Sunday, December 22, 2013

China Construction Bank :Solid capital base; disciplined operations (MKE)

China Construction Bank
Buy (Initiation)
Share price: HKD6.25 (27 Nov 2013)
Target price: HKD7.25
Solid capital base; disciplined operations

Selective loan growth and slight NIM pressure. China Construction Bank (CCB)’s loan growth remained healthy at 11.5% 9M13. Key drivers were SME loans, residential mortgages and overseas lending. CCB also shifted its loan growth towards less risky Central and Western China. CCB maintained its net interest margin (NIM) at 2.71% in each quarter during 9M13. However, its loan-to-deposit ratio rose to 69.1% in Sep 2013 (66.2% in Dec 2012). To regain market share in deposits and factor in potential price competition stemming from interest rate deregulation, we forecast CCB’s NIM to narrow to 2.66% in 2014.


Disciplined fee income development and costs control. CCB has turned cautious in selling trust products and shifted towards lower-margin standardized wealth-management products. Still, with strong growth in consultancy and advisory, bank cards and electronic banking services fees, we forecast its net fees to grow at a CAGR of 12.4% during 2012-15. Total expenses grew 8.7% YoY for 9M13, slower than its revenue growth. With good track record of disciplined costs control, we forecast CCB’s cost-income ratio to fall below 37% during 2013-15.

Sound asset quality. Total NPLs increased slower by CNY1.8b QoQ in 3Q13 (+CNY3.2b in 1Q13; +CNY2.5b in 2Q13). However, CCB’s credit cost rose from 0.38% in 2Q13 to 0.45% in 3Q13. We believe this was due to increased NPL write-offs. Overdue loans within three months increased by CNY2.2b HoH to CNY26.9b in Jun 2013. CCB has classified 89% of its overdue loans as NPLs in Jun 2013. Under our conservative assumptions of: (i) an annual increase in NPLs of over 10% for the risky loans; (ii) new NPLs of 3-5% p.a. for its LGFV loans (CNY377b in Jun 2013); and (iii) an annual increase in collective loan impairment allowance ratio of 5bps during 2013-15, we forecast a slight rise in CCB’s credit cost to 0.72-0.96% in 2013-15 (0.55% in 2012).

Strong capital positions to sustain dividend payout. Under the Basel III capital rules, CET1 CAR remained solid at 10.9% in Sep 2013. With the shift towards less risky loans and wealth-management products, we forecast CCB’s CET1 CAR will remain above 10% even if maintains a dividend payout ratio of 35% during 2013-15.

Initiate with a BUY rating. With the projections of narrowing NIM and higher credit cost, we forecast CCB’s ROE will fall to 19-20% in 2014-15 (22% in 2012). Based on a long-term ROE assumption of 16.75% in our Gordon Growth Model (GGM), we derived a target price of HKD7.25, equivalent to a projected Dec 2014 P/B of 1.2x.

Investment Positives
Lower cost-income ratio than peers: With proven track record of tight control on staff cost and general and administrative expenses, we forecast CCB’s cost-income ratio to fall below 37% during 2013-15, lower than most of its peers.

Selective lending business and prudent provisioning policy: CCB has shifted towards less risky loans in Central and Western China and overseas lending in recent years. It has classified 89% of the overdue loans as NPLs in Jun 2013 and its provision-to-loan ratio remained high at 2.62% in Sep 2013.

Strong capital positions: CET1 CAR stayed at 10.9% in Sep 2013 under Basel III capital rules. We forecast CCB’s CET1 CAR will remain above 10% even if maintains a dividend payout ratio of 35% during 2013-15.

Investment Concerns
Moderate deposit growth: Total deposits grew slower than market average at 6.8% YTD in Sep 2013. As such, its loan-to-deposit ratio rose to 69.1% in Sep 2013. We see potential NIM pressure if management intends to regain market share in deposits.

Disciplined expansion in fee income business: CCB recorded a decline in agency service fees and wealth management fees of 10.6% YoY and 7.6% YoY in 1H13, mainly as it sold fewer trust products and the shift towards lower-margin standardized wealth-management products. We forecast its net fees to grow at a CAGR of 12.4% during 2012-15 (vs. over 20% p.a before 2012).

Valuation and Recommendations
We forecast CCB’s net profit to grow at a CAGR of 8.4% during 2012-15. Key earnings drivers will be healthy loan and net fees growth, and tight costs control. We forecast its core ROE will fall to 19-20% in 2014-15 (22% in 2012).

We project a long-term ROE assumption of 16.75% for CCB in our GGM. This is higher than its historic trough ROE of 15% during 2005-12. We derive our target price at HKD7.25 based on the fair Dec 2014 P/B of 1.2x estimated from the GGM. This is also slightly above CCB’s historic trough P/B of 1.1x during 2005-12. We initiate coverage of CCB with a BUY rating. Key risks to our rating include asymmetric interest rate hikes and a hard landing in China.




Source/Extract/Excerpts/来源/转贴/摘录: MKE-Research,
Publish date: 28/11/13

No comments:

Post a Comment

Warren E. Buffett(沃伦•巴菲特)
Be fearful when others are greedy, and be greedy when others are fearful
别人贪婪时我恐惧, 别人恐惧时我贪婪
投资只需学好两门课: 一,是如何给企业估值,二,是如何看待股市波动
吉姆·罗杰斯(Jim Rogers)
“错过时机”胜于“搞错对象”:不会全军覆没!”
做自己熟悉的事,等到发现大好机会才投钱下去

乔治·索罗斯(George Soros)

“犯错误并没有什么好羞耻的,只有知错不改才是耻辱。”

如果操作过量,即使对市场判断正确,仍会一败涂地。

李驰(中国巴菲特)
高估期间, 卖对, 不卖也对, 买是错的。
低估期间, 买对, 不买也是对, 卖是错的。

Tan Teng Boo


There’s no such thing as defensive stocks.Every stock can be defensive depending on what price you pay for it and what value you get,
冷眼(冯时能)投资概念
“买股票就是买公司的股份,买股份就是与陌生人合股做生意”。
合股做生意,则公司股份的业绩高于一切,而股票的价值决定于盈利。
价值是本,价格是末,故公司比股市重要百倍。
曹仁超-香港股神/港股明灯
1.有智慧,不如趁势
2.止损不止盈
成功者所以成功,是因为不怕失败!失败者所以失败,是失败后不再尝试!
曾淵滄-散户明灯
每逢灾难就是机会,而是在灾难发生时贱价买股票,然后放在一边,耐性地等灾难结束
  • Selected Indexes 52 week range

  • Margin of Safety

    Investment Clock

    World's First Interactive Investment Clock