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1、Asia Pacific Equity Research 26 August 2010 Corrected Note Agricultural Bank of China - H Initiation Overweight 1288.HK, 1288 HK Uniquely positioned for more growth; OW Price: HK$3.42 Price Target: HK$4.60 China Banks Samuel ChenAC (852) 2800-8557 Cindy Xu (852) 2800-8502 Sunil Garg (852) 2800-851
2、8 J.P. Morgan Securities (Asia Pacific) Limited 3.0 3.3 3.6 HK$ Aug-09Nov-09Feb-10May-10Aug-10 Price Performance 1288.HK share price (HK$ MSCI-Cnx (rebased) YTD1m3m12m Abs 6.9%-2.3%6.9%6.9% Rel 13.0%-0.6%-2.4%4.2% Agricultural Bank of China - H (Reuters: 1288.HK, Bloomberg: 1288 HK) Year-end Dec (R
3、mb in mn) FY08AFY09AFY10EFY11EFY12E Operating Profit (Rmb mn) 103,841 114,070 159,245 200,062 244,033 Net Profit (Rmb mn) 51,47464,99296,152 130,843 161,387 Cash EPS (Rmb) 0.270.250.330.400.50 Fully Diluted EPS (Rmb) 0.270.250.330.400.50 DPS (Rmb) 0.000.080.060.160.20 EPS growth (%) 105.6%(7.3%)32.2
4、%21.9%23.3% ROE (23.5%)20.5%21.6%21.7%22.6% P/E 11.112.09.07.46.0 BVPS (Rmb) 1.121.321.692.032.37 P/BV 2.72.31.81.51.3 Div. Yield 0.0%2.6%2.0%5.4%6.6% 52-wk range (HK$) 3.60 - 3.20 Market cap (Rmb mn) 91,905 Market cap ($ mn) 13,518 Shares outstanding (mn) 30,739 Fiscal Year End Dec Price (HK$) 3.42
5、 Date Of Price 25 Aug 10 Avg daily value (HK$ mn) 652.0 Avg daily value ($ mn) 84.0 Avg daily vol (mn) 193.0 MSCI-Cnx 6,203 Exchange Rate 7.78 Source: Company data, Bloomberg, J.P. Morgan estimates. See page 77 for analyst certification and important disclosures, including non-US analyst disclosures
6、. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making t
7、heir investment decision. Uniquely positioned: We initiate coverage on ABC-H with OW. ABC is the third-largest bank by assets in China, and its branch network is the largest with the most extensive coverage in fast-growing county areas which accounted for about 50% of the nations GDP in 2008, in add
8、ition to a fully fledged urban presence. Its presence in “rural China” is minimal. Retail banking positioning is notable with the biggest customer base, No. 2 market share (16.5% as of 2009) in retail deposits and a leading retail fee business. Investment case: We believe ABCs unique footprint trans
9、lates into a competitive edge in funding as well as positioning for growth as: (1) ABC appears ideally positioned to capture the faster GDP growth in Chinas county areas (county areas GDP CAGR was 1.5ppt higher than that of urban areas between 2000 and 2008); (2) it has a very liquid balance sheet (
10、55% L/D ratio, only 39% L/D in county areas, liquid assets at 23% of assets) and the highest proportion of demand deposits (56%) should drive faster NIM expansion vs. other large banks as balance sheet gearing and interest rates rise; (3) it has the highest delta in earnings and profitability improv
11、ementdrivers include asset quality improvement, NIM, volume growth, and efficiency. We expect balance sheet metrics to be more peer-aligned by 2012. Lower credit costs should also help drive FY10-12E earnings CAGR of 35% vs. 25% for the sector. Risks and challenges: Other than generic sector challen
12、ges, we believe risks specific to ABC relate to: (1) higher credit risk in certain loans due to higher exposure to unpredictable natural disasters, diseases and climate changes; (2) still weaker operating efficiency, especially in county areas; (3) asset quality metrics still lag behind peers. While
13、 these are weaknesses today, we expect a fast improvement and alignment with peers over the next two years, and (4) preferential policies in favor of ABC may not be permanent or exclusive. 34% upside potential: Based on a sustainable ROE of 16.5%, our P/BV-based Dec-10 PT is HK$4.6, implying 30% ups
14、ide. Our PT implies a 2x FY11E and 10x FY11E P/BV. Although the relative outperformance opportunity has been largely realized since its listing, we expect ABC to slightly outperform ICBC and CCB. Earnings surprises may drive some relative re-rating opportunities. 2 Asia Pacific Equity Research 26 Au
15、gust 2010 Samuel Chen (852) 2800-8557 Table of Contents Investment summary3 Company overview4 Investment positives 7 Key challenges and risks12 Financial forecasts .15 Fair valuation.16 Key strength and opportunities 19 Significant growth potential in county area banking market .19 A strong platfor
16、m to capture growth potential in both county and urban banking 24 Potential to leverage its cheap deposit franchise27 Potential multiple drivers for above-peer earnings growth and ROA improvement in the next two years31 Fair valuation40 Two-stage DDM model .40 Fair valuation sensitivity42 Peer valua
17、tion comparison.43 Key challenges and risks.45 Structurally higher risks in certain loan exposure in county area banking.45 Lower operating efficiency yet to be improved.46 Potential economic slowdown may affect loan quality46 Common macro challenges faced by the sector.47 Rising competition in coun
18、ty area banking49 Preferential policies may not be permanent.49 Financial analysis.51 Balance sheet analysis51 Profitability analysis57 Company overview.62 History and restructuring .62 Company overview63 Business segment analysis.68 Agricultural Bank of China: Summary of financials74 ABC Quick fact
19、s Assets = Rmb8,883B Loans = Rmb4,138B Deposits = Rmb7,498B Note: Data are as of Dec-09. Market positioning and share - Third-largest bank in China by assets, with over 99% assets in mainland China. - No.2 in retail deposits with a market share of 16.5%. It has the largest retail client base. - Seco
20、nd-largest custodian bank and the largest custodian bank for the insurance sector. - No.1 in total cards issued, total bank card deposits, and No.1 in debt card transaction volumes. Business mix (as of 2009) - Corporate banking (56% of pre-tax profit, 55% of revenue, and 80% of loans including disco
21、unted bills) - Personal banking (19% of pre-tax, and 33% of revenue) - County area banking accounted for about 40.5% of total deposits, and 36.4% of total loans Ownership structure 83.13% by the government including 39.21% stake owned by MOF and 40.03% by Huijin, plus 3.89% stake held by SSF 3 Asia
22、Pacific Equity Research 26 August 2010 Samuel Chen (852) 2800-8557 Investment summary Company Description P (2) lengthening of asset duration; (3) a rising market rate environment which increases its deposit margin; and (4) changing investment bond mix. In particular, increasing lending in County a
23、rea banking may help improve its overall NIM given higher spread in county loans. Lower tax rates due to preferential state policies. We believe operating ROA and ROA would further improve in the next two years, allowing ROE to sustain at above 20% at least in the next two years. This will be broadl
24、y in line with other state-controlled banks, in our view. Expected strong 1H10 performance ABC is due to release its 1H10 earnings early next week. We expect improving operating trend and strong asset quality performance. In fact, its operating performance in 1Q10 fully supported our bullish 2010 ou
25、tlook on the bank. During 1Q10, both PPOP and attributable income reached about 25% of our FY10 estimates, and asset quality improvement was very strong. On a quarterly basis, however, we expect a modest decline in PPOP and 11% decline in the bottom line due to increased costs in 2Q and also higher
26、credit charges to boost collective impairment reserves. Despite of the sequential decline, we expect net profit of Rmb47B for 1H10, reaching 72% of FY09s growth, or 49% of our FY10 earnings estimate. We estimate NIM to rise to 2.45% for 1H10, vs. 1Q10s 2.42%. We expect NIM to further expand a furthe
27、r 5bp to 2.49% in 2H10. We expect nearly 40% yoy fee growth to Rmb22.1B. Cost-to-income ratio may improve notably to 42% for 1H10. Although we expect some seasonality in 2H10, we expect FY10E CIR to improve by 5ppt vs. 2009. NPL balance may have further declined by 3% q/q to Rmb106B, on the back of
28、expected low gross new NPL formation (annualized around 25bp of average daily loans), and very strong recovery (During 1Q10, the bank already recovered 11.5% of NPL balance as of year beginning). We expect NPL coverage to further rise to 135%. Note that our estimated sequential quarterly pickup in c
29、redit costs to 82bp in 2Q10 was still mainly driven by increased collective impairment to boost LLR coverage. 12 Asia Pacific Equity Research 26 August 2010 Samuel Chen (852) 2800-8557 Table 5: Key P Income 0.00% -0.02% -0.01% 0.00% 0.00% 0.00% 0.00% 0.00% -0.01% 0.00% 0.00% -0.01% 0.00% Pre-Tax RO
30、A 1.49% 1.47% 1.27% 1.23% 1.32% 0.91% 1.12% 1.18% 1.12% 1.27% 1.23% 1.34% 1.18% Tax 24.0% 24.0% 24.0% 23.0% 22.5% 24.0% 24.0% 24.0% 23.0% 24.0% 23.7% 23.5% 23.0% Minorities Interests 0.0% 0.0% -0.04% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.01% 0.0% 0.0% ROA 1.12% 1.11% 0.92% 0.95% 1.02% 0.69% 0.85% 0.
31、90% 0.86% 0.96% 0.93% 1.02% 0.91% E/A 6.4% 6.4% 6.0% 5.7% 5.5% 4.9% 5.9% 5.8% 5.6% 6.5% 5.9% 6.0% 5.6% ROE 17.7% 17.4% 15.5% 16.7% 18.5% 14.0% 14.4% 15.5% 15.3% 14.8% 15.9% 17.0% 16.2% Cost of equity 11.4% 11.4% 11.4% 11.5% 11.5% 11.6% 11.6% 11.5% 11.6% 11.3% 11.5% 11.4% 11.5% LT-growth 6.0% 6.0% 5.
32、8% 6.0% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.3% 6.0% 6.0% Fair terminal PB 2.18x 2.10x 1.73x 1.94x 2.40x 1.46x 1.53x 1.79x 1.74x 1.75x 1.85x 2.02x 1.86x Fair PE multiple 12.3x 12.1x 11.2x 11.6x 13.0x 10.4x 10.7x 11.6x 11.4x 11.8x 11.7x 11.9x 11.5x 50bp increase in “K” -7% -7% -7% -7% -9% -8% -8% -9% -8%
33、-9% -7% -7% -7% 50bp cut in LT growth -4% -4% -3% -4% -5% -3% -3% -4% -4% -4% -3% -4% -3% 50bp cut in norm ROE -4% -4% -4% -4% -4% -6% -6% -5% -5% -6% -5% -4% -4% Source: J.P. Morgan estimates. Like other Chinese banks, ABCs estimated fair values are also sensitive to changes in key assumptions. Oth
34、er than high sensitivity to cost of equity, we believe a few elements in normalized ROE assumptions are also very important, including normalized credit costs, non-interest income contribution and tax rates. We estimate every 10bp change in normalized credit costs would result in around 6% change in
35、 the fair value. We estimate every 1ppt change in non-interest income contribution would result in around 4.3% change in the fair value. The table below shows fair valuation ranges based on different cost of equity assumptions. Table 8: Fair value sensitivity to different cost of equity assumptions
36、Cost of equity LT growth Norm. ROE Fair P/BV Dec-10 FV P/BV P/E RmbB 10E 11E 10E 11E Low 12.0% 5.5% 16.2% 1.65x 3.47 2.1x 1.7x 10.5x 8.6x 11.8% 6.0% 16.2% 1.78x 3.73 2.2x 1.8x 11.3x 9.3x Mid 11.5% 6.0% 16.2% 1.86x 3.90 2.3x 1.9x 11.8x 9.7x 11.3% 6.0% 16.2% 1.94x 4.08 2.4x 2.0x 12.4x 10.1x High 11.0%
37、 6.0% 16.2% 2.04x 4.29 2.5x 2.1x 13.0x 10.6x Source: J.P. Morgan estimates. Peer comparison Below is an ROE and valuation for other national Chinese banks under our coverage. 18 Asia Pacific Equity Research 26 August 2010 Samuel Chen (852) 2800-8557 Figure 14: ROE and P/B of Chinese banks, valuatio
38、n as of 25 August 2010 market close CMB-A BOC-A BoComm-A CCB-A Minsheng-A SPDB SZDB ICBC-A Citic-A BOC-H BoComm-H CCB-HICBC-H Citic-H Minsheng-H CMB-H ABC-H 1.0 1.4 1.8 2.2 2.6 3.0 16.0%18.0%20.0%22.0%24.0% 10E ROE 10E PB Source: Bloomberg, J.P. Morgan estimates. Figure 15: SWOT analysis for ABC Wel
39、l-recognized brand name nationwide The largest branch network and ATMs covering both urban and county areas in China. Leadership position in county banking Largest retail customer base, second largest retail deposit base in China Strong cheap deposit franchise (highest % of demand deposits. Comprehe
40、nsive IT platform and improved risk management Experienced and capable management Strength Opportunity Favorable economic growth prospects with industrialization and urbanization Rapidly growing need for more financial products in both corporate and retail sector. Increasing income in county househo
41、lds supports need for WM and other personal financial products. Low consumer credit penetration in China counties, with significant potential to increase its L/D ratio. Improved infrastructure for credit risk management Preferential government policies for agriculture/rural development Threat High c
42、redit risk in economically less developed areas and agriculture-related business Risk of double-dip in global economy caused from European debt issue Near-term policy risks on property tightening and tighter control on LGFV loans. Rising competition in county banking Preferential policies may not be
43、 sustainable Low cost efficiency compared with other state-controlled banks, mainly due to low cost efficiency in county banking Low asset quality at county level and still higher credit risk faced in certain lending in county areas in future High percentage of short-term manufacturing loans in coun
44、ty loans are more vulnerable to export demand Slightly higher percentage of property development loans Weakness Well-recognized brand name nationwide The largest branch network and ATMs covering both urban and county areas in China. Leadership position in county banking Largest retail customer base,
45、 second largest retail deposit base in China Strong cheap deposit franchise (highest % of demand deposits. Comprehensive IT platform and improved risk management Experienced and capable management Strength Well-recognized brand name nationwide The largest branch network and ATMs covering both urban
46、and county areas in China. Leadership position in county banking Largest retail customer base, second largest retail deposit base in China Strong cheap deposit franchise (highest % of demand deposits. Comprehensive IT platform and improved risk management Experienced and capable management Strength
47、Opportunity Favorable economic growth prospects with industrialization and urbanization Rapidly growing need for more financial products in both corporate and retail sector. Increasing income in county households supports need for WM and other personal financial products. Low consumer credit penetra
48、tion in China counties, with significant potential to increase its L/D ratio. Improved infrastructure for credit risk management Preferential government policies for agriculture/rural development Opportunity Favorable economic growth prospects with industrialization and urbanization Rapidly growing need for more financial products in both corporate and retail sector. Increasing income in county households supports need for WM and other personal financial products. Low consumer credit penetration in China counties, with significant potential to increase its L/D ratio. Improv