Download IPO Analysis - Agricultural Bank of China (1288.HK)

30 Jun 2010
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HK$3.44
Agricultural Bank of China (1288.HK)
Table 1：Details of Global Offering
Details of Global Offering
Number of Offer Shares under the
Less than 25,411,765,000 Shares
Global Offering
Number of Hong Kong Offer Shares
1,270,590,000 Shares
Number of International Offer Shares
24,141,175,000 Shares
Offer Price
HK$2.88 – HK$3.48
Amount of fund Raising
less than HK$88.433 billion
Nominal Value
1.00RMB
Listing Date
July 16, 2010
Market Value after listing
HK$ 1,028.03 billion (base on an
offering price of HK$3.48)
Joint Global Coordinators
China International Capital
Corporation Hong Kong Securities
Limited, Goldman Sachs(Asia),
Morgan Stanley Asia, ABC
International
Joint Bookrunners and Joint Sponsors
China International Capital
Corporation Hong Kong Securities
Limited, Goldman Sachs(Asia),
Morgan Stanley Asia, Deutsche
Bank AG, J.P Morgan, Macquarie,
ABC International
Source: Prospectus
Table 2：Financial Highlight
Year ended 31 Dec (million RMB)
FY07
FY 08
FY 09
Revenue
179,237
211,189
222,274
Analysts: Castor Pang、Lewis Pang
Gross Profit
77,447
52,071
73,742
[email protected]
Gross Profit Margin (%)
43.21%
24.66%
33.18%
[email protected]
Profit attributable to shareholders
43,787
51,474
64,992
(852) 2235 7127
Net Profit Margin (%)
24.43%
24.37%
29.24%
(852) 2235 7847
Diluted EPS (RMB)
N/A
N/A
0.25
Source: Prospectus
Page 1
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Website: www.cinda.com.hk
30 Jun 2010
Investment Summary
The Agricultural Bank of China (ABC) is the leading bank in China’s countryside, providing corporate and
personal banking services, discounted bills, and other wealth management related services to customers in both
rural and urban areas. As of December 31, 2009, ABC had 23,624 domestic branches, 10,887 of which is
located in urban areas and 12,737 of which is located in rural areas. As of December 31, 2009, ABC had RMB
8.8826 trillion in total assets, 23.6% of the combined total assets of the four State-owned commercial banks.
ABC has RMB 4.1382 trillion in loans and RMB 7.4976 trillion in customer deposits; relative to all the banking
institutions in China, ABC has a market share of 9.7% and 12.3% respectively, in the above categories.
We believe ABC has the unique advantage in the countryside that would be beneficial to expanding their
business foundation. ABC’s interest income is expected to benefit from government’s “Sannong Policy,” which
lowered the cost of funding and the loan to deposit ratio, while the network of branches in across the rural areas
of China brings economies of scale when promoting non-interest services.
Assuming the required cost of equity for China’s banking sector is 15.5%, while ABC’s EPS would increase by
9.0% in 2010 and 35.3% in 2011, while that growth rate would first slow down to 17% in 2012-2014, and
eventually maintain a steady CAGR growth of 9% afterward. We also assume that ABC would adopt a dividend
payout ratio of 50% in the long term, we appraise a fair value of HK$3.444 per share based on the multistage
dividend discount model, implying a 10.5X and 7.8X expected price to earnings in FY10 and FY11, or a 2.00X
and 1.78X expected price to book ratio in FY10 and FY11.
Since the H-share offering price range is between HK$2.88 and HK$3.48, the offering price of HK$2.88 has a
potential upside of only 19.5%; if the share is offered at the price of HK$3.48, the offering price would be 1.0%
higher than our expected fair price. We believe that the market trading volume would remain in a low level, and
institutional investors are relatively conservative to the IPO, it is likely that ABC offering price would be close
to the lowest bound of HK$2.88.
Use of Proceeds
After paying the offer related fee, the remaining proceeds from A-share and H-share offering will be used to
enhance the capital base of Agricultural Bank of China (ABC).
Page 2
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30 Jun 2010
Competitive Strengths
1） ABC is the leading bank in China’s countryside, with 23,624 domestic branches: There are 900 million
citizens living in China’s rural areas, accounting for 69% of the total population. In 2008, the rural economy
contributed 49.8% of China’s total GDP. As the leading bank in those areas, the ongoing urbanization
process is expected to improve the operating environment. ABC’s business strategy focuses on the 900
million in rural areas, especially the 300 million upper to middle class customers. As the growth pace of the
countryside is expected to be faster than the country-wide growth rate, ABC is expected to benefit from the
development of the rural economy, leading to an improvement in profitability.
2） Countryside economy is expected to enjoy a faster growth than the urban economy: Countryside area is
the business focus of ABC, among the 23,624 branches, 53.9% are located in the countryside area. From
2005 to 2009, China’s economy achieves a respectful growth rate, GDP per capita increased from RMB
14,144 to RMB 25,125 during this period, implying a CAGR growth of 15.4%. The step up in household
income increases the demand of banking service. During the period, although the disposal income per person
in urban area growth by 13.1%, which is higher than the growth rate of 12.2% in countryside. However,
from the income growth rate in countryside area and urban area in 2009 (which are 8.2% and 8.8%
respectively), we can observe the difference in growth rate is narrowing, meaning that the economy growth
of countryside economy can achieve the growth pace of urban area, driving a more significant increase in
demand of banking service in countryside area. At the end of 2009, ABC had a total loan amount and total
deposit amount of RMB 1,193.4 billion and RMB 3,034.6 billion in countryside area, representing a YoY
growth of 43.4% and 20.7% respectively.
3） ABC enjoy a low cost of funding among the four State-owned commercial banks: ABC has an national
network of branches providing various banking services to corporate and retail customers; as of December
31, 2009, ABC had approximately 320 million retail customers. Leveraging on the extensive distribution
network in the rural and urban areas as well as the large customer base, ABC has a long-term advantage in
the structure and cost of providing loans. At December 31, 2009, ABC’s retail deposits accounted for 58.2%
of the total deposits, the highest percentage among the four State-owned commercial banks, and providing
ABC with a stable source of funding. ABC also has a greater percentage of demand deposits, accounting for
55.5% of the total deposits as of December 31, 2009, also the highest percentage among the large
commercial banks. This deposit mix enables ABC to maintain lower cost of deposits. For the years ending
Decembers 2008 and 2009, ABC’s average domestic deposit costs were 1.98% and 1.48%, respectively, the
lowest of the four State-owned commercial banks. Since deposit availability for all banks are still limited in
the countryside, ABC is expecting to enjoy a lower cost of funding after expanding in the future.
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30 Jun 2010
4） Fast growing fee and commission based business: In addition to the traditional saving and lending
business, ABC also provides other fee and commission based business, such as settlements, asset custody,
bank cards, and bank assurance. In 2009, the transaction volume of ABC Renminbi settlement business was
RMB 234.4 trillion. As of December 31, 2009, ABC’s assets under custody reached RMB 1.391.3 trillion,
the second largest among all commercial bank in China, while the value of ABC’s insurance assets under
custody was the largest among all commercial banks in China. In addition, ABC was consistently ranked
first in the total number of bank cards issued as of the end of each year from 2006 to 2009. ABC had issued
approximately 365 million bank cards as of December 31, 2009. Also in 2009, ABC collected RMB72.8
billion in new premiums from the sales of insurance products, the largest among all commercial banks in
China. Given the national network of branches, combined with the large and diversified customer base, the
fee and commission based business is expected to maintain rapid growth rate in the future. We believe that
the contribution of fee and commission based business to ABC’s total revenue will rise from 18.8% in 2009
to 20% or above, which is similar to the other three State-owned commercial banks.
5） Low loan to deposit ratio provide room for growth in lending business: To catch up the opportunity of
the growth in countryside area, ABC will focus on developing the corporate and personal lending business
in the areas. We expect ABC’s total loan amount would raise significant according to their business strategy,
at the same time, as ABC has a solid deposit foundation, we believe that the total loan amount would enjoy a
stronger growth and push up ABC’s loan to deposit ratio, which is expected to increase from 53.50% in
2009, to 53.98% in FY10 and 55.07% in FY11, bringing RMB 220.53 billion and RMB 230.51 billion net
interest income in this two years. Since ABC’s loan to deposit ratio are lower than the other three
State-owned commercial banks, ABC is having larger room for growth in lending business, while the steady
increase in loan to deposit ratio would be one of the main driving force of profit growth in the future.
Cornerstone Investors

ADM subscript H share of US$100 million；

Cheung Kong Limited (0001) subscript H share of US$100 million；

China Resources subscript H share of US$200 million；

CTS Holdings subscript H share of US$150 million；

Kuwait Investment Authority subscript H share of US$800 million；

Qatar Investment Authority subscript H share of US$2.8 billion；

Rabobank subscript H share of US$250 million；

Standard Chartered Bank (2888) subscript H share of US$500 million；

Seven Group subscript H share of US$250 million；

Temasek subscript H share of US$200 million；

United Overseas Bank Limited subscript H share of US$100 million.
It is expected that the cornerstone investors would subscript base on the public offering price, and the lock-in
period would be 12 months after listing.
Page 4
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30 Jun 2010
Valuation
Given their profitability and ability to handle the bad debt, after the disposal of non-performing assets in 2008
and listing on the Hong Kong and Shanghai Stock Exchanges, ABC’s valuation should has the potential to grow
in many other areas. However, we believe that ABC will remain focused on the banking business in rural areas,
so that the operating costs, risk levers, and gross profits will not change fundamentally. Thus, we adopted a
conservative approach to evaluate ABC’s fair value price, applying the traditional price to book ratio (P/B) and
dividend discount model.
P/B valuation:
Since ABC had disposed of non-performing assets amounting to RMB815.695 billion, and the future operation
strategy is has been changed, we assume that the operation model will be similar to that of the other listed
State-owned commercial banks. Hence the industrial average P/B ratio, or the P/B ratio of banks of comparable
scale and operation model, can be applied in ABC’s valuation. In the following section, we will compare ABC
with the other three listed State-owned commercial banks with factors such as profitability, capital adequacy
ratio, non-performing asset ratio, and total profit, followed by a regression model to appraisal ABC’s fair price
level under P/B valuation methodology.
Profitability Comparison:
By comparing the profit related figures of the four State-owned commercial banks in 2009, we find that ABC
enjoys a clear advantage in loan-to-deposit ratio only. Since ABC currently has a loan-to-deposit ratio of 55.2%,
an increase in the deposit reserve ratio by the People’s Bank of China does not impact ABC’s lending business
significantly.
In the other profit related figures, ABC has the lowest return on asset ratio among the four banks, 36 basis
points lower than the average of the remaining three. However, although ABC’s return on equity ratio and net
interest spread is not the highest of the four, it is higher than the average of the remaining three. From Table 3,
we find that ABC profitability level is not as high as that of China Construction Bank (CCB) and Industrial and
Commercial Bank (ICBC), but slightly better than Bank of China (BOC). Thus, when only considering the
profitability factor, we believe ABC’s valuation should be at a comparable level to the other three banks.
Page 5
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Website: www.cinda.com.hk
30 Jun 2010
Table 3：Revenue and profit comparison of the four Stated-owned commercial banks
Average
value of the
As of December 31, 2009
BOC
ICBC
CCB
ABC
ABC
other three
performance
banks
Return to asset ratio
1.09%
1.20%
1.24%
1.18%
0.82%
Weak
Return to equity ratio
16.44%
20.14%
20.87%
19.15%
20.53%
Strong
Net interest spread
2.04%
2.16%
2.30%
2.17%
2.20%
Strong
Net interest margin
2.19%
2.26%
2.41%
2.29%
2.28%
Similar
31.58%
17.82%
17.99%
22.46%
16.03%
Cost to income ratio
37.15%
32.87%
32.90%
34.31%
43.11%
Weak
Loan to deposit ratio
71.76%
58.63%
60.24%
63.54%
55.19%
Strong
Fee and commission net revenue to
Weak
total operating revenue
Source: Prospectus and annual report
Capital adequacy ratio Comparison:
On December 31, 2009, the capital adequacy ratio of ABC is the lowest of all State-owned commercial bank.
ABC’s capital adequacy ratio will increase significantly after the offering, and rise beyond the average level of
the other three banks. As the three banks have not completed their right offering process, ABC’s relative
strength in capital adequacy level would depend on the details of the right offering plan. However, assuming that
ABC can raise US$20 billion capital from the offering, ABC’s capital adequacy ratio would improve
significantly and rise above the level required by the regulation authorities. Thus based on the capital adequacy
level, ABC’s fair P/B ratio valuation should higher than the average level of the other three listed State-owned
commercial banks.
Table 4：Capital adequacy level comparison of the four Stated-owned commercial banks
Average
ABC
As of December 31, 2009
BOC
ICBC
CCB
value of the
ABC
performance
3 banks
Core Capital Adequacy Ratio
Core Capital Adequacy Ratio after listing*
Capital Adequacy Ratio
Capital Adequacy Ratio after listing*
Total Equity to Total Asset
Total Equity to Total Asset after listing*
9.07%
9.90%
9.31%
9.43%
7.74%
Weak
--
--
--
--
10.86%
Strong
11.14%
12.36%
11.70%
11.73%
10.07%
Weak
--
--
--
--
13.19%
Strong
5.88%
5.76%
5.81%
5.82%
3.86%
Weak
--
--
--
--
5.32%
Weak
*Assume ABC will raise US$20 billion in A+H listing
Source: Prospectus and annual report
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30 Jun 2010
Non-performing assets Comparison:
After asset reorganization and disposal of non-performing assets, the non-performing asset ratio of ABC remains
relatively high compared with other State-owned commercial banks. On December 31, 2009, the bad loan ratio
of ABC reached 2.91%, 91% higher than the average of other three State-owned commercial banks. Thus, we
believe that investors would require a decrease in valuation. Even after disposal of the non-performing assets,
ABC’s non-performing asset ratio remains higher than the average level of the other three Stated-owned
commercial banks. Hence, ABC’s fair valuation should be close to the lower bound of the industrial P/B band.
Table 5：Non-performing assets comparison of the four Stated-owned commercial banks
Average
ABC
As of December 31, 2009
BOC
ICBC
CCB
value of the
ABC
performance
3 banks
Bad loan Ratio
1.52%
1.54%
1.50%
1.52%
2.91%
Weak
Provision to total loan
2.30%
2.54%
2.63%
2.49%
3.06%
Weak
151.17%
164.41%
175.77%
163.78%
105.37%
Weak
Provision coverage
Source: Prospectus and annual report
Total Profit and P/B ratio:
In 2009, the total profit of the four State-owned commercial banks ranges from RMB 65 billion to RMB 128.6
billion. Among them, ICBC achieved an annual profit of RMB 128.6 billion, which is the highest among the
four banks, thus ICBC also achieved a higher P/B ratio. In comparison, ABC only recorded a profit of RMB 65
billion, the lowest among the four banks.
Table 6：Total Profit and P/B ratio comparison of the four Stated-owned commercial banks
Average
ABC
As of December 31, 2009
BOC
ICBC
CCB
value of the
ABC
performance
3 banks
P/B ratio (market close at June 22, 2010)
Total profit (100 million RMB)
1.77
2.58
2.31
2.22
--
--
810.68
1,286.45
1,067.56
1,054.90
650.02
Weak
Source: Prospectus and annual report
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Relationship between P/B ratio and P/E ratio：
We formulated a regression model base on the historical P/B ratio and P/E ratio of the listed commercial banks.
The result is shown in graph 1, where the relationship between the P/B ratio and P/E ratio is:
P/B ratio = 0.7344 + 0.1048 X P/E ratio
In graph 1, the red line represents the long term relationship between the bank’s P/E ratio and P/B ratio. CCB
(0939), ICBC (1398), Bank of Communications (3328) and China Merchants Bank (3968) are above the red line,
representing a slightly over-value of their P/B ratios. On the other hand, Minsheng Bank (1988) and Bank of
China (3988) are below the red line, meaning that their P/B ratios are lower than the fair ratio. The three listed
State-owned commercial bank have an average P/E ratio of 12X; according to the regression results, the fair P/B
ratio of a State-owned commercial bank should be around 1.99X. Since we believe that ABC does not have a
significant advantage over the other three State-owned commercial banks, the valuation of ABC should be at a
similar level comparing with others, suggesting a P/E ratio of 12X and a P/B ratio no higher than 1.99X.
Graph 1：Relationship between P/B ratio and P/E ratio of listed Chinese commercial bank
Source: Bloomberg and Cinda International
Multistage Dividend Discount Model
We believe that ABC’s profit growth rate will peak two years after listing and afterwards will slow down, hence
we applied the multistage dividend discount model to estimate ABC’s fair value. Assuming that ABC would
benefit from government’s “Sannong Policy” and enjoy a rapid growth in customer base, we predict that ABC’s
EPS would increase by 9.0% in 2010 and 35.3% in 2011, while that growth rate would first slow down to 17%
in 2012-2014, and eventually maintain a steady CAGR growth of 9% afterward. In addition, we estimate the
cost of equity for investors and payout ratio of ABC to be 15.5% and 50% respectively. The fair value of ABC
under this model is HK$3.444 per share, implying a 12.77X FY10 expected P/E and 2.00X FY10 expected P/B.
Page 8
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30 Jun 2010
Assumption on future growth:
We believe ABC would benefit from government’s “Sannong Policy” in the future, since ABC already has a
well developed coverage in countryside area, the margin benefit for further expansion will be relatively low,
thus after experiencing the rapid growth in 2008 and 2009, we expect ABC’s total deposit growth rate in 2010
and 2011 would decrease to 10% from 22.96% in 2009. Besides, we expect ABC would focus on the retail loan
and discounted note business in order to improve the company’s profitability. Thus these two businesses would
achieve a rapid development and induce a 13.80% and 14.32% total loan growth in 2010 and 2011 respectively,
which would be higher than the overall deposit growth.
Although we expect the interest margin would drop from 2.2% in 2009 to 2.0% in 2010, however, the loan to
deposit ratio is expected to increase gradually from 53.50% of 2009 to 53.98% and 55.07% in 2010 and 2011
respectively, driving an increase in net interest income, where ABC’s expected net interest income would be
RMB 220.53 billion in FY10 and RMB 232.51 billion in FY11. Besides, ABC is working hard on their fees and
commissions based business, thus we expect the net fees and commissions income would experienced a CAGR
growth of 25% in FY10 and FY11. Combining the interest based business and the fees and commissions based
business, we expect ABC’s operating income would be RMB 265.08 billion and RMB 288.19 billion in FY10
and FY11 respectively, implying a growth rate of 18.5% and 8.7%.
After disposing the non-performing asset in November, 2008, ABC had continued the provision possess for the
non-performing asset, hence we believe that in short term, ABC would not experience a large scale asset
provision, and the asset provision expense would gradually decrease in 2010 and 2011, where the asset
provision expense to operating income ratio would decrease from 15.09% in 2010 to 6.94% in 2011, and
operating cost to operating income ratio would maintain on a level between 43% to 45%.
Table 7：Key assumption on ABC’s operating performance
Deposit growth rate
Loan growth rate
Bad loan ratio
Cost to income ratio
Loan to deposit ratio
Interest of interest bearing asset
Cost of interest bearing liability
Dividend payout ratio
2008
15.32%
(10.77%)
4.32%
45.30%
49.45%
4.72%
1.89%
-
2009
22.96%
33.48%
2.91%
43.40%
53.50%
3.41%
1.39%
-
2010E
10.00%
13.80%
2.50%
45.00%
53.98%
3.90%
1.50%
50.00%
2011E
10.00%
14.32%
2.25%
45.00%
55.07%
3.90%
1.50%
50.00%
Source: Prospectus and Cinda International
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Risk Factors
ABC has better growth prospects comparing with other listed Chinese commercial banks, especially if ABC
adopts the business model of the other three State-owned commercial banks. However, investors should also
keep an eye on the following risk factors.
1） Bad loan ratio remains high: On November 21, 2008, ABC disposed of certain non-performing assets with
total principal amounts of RMB 815,695 million as of December 31, 2007; this disposal have greatly
reduced ABC’s bad debt risk, bringing the bad debt ratio down to 4.32% and 2.91% respectively in 2008 and
2009. However, the 2009 figure is still 139 basis points higher than the average level of the other three
State-owned commercial banks (1.52% as of December 31, 2009). On March 31, 2010, the bad debt ratio of
ABC dropped to 2.45%, 122 basis points above the average level of the other State-owned commercial
banks (1.33%). Although the difference is decreasing, ABC still has a comparatively higher risk level.
Table 8：Bad debt ratio comparison of the four Stated-owned commercial banks
CCB
BOC
ICBC
Average value of
ABC
the 3 banks
December 31, 2009
1.50%
1.52%
1.54%
1.52%
2.91%
March 31, 2010
1.35%
1.30%
1.35%
1.33%
2.45%
Source: Prospectus and annual report
2） The slowdown in the Chinese economy brings adverse effects to banking sector’s loan growth: Despite
maintaining a positive growth rate, Chinese economic growth shows signs of slowing down, particularly
under the cyclical fluctuation in the global economy. Although the economy has almost recovered from the
US subprime mortgage crisis, the risk faced by the banking industry increased. This is due to the following
factors:
(i)
As exports decreased, more companies suffered from a reduction in profit or even a loss. This causes
certain industries suffering from a higher credit risks, and may lead to an increase in bank’s bad loan
ratio;
(ii) There are more uncertainty regarding liquidity in the banking industry, resulted in difficulties in
liquidity management;
(iii) After the rebound in 2009, the Chinese economy face structural inflation, which combined with
irrational performances in property market, caused the government to impose a series of contractionary
policies. These included lifting the deposit reserve ratio and raise the minimum down payment ratio of
second-house mortgage from 40% to 50%. The policies bring short term uncertainty to the banking
sector.
After the rapid rebound in early 2009, Chinese economic growth show sign of slowing down. As seen in
graph 2, all industries maintain positive growth, with the overall economy recorded a growth rate above 8%.
However, to prevent overheating economy and a possible asset bubble caused by the loosening monetary
policy, from 2009 onwards, the PRC government imposed a series of macro-control policies to stave off a
bubble.
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In graph 3 and 4, the net increase in total loans has decreased significantly after its rapid growth in the first
half of 2009. Since the government wanted to limit the net increase in total loan to below RMB 7,000 billion,
the lending capacity in the second half of 2010 will be smaller than that of the first half, causing an adverse
effect to the banking sector. In additional to the commercial banking function, the four Stated-owned banks
will need to execute the monetary policies imposed by the government, which will result in a low profit
growth rate. In addition, after reaching a peak in late 2009, banking sector’s business climate index,
confidence index and the demand of loan have been falling. If the demand of loans keeps diminishing in the
second half of 2010, the banking sector would face a difficult operating environment.
Graph 2：China’s economy growth
Graph 3：Monthly net increase in total loan
Source: CEIC
Source: CEIC
Graph 4：YoY growth rate of total bank loan
Graph 5：Banking Sector confidence index
Source: CEIC
Source: CEIC
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3） ABC face a tight competition in the Chinese banking Sector: ABC has established a network of 2,048
country-level sub-branches and 22 business departments of tier-2-branches, providing various type of
banking service to countryside area’s customer. Besides, their market share in terms of total deposits and
total loans are 12.3% and 9.7% of all PRC banking institution, respectively, which ranks third among all
Chinese commercial banks. However, Chinese banking sector involve a large numbers of players. At the end
of 2008, in addition to the four large commercial banks (ICBC, CCB, BOC and the Bank of
Communications), there were 12 other national commercial banks, 136 city commercial banks, 22 urban
credit cooperatives, 5,257 rural financial institutions, 28 foreign-owned banks, 196 banks from 46 foreign
jurisdictions and a number of other banking institutions.
The large commercial banks and other national commercial banks are the main competitors of ABC in the
urban market, while the large number of city commercial banks, urban cooperatives and rural financial
institutions will compete for the customer resources in countryside areas. Thus, ABC faces keen competition
in both areas, and the operation costs will increase significantly if ABC intends to increase their profitability
and market share.
Graph 6：Market share in term of total asset
(at the end of 2008)
Source: Prospectus
Graph 7：Market share in terms of total deposits
Graph 8：Market share in terms of total loans
(at the end of 2009)
(at the end of 2009)
Source: Prospectus
Source: Prospectus
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4） Lack of geographical diversity: In 2009, the Western, Central, and Northeastern regions account for 36.8%
of all total loans, suggesting over-reliance on specific areas of economic development. This region also
accounts for 50.7% of total non-performing loans, indicating that these areas fall into a high risk category. In
the case of an adverse change in economic policies or a economic downturn in these areas the asset quality,
financial condition and operating result would be significantly affected.
In addition, loans are concentrated on specific sectors, which increase the overall risk. In 2009, 68.4% of
loans were grouped into the following four categories: manufacturing, real estate, power/fuel/water supply,
and transportation/postal services. In addition, 63.1% of personal loans and 16.7% of all loans were
mortgages for housing, or RMB 497.95 billion out of RMB 2,968.69 billion in total loans. Taking the loan to
real-estate developers into account, the loans related to properties contributed 31.1% of the total loans.
Table 9：ABC’s loan portfolio as of December 31
2007
2008
2009
2007
2008
2009
%
%
%
RMB million RMB million RMB million
Cooperate loan
2,761,157
2,359,297
2,968,691
7935
76.1
71.7
Notes financing
204,127
257,163
352,230
5.9
8.3
8.5
Personal loan
491,185
464,465
789,342
14.1
15.0
19.1
Others
17,705
19,234
27,924
035
0.6
0.7
Total
3,474,174
3,100,159
4,138,187
100
100
100
Source: Prospectus
Table 10：ABC’s personal retail loan portfolio as of December 31
2007
2008
2009
2007
2008
2009
RMB million
RMB million
RMB million
%
%
%
Mortgage loan
298,846
319,498
497,946
60.8
68.8
63.1
Loan to private business
92,758
78,428
105,953
18.9
16.9
13.4
Personal consumption loan
40,090
42,299
85,600
8.2
9.1
10.8
Credit card balances
4,417
7,901
14,118
0.9
1.7
1.8
Others
55,074
16,339
85,725
11.2
3.5
10.9
Total
491,185
464,465
789,342
100
100
100
Source: Prospectus
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5） Although the coverage of non-performing assets increased, but it has not yet reached the industry
average: Since 2008 the global financial crisis has generated more obvious impact on the mainland
economy, the quality of bank loan assets declined. To accommodation with this bearish factor, the
non-performing assets provision coverage of the ABC went from 93.4% in 2007 to 105.4% in 2009, an
increase of 12 percentage points in two years. However, this figure is still low compared to other banks.
Coverage in 2009 for the China Merchants Bank (3968.HK) and Minsheng Bank (1988.HK) reached
246.7% and 206.0%, respectively. In 2010, the economy show sign of slowdown, and part of the large
amount of loans provided by the banking sector in 2009 is invested in the high-risk industries. With the
government pressure to prevent a property bubble, the asset quality would worsen, and we believe that the
banking industry would further increase coverage of non-performing assets. As the coverage of ABC is still
low even after the disposal of non-performing asset in 2008, with the decline in overall asset quality, we
believe that the need for ABC to cover non-performing assets will increase in 2010, which will cause the
overall profitability to decline.
Table 11：Non-performing asset coverage ratio of China’s commercial bank
2007
2008
2009
%
%
%
ABC
93.4
63.5
105.4
Industrial and Commercial Bank of China (1398.HK)
103.5
130.1
164.4
China Construction Bank (0939.HK)
104.4
131.6
175.8
Bank of China (3988.HK)
104.3
115.3
149.9
Bank of Communications (3328.HK)
95.8
117.1
151.0
China Merchants Bank (3968.HK)
180.4
223.3
246.7
China CITIC Bank (0998.HK)
110.0
136.1
149.4
China Minsheng Bank (1988.HK)
111.6
150.0
206.0
Average of the four State-owned banks
96.2
105.5
143.7
Average of major banks in China
97.1
110.0
147.9
Industry Overview
History
Since the late 1970s, several of the PBOC’s commercial banking functions were separated from the PBOC’s
central bank functions. The ABC, BOC, the CCB and the ICBC have gone on to become the main service banks
in the industry. The Big Four were designated to specialize in agrarian financing, foreign exchange and trade
finance, construction and infrastructure financing and urban commercial financing, respectively.
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In the mid-1980, a number of new commercial banks and non-bank financial institutions were set up, but only a
few were allowed to offer nationwide commercial banking services. In 1994, the PRC government established
three policy banks: China Development Bank, The Export-Import Bank of China, and Agricultural
Development Bank of China, to assume most of the policy lending functions of the Big Four. Accordingly, the
Big Four started to be transformed into state-owned commercial banks.
In 1997, after the Asian financial crisis, the PRC government adopted a number of measures to improve the
quality of China's banking sector's assets and increase their capital base. In 1999, the PRC government
established four wholly state-owned financial asset management companies, which received RMB 1,393.9
billion of non-performing loans and other impaired assets from the Bing Four and China Development Bank. In
2001, China joined the World Trade Organization and started to gradually open its banking sector to foreign
financial institutions. Between 2003 to 2005, Huijin made a capital contribution to BOC, CCB, Bank of
Communications and ICBC. In 2008, Huijin made a capital contribution of approximately US$19 billion to
ABC, and ABC restructured and transformed into a joint stock limited liability company.
Subsequent to the disposal of non-performing loans and equity contribution of Huijin, Bank of Communications,
CCB, BOC, and ICBC introduced domestic and foreign strategic investors and listed their shares on both the
Shanghai Stock Exchange and Hong Kong Stock Exchange. Meanwhile, many other national commercial banks
and a number of city commercial banks have also introduced strategic investors, raised capital from
shareholders to strengthen their capital bases, and successfully listed their shares on domestic or overseas stock
exchanges. By adopting international practices, they have improved their asset quality and profitability.
Industry Status
Due to the rapid growth of China's economy, the increasing demand for banking services by businesses and
residents gave the banking industry a great growth opportunity. Sarting from 2003, state-owned commercial
banks launched a series of reform and integration. China's banking sector improved the corporate governance
and risk management abilities, enhanced capital strength, increased profitability and brand value, and
significantly increased market credibility. Graphs 9, 10 and 11 show the total amount of loans, deposits and
assets have maintained a steady growth in recent years. From 2003 to 2009, the banking system's total loans,
total deposits and total assets have experienced a CAGR growth of 17.2%, 19.6% and 18.7%. Therefore,
short-term reducing in loans demand should not affect the healthy growth of the Chinese banking industry in the
long run.
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Graphs 9：Total Loans
Graph 10：Total Deposits
Source: CEIC
Source: CEIC
Graph 11：Total Assets
Source: CEIC
During this period, the quality of assets improved greatly. Non-performing loans of commercial banks went
from 12.4% in the first quarter of 2005 to 1.4% in the first quarter of this year, while the major commercial
banks have gradually increased coverage of bad loans to 170.2% by the first quarter of this year. The Chinese
banking sector has not been significantly impacted by the global financial crisis, and still maintains healthy
growth.
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Graph 12：Non-performing Loan Ratio
Graph 13：Non-performing Loan coverage ratio by
Major Commercial Banks
Source: CEIC
Source: CEIC
Despite the movements towards a more competitive environment, as of late 2009, the five largest commercial
banks, the Agricultural Bank, Industrial and Commercial Bank of China, Bank of China, the Construction Bank
and Bank of Communications, accounted for 53.8% of total banking assets in China, while the other 12 national
commercial banks accounted for only 14.1% of total assets. It is unlikely that the five leading commercial banks
will be shaken from their position.
Industry Trends
Rapid growth of countryside area financing
China’s countrywide area are areas designated as countries or country-level cities under China’s administrative
division unit. As of December 31, 2008, there were 2,003 countries and country-level cities in China,
accounting for 95.2% of the total area and 69.8% of the total population of China. While the PRC government is
promoting the process of urbanization and industrialization, China’s urbanization rate increased to 45.7% in
2008 from 36.2% in 2000. The urbanization process induced the increase in demand of property and durable
consumption goods, combining with the shift in economic structure to the secondary and tertiary industries, the
countryside economy experience a rapid growth. Besides, the PRC government has undertaken a number of
policy initiatives aiming to promote agricultural production, rural development and income growth for farmers,
which have played a significant role in promoting countryside area economic growth. The government
expenditure related to “Sannong” increased by 21.8% to RMB 725.3 billion in 2009 from RMB 595.6 billion in
2008, which in turn increased by 37.9% from 2007.
At end of 2008, the total loan amount of all countryside financial institution amount up to 5,999.6 billion,
contributing 18.7% of the national total loan amount. From 2005 to 2008, the loan amount in countryside area
experienced a CAGR growth of 16.0%, slightly above the nation-wide loan amount growth rate of 15.7%.
However, the overall countryside area banking market currently remains underserved. In 2008, ratio of
countryside area loans to the total countryside area GDP was 40.2%, compared with a loans-to-GDP ratio of
171.5% for the urban areas. Thus from 2009, the PRC government had launched the policy included the
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“Provisional Measures on Administering Fund for Rewarding Increases in Agriculture-related Loans by
Country Area Financial Institutions”, the “Notice on Policies for Pretax Deduction of Loss Provisions for
Agriculture-related Loans and SME Loans Made by Financial Enterprises”, the “Notice on Issues Relating to
Write-off of Non-performing SME Loans and Non-performing Agriculture-related Loans”, the “Notice on
Rural Finance Tax Policy” and the “Notice on Matters Relating to Furthering Agricultural Bank of China’s
Country Area Banking Division Reform on a Pilot Basis”. These policies aimed to improve the operating
environment for countryside area financing institutions and expand the range of financial products and services
available in the countryside area.
Personal banking services and non-traditional banking services are the key of banking sectors growth
The income level of Chinese citizens maintain a steady growth, during 2005 to 2009, the disposal income per
person in urban areas and countryside areas had a CAGR growth of 13.1% and 12.2% respectively, driving up
the demand on mortgage loan, bank cards and personal wealth management services. In 2005-09, the total
personal loan amount achieved a 23.6% CAGR growth, which is significantly higher than the nation-wide loan
growth of 19.6% in the same period. Besides, the number of bank cards issued achieved a 46.1% CAGR growth,
reflecting the huge demand on related services.
Besides, a new market of wealth management services has emerged as a result of the rapid increase in
household wealth and an expanding class of wealthy individuals. Commercial banks have started to offer
customized and professional wealth management services to mid- to high-end customers, such as asset
allocation, dynamic wealth management and corporate finance advisory services. Following the establishments
of private banking business be several foreign banks, domestic commercial banks have also set up their own
private banking departments and start to increase their market position in private banking services to high net
worth individuals. Since the PRC government strives to increase the disposal income of individual, it is
believed that the demand on personal banking would enjoy a steady and rapid growth.
Graph 14：Personal loan amount
Graph 15：Numbers of bank card issued
Source: Prospectus
Source: CEIC
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In addition to growing traditional banking products and services, the PRC financial services industry has in
recent years expanded financial product and service offerings in areas such as financial leasing, fund
management and insurance. As of December 31, 2008, 7 Chinese commercial banks had jointly invested in or
established financial leasing subsidiaries and 8 Chinese commercial banks, included ABC, have established
fund management subsidiaries. As of December 31, 2008, bank-owned fund management companies
commanded a market share of 12.4% in terms of the total net assets under management in China. Besides, the
CBRC promulgated the Pilot Administrative Measures for Commercial Banks to Make Equity Investments in
Insurance Companies, permitting commercial banks to invest in the insurance industry.
As banks continue to expand their financial product and service offering in non-traditional areas, cross-selling
financial products across a bank’s integrated branch network has become an important way for banks to
increase their fee and commission income. In 2009, according to the information made publicly available by
China’s 14 listed banks, total fee and commission income of these banks accounted for 16.3% of their total
income, compared to 6.4% in 2005. However, this is still substantially lower than that of the mature overseas
banks, which fee and commission income contribute almost 50% of their total income, thus fee and commission
income still have a huge growth potential.
Growth Potential
ABC is one of the four major state-owned commercial banks: As one of the Big Four, ABC has the most
prominent role in the countryside, and in contributing to local rural economic development, thus ABC had
developed a close relationship with the business entities in the countryside area. As the PRC government aimed
to narrow the economic gap between the urban areas and the countryside, we believe that PRC government’s
policy would be more favorable to the rural areas. Given the background and position of, ABC would become
the most beneficial bank from the overall economic growth of rural areas.
Urbanization in rural areas has been accelerated: It has been almost thirty years since the economic reform
in China, but the majority of the population still live in rural areas. According to 2009 statistics, 53.4% of the
population still live in rural areas, while the urbanization ratio is only 46.59%; in comparison, more than 70% of
the population live in urban areas in most industrialized countries. With the expectation that China's urbanization
rate will accelerate, the proportion of rural area’s economic activity to national GDP will increase. Therefore, as
the major bank in rural areas, the ABC will benefit greatly from this development, in particular through personal
loans; the ratio of personal loans to total loans (20.7% in 2009) is expected to raise and bring up the total profit.
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Graph 16：Urbanization trend of China
Source: CEIC
ABC is widely established in China: The bank had over 23,600 branches in China, where the proportion of
branches in urban areas to that in rural proportion is 0.854:1, allowing ABC to enjoy the benefit from the
economy growth of both the urban area and the countrywide area. ABC participates in the interest based
business and the fees & commissions based business. These activities require a sales team to promote, thus the
existing extensive network provide a bright growth prospect for the interest based business and he fees &
commissions based business.
There is increasing demand for personal banking products and services: The rapid economic development
of China and the current extensive customer network have allowed the non-banking businesses, such as credit
card, insurance, custody and agency services, to utilize the banking network for promotion. We notice that the
China’s banking institutions are having an expanding business scope, thus the type of services available
increased. We believe that the demands for such services will rise, increasing the absolute amount and relative
importance of non-interest income. For example, ABC’s net non-interest income rose from RMB 22.995 billion
in 2007 to RMB 35.640 billion in 2009, representing a 54.9% growth and a 24.5% CAGR growth. Base to the
current situation, we expect that fee and commission income to be doubled in the next four years.
The non-performing asset ratio will gradually decline: The Agricultural Bank of China has been affected by
investors worried about its bad debts and high levels of non-performing loans problem. However, on November
2008, the bank had disposed RMB 815.6 billion non-performing assets, and began monitoring loan approval
procedures, gradually lowering the non-performing loan ratio and improving the asset quality. Similar situation
have been happened in the past with the other three State-owned banks, where their non-performing asset ratio
had reduced significantly after listing. We believe the Agricultural Bank of China will also have a similar
opportunity, so that the non-performing loan ratio will fall in the future.
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Low loan-to-deposit ratio increase interest income: The loan to deposit ratio for the ABC has been higher
than the other three State-owned commercial banks, mainly because of its operational characteristics in the
countryside areas. In the past, rural economic development was slow and characterized by a lack of large
corporate enterprisers, keeping the banks' loan-to-deposit ratio remains below 50%. However, after the offering,
ABC will focus on the development of rural areas, along with the PRC government’s "Sannong policy”, the
deposit-to-loan ratio, which was 53.5% in 2009, is expected to rise to 54.0% in 2010 and 55.1% in 2011,
bringing RMB 220.53 billion and RMB 230.51 billion net interest income in this two years. ABC is having
larger room for growth in lending business, while the steady increase in loan to deposit ratio would be one of the
main driving force of profit growth in the future.
Table 12：2007 to 2011E Income Statement Overview for ABC
2007
2008
2009
2010E
2011E
RMB million RMB million RMB million RMB million RMB million
Interest Income
250,035
321,855
296,147
356,015
382,315
Interest Expenses
(85,852)
(121,852)
(114,508)
(135,488)
(149,809)
Net Interest Income
164,183
200,003
181,639
220,526
232,505
Net fees and commission income
22,995
23,798
35,640
44,550
55,688
Other net income
(3,727)
(9,785)
6,358
0
0
Operating income
183,451
214,016
223,637
265,076
288,193
Operating expenses
(74,620)
(110,175)
(109,567)
(114,447)
(118,529)
Provisions for impairment losses
(30,574)
(51,478)
(40,142)
(40,000)
(20,000)
0
(14)
0
0
0
Profit before tax
78,257
52,349
73,928
110,630
149,664
Income tax expense
(34,470)
(896)
(8,926)
(22,126)
(29,933)
43,787
51,453
65,002
88,504
119,731
Share of losses of an associate
Net profit
Source: Prospectus, Cinda International
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Table 13：ABC’s operational and valuation ratio
2007
2008
2009
2010
2011
Earning per share (RMB)
0.360
0.198
0.250
0.272
0.369
Dividend per share (RMB)
-
-
-
0.136
0.184
ROE (%)
-
-
17.9%
21.6%
Book value per share (RMB)
(5.98 )
1.12
1.32
1.53
1.71
Book value per share (HKD)
-
-
-
1.74
1.96
P/B (base on HK$2.88 offering price)
-
-
-
1.66X
1.47X
P/B (base on HK$3.48 offering price)
-
-
-
2.00X
1.78X
P/E (base on HK$2.88 offering price)
-
-
-
10.57X
7.81X
P/E (base on HK$3.48 offering price)
-
-
-
12.77X
9.44X
-
-
-
4.73%
6.40%
-
-
-
3.92%
5.30%
Dividend Yield (base on HK$2.88
offering price)
Dividend Yield (base on HK$3.48
offering price)
Source: Prospectus, Cinda International
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Table 14：2007 to 2011E Balance Sheet Overview for ABC
2007
2008
2009
2010E
2011E
RMB million RMB million RMB million RMB million RMB million
Loans to customers, net
2,709,192
3,014,984
4,011,495
4,582,746
5,257,102
1,309,107
2,309,077
2,616,672
2,684,500
2,684,500
937,014
1,145,884
1,517,806
2,094,313
2,446,798
16,432
62,668
61,693
62,000
62,000
institutions, net
52,498
44,479
49,435
50,000
50,000
Financial assets held under resale agreements
144,848
246,370
421,093
100,000
100,000
Other assets
136,415
190,889
204,394
234,066
251,357
Total assets
5,305,506
7,014,351
8,882,588
9,807,625
10,851,757
Deposits from customers
5,287,194
6,097,428
7,497,618
8,247,380
9,072,118
296,618
289,772
573,949
600,000
710,000
30,375
34,131
26,312
30,000
30,000
agreements
73,391
35,090
100,812
100,000
120,000
Debt securities issued
4,154
5,150
55,179
55,179
55,179
Borrowings from central bank
150,867
314
58
0
0
Other liabilities
190,512
261,925
285,735
279,357
308,885
Total liabilites
6,033,111
6,723,810
8,539,663
9,311,916
10,296,182
Paid in／share capital
121,612
260,000
260,000
324,794
324,794
Total reserve
(4,597)
18,423
23,002
66,740
66,740
(844,620)
12,022
59,817
104,069
163,934
(727,605)
290,445
342,819
495,603
555,468
0
96
106
106
106
Total Equity
(727,605)
290,541
342,925
495,709
555,574
Total Equity and liabilities
5,305,506
7,014,351
8,882,588
9,807,625
10,851,757
Investment securities and other financial assets,
net
Cash and balances with central bank
Deposits with banks and other financial
institutions, net
Placements with banks and other financial
Deposits from banks and other financial
institutions
Placements from banks and other financial
institutions
Financial assets sold under repurchase
(Accumulated losses)／retained earnings
Equity attributable to equity holders of the
Bank
Non-controlling interests
Source: Prospectus, Cinda International
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Rating Policy
Rating
Buy
Stock Rating
Neutral
Sell
Accumulate
Sector Rating
Definition
Outperform HSI by 15%
Between -15% ~ 15% of the HSI
Underperform HSI by -15%
Outperform HSI by 10%
Neutral
Between -10% ~ 10% of the HSI
Reduce
Underperform HSI by -10%
Analysts List
Castor Pang
Research Director
(852) 2235 7127
[email protected]
Christina Ngai
Research Analyst
(852) 2235 7170
[email protected]
Hayman Chiu
Research Analyst
(852) 2235 7677
[email protected]
Frankie Chan
Research Assistant
(852) 2235 7840
[email protected]
Lewis Pang
Research Assistant
(852) 2235 7847
[email protected]
Barry Chan
-
(852) 2235 7617
[email protected]
Michael Yuk
-
(852) 2235 7619
[email protected]
Analyst Certification
I / We Castor Pang hereby certify that all of the views expressed in this report accurately reflect my / our personal views
about the subject company or companies and its or their securities. I / We also certify that no part of my / our compensation
was / were, is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report
/ note.
Disclaimer
Cinda International may participate in the IPO of Agricultural Bank of China.
This report has been prepared by the Research Department of Cinda International Holdings Limited (00111). Although the
information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable,
Cinda International cannot and does not warrant the accuracy or completeness of any such information and analysis. The
report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should
understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial
advisers prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived
from assumptions of future political and economic conditions that are inherently unpredictable and which carry uncertainty.
Any opinions expressed in this report are subject to change without notice. The report is published solely for information
purposes, it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda
International will not accept any liability whatsoever for any direct or consequential losses arising from usage of any of the
materials contained in this report. This document is for the use of intended recipients only, and the whole or a part of this
report should not be reproduced to others.
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