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China: Banks
See resilience, visibility; adding BOC (H), CITIC (H), SZDB to Buy
Raising 2008/2009 earnings 10% or more; 9% above consensus
We have raised our 2008E/2009E earnings estimates for H-share banks by
an average of 13% and 12% (and 10% and 9% for all listed China banks),
following stronger-than-expected 1Q08 results — which were due mostly
to banks’ loan pricing power and strong fee growth from non-mutual funds
wealth management product sales and loan advisory. Our 2008E/2009E
estimates for H-share banks are 9% above consensus, on average.
The appeal: resilience, visibility; still rising ROAs/ROEs; GARPs
While many macro challenges remain—China CPI inflation, falling property
prices and pressure on corporate margins—plus concerns on US/global
slowdowns, we believe China H-share banks look relatively attractive as GARP
plays vs. regional banks, given strong, resilient and visible earnings growth
and rising ROA/ROE we see in 2008/2009. We forecast China banks to post
average EPS growth of 52% in 2008E and 19% in 2009E; they are trading at
below-regional-peer P/Es of 14X and 11X, respectively, based on our estimates.
Compared to many other sectors in China that are facing margin pressure,
we believe banks’ robust revenue growth — partly given their ability to raise
loans yields/NIM and fees amid the ongoing credit quota control — should
enable them to pass on modest credit costs and funding costs pressure.
We raise our 12-mo target prices, suggested entry levels and trading
ranges for H-shares banks. We still prefer GARP banks. We upgrade BOC
H-shares (3968.HK) and Citic H-shares (998.HK) to Buy from Neutral, with
both trading at about 12X 08E P/E vs. the H-share bank average of 14.2X.
We also upgrade SZDB (000001.SZ) to Buy from Neutral, as we think longterm
value is emerging following the 32% share price decline ytd, and
given its continuing management turnaround and better risk-reward. We
revise A-share banks’ market-relative 12-mo. target prices using our new
10% liquidity premium (from 28%) after recent valuation pullbacks.
Catalyst
Strong 1H08 results in August; signs of China CPI inflation pressure easing.
Risks
Our earnings estimates have not factored in China hyperinflation, which
could lead to aggressive rate hikes by the PBOC; and worse-than-expected
asset quality of China banks due to severe GDP slowdown.
Table of contents
Raising H-share (5%-30%) and mostly cutting A-share target prices 3
Positives should continue to offset headwinds and modest credit cost pressure 5
Upgrade BOC H-shares and Citic H-shares to Buy as GARP plays 8
A-share banks — five names we like; upgrading SZDB to Buy 10
Raising earnings estimates post stronger-than-expected 1Q08/2007 13
Two key risks have not been factored into our earning estimates 15
Disclosures 32
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