HSBC has hired Goldman Sachs (US:GS) and investment bank Robey Warshaw to shore-up defences against Ping An. Unfortunately, a protracted wrangle over the direction and composition of the assets will divert attention from ongoing turnaround efforts that have already produced better-than-estimated profits through 2Q 2022.
Flutter Entertainment’s (FLTR) gamble in the American market looks like it could soon start to pay off, with revenue booming Stateside as other markets faltered. But the gambling company, which owns Paddy Bower and Betfair, made a half-year loss on the back of a chunky £286mn amortisation charge and sales were hit by actions anticipating stricter gambling regulations in its key UK market.
Total US revenue of £1.1bn was a 61 per cent improvement on last year, with the market almost overtaking the UK and Ireland as the company’s main sales generator. UK and Ireland revenue fell by 4 per cent to £1.1bn, with “proactive safer gambling actions” (such as stake and deposit limits trials) having their impact as the business awaits the outcome of the UK government’s upcoming white paper on the gambling sector. CA
There has been much talk about 888’s (888) acquisition of William Hill, which chief executive Itai Pazner said has “transformed” the business. This was completed on 1 July, and management disclosed in pro forma results that adjusted cash profits would have been up by a quarter if William Hill had been owned for the period.   
But we have to look at the statutory side of things. Revenue for the half-year was down by 13 per cent to £332mn, with UK sales plunging by a quarter as the business introduced “safer gambling policies”. Retail revenues benefitted from shops being open for the half after against the pandemic-hit prior year, but online sales were down by a fifth. Pre-tax profit came in at £14mn, a fall of 65 per cent. CA
Shares in GSK (GSK) and Haleon (HLN) are stabilising after growing investor concerns over upcoming litigation sent them plummeting on Wednesday and Thursday. 
The legal action concerns Zantac, a popular antacid that was recalled in 2019 after regulators raised concerns that it contained a carcinogenic compound known as NDMA. Some 3,000 personal injury cases have been filed against GSK in US courts and the first trial is due to commence later this month.
Zantac, which was available on prescription and over-the-counter, was released by GSK in 1983 and had become the world’s best-selling drug by 1988. Pfizer (US: PFE) and Sanofi (EU: SAN) also made generic versions. 
GSK shares dropped by 12 per cent yesterday, meanwhile its recently demerged consumer health business Haleon fell by 13 per cent. GSK has since seen a modest rebound of 4 per cent to 1,455.8p by mid-morning on Friday. The company has vowed to “vigorously defend itself against all meritless claims” concerning Zantac and cancer risk. JJ
The government is launching a consultation exercise into exempting the most energy-intensive industries from paying emissions levies.
Under the current Energy Intensive Industries Compensation Scheme, heavy power users such as steel, glass, cement and paper makers are exempt from 85 per cent of the UK’s Emissions Trading Scheme and Carbon Price Support mechanisms but the government is proposing to increase this to 100 per cent.
The measure is in recognition of the fact that prices paid for electricity by UK industry is higher than that by peers in Europe. The government acknowledged this could hamper investment and lead to some firms relocating operations to markets where fuel costs are cheaper.
The exemption will help to support 300 businesses supporting around 60,000 jobs, according to the Department for Business, Energy and Industrial Strategy.
“With global energy prices at record highs, it is essential we explore what more we can do to deliver a competitive future for those strategic industries so we can cut production costs and protect jobs across the UK,” said business secretary Kwasi Kwarteng.
Gareth Stace, director of lobbying group UK Steel, said the move should provide “much-needed relief in the face of extremely challenging circumstances”.
The consultation is open until 16 September. MF

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