China Merchants Bank (3968 HK) Summary
Core Content
China Merchants Bank (CMB) has been upgraded to a Buy (1) rating from Outperform (2), with a revised target price of HKD21.0 (from HKD17.25), implying an upside of 40.2%. The stock's performance has been weak YTD due to lack of catalysts and perceived weak balance sheet, but recent developments suggest a turning point.
Main Points
- Strong internal capital generation: CMB has shown a strong ability to generate capital internally, which has supported its growth without significant external fundraising.
- Capital-efficient growth model: The bank's focus on retail and intermediary businesses, which are less capital-intensive, contributes to a more efficient use of capital.
- Low regulatory risk: CMB has the least regulatory risks in areas such as trust beneficiary rights (TBR), wealth-management products (WMP), and local government financing vehicles (LGFV).
- Improved asset quality: CMB has the best underlying asset-quality trend among joint-stock banks, with a consistent reduction in non-performing loans (NPLs) and better provision coverage.
- SME loan growth: There has been a notable increase in SME loans, which is expected to improve yield on loans and reduce capital consumption.
- Valuation: The new Gordon Growth Model implies a 2014E PBR of 1.4x, suggesting a fair value of HKD22.3/share. After a 30% haircut for LGFV exposure, the target price is HKD21.0.
- Earnings forecast: The 2013-15 net-profit forecasts are 4-9% below the Bloomberg consensus due to the recent rights issue dilution.
- Share price performance: The stock has underperformed its peers, but the analysis suggests a potential reversal in performance.
Key Information
Financial Highlights
| Metric |
2013E |
2014E |
2015E |
| Net profit (CNYm) |
47,518 |
52,307 |
53,989 |
| Core EPS (FD) |
2.026 |
2.065 |
2.131 |
| DPS (CNY) |
0.614 |
0.619 |
0.639 |
| PBR (x) |
1.1 |
1.0 |
0.9 |
| ROE (%) |
20.2 |
18.2 |
16.6 |
| 6 Nov price (HKD) |
14.98 |
- |
- |
| Target price (HKD) |
21.00 |
- |
- |
| Upside (%) |
40.2 |
- |
- |
Balance Sheet (CNYm)
| Item |
2013E |
2014E |
2015E |
| Shareholders’ equity |
269,514 |
306,259 |
344,556 |
| Total assets |
3,841,844 |
4,211,209 |
4,593,395 |
Capital Ratios
| Ratio |
2013E |
2014E |
| Tier-1 CAR |
9.8 |
10.1 |
| Total CAR |
12.6 |
12.6 |
Loan Mix (1H13)
| Bank |
Retail (%) |
Corporate (%) |
SME (%) |
| CMB |
35.9 |
60.9 |
25.0 |
| Sector Average |
27.7 |
69.7 |
20.6 |
Growth Forecasts (2013-2015E)
| Metric |
2013 |
2014 |
2015 |
| Fee income growth (YoY) |
30% |
15% |
10% |
| Loan growth (YoY) |
15% |
11% |
10% |
| Deposit growth (YoY) |
15% |
13% |
11% |
Risks
- Sharp rise in provisions: A potential sharp increase in provisions to meet the 2.5% loan-loss reserve (LLR) ratio could impact earnings.
- Regulatory changes: While CMB has lower regulatory risk, changes in the regulatory environment could affect its performance.
Conclusion
CMB is now the top pick among China joint-stock banks due to its capital-efficient growth model, strong internal capital generation, and low regulatory risk. The bank's focus on retail and SME lending is expected to drive sustainable earnings growth, supported by improved asset quality and a favorable regulatory environment. With a revised target price and an upgraded rating, the stock is viewed as a good investment opportunity.
