Regional economy: economically active, linked to both sides of the strait, strategic location. Xiamen, adjacent to the Taiwan Strait, is an important external port along the southeast coast of China. China's first special economic zones and one of the five separately listed cities were officially established in Fujian Free Trade Zone in 2015. Xiamen has become a cross-strait financial center and trade center, bringing new development opportunities for local financial institutions. The economic characteristics of Xiamen are as follows:

1) Rapid economic growth: GDP grew 7.9% in 2019, and has been steadily higher than the national average growth rate of 2pc since 2008.

2) the economic "density" is large: the GDP per square kilometer is 352 million yuan, second only to Shenzhen and Shanghai in the first-and second-tier cities, and the per capita disposable income is as high as 59000 yuan.

3) Electronics + machinery is the pillar of the secondary industry. There are 1071 large-scale industrial enterprises in these two major industries, accounting for more than 50% of the whole city.

4) the tertiary industry accounts for a high proportion (58%), which is mainly driven by real estate and financial industry (accounting for 8.5% and 11% of GDP, respectively). In addition, Fujian Province as a whole has a good small soil. In 2019, the province's personal operating loans reached 528.8 billion, with a growth rate of 22%, accounting for 11.7% of the total loans.

Therefore, for banks in Xiamen, its advantage is that based on the developed economic environment, there is room for financial business in real estate, electronic machinery, small and micro enterprises and other fields from large to small, but the disadvantage is that the local financial competition is more fierce.

Xiamen Bank: serving both sides of the strait, focusing on small and medium-sized enterprises, and experienced management. Xiamen Bank was founded in 1996, led by the Xiamen Municipal Department of Finance (currently the largest shareholder of Xiamen Bank, with a shareholding ratio of 20%). With total assets of 265.9 billion, Xiamen Bank is the second largest city commercial bank in Fujian Province.

1) Regional distribution: more than 90% of Xiamen Bank's loans are invested in Fujian (of which Xiamen accounts for 48%), and 95% of deposits come from Fujian (of which 69% are from Xiamen), mainly by absorbing local deposits in Xiamen to support off-site investment.

2) the pattern of regional competition is more fierce. There are 48 banking institutions in Xiamen. As of 2020H, the deposit and loan market share of Xiamen banks is 7.8% and 4.9% respectively, ranking 6th and 8th, and the local competition (especially deposits) is relatively fierce.

3) perfect corporate governance and rich experience of management.

The corporate governance mechanism of Xiamen Bank is sound, and the incentive mechanism is sufficient: in 2019, the per capita annual salary of its employees is about 300000 yuan, which is significantly higher than the per capita disposable income of Xiamen cities and towns (59000 yuan), which provides a strong guarantee for the construction and stability of the workforce.

Mr. Wu Shiqun has been chairman of the board for more than 10 years, and Mr. Hong Zhuomin, president of Xiamen Bank, has worked at Fubon Bank for many years and has been president of Xiamen Bank since 2014. Bring the rich management experience of Taiwan banks to Xiamen Bank. In addition, among the independent directors, Mr. Chen Hanwen is the head of the Accounting Department of Xiamen University and a special professor of "Minjiang Scholars", while Hong Yongmiao is a "Yangtze River Scholar" in China, a tenured professor of Cornell University, and Mr. Ning Xiangdong is a professor of the School of Economics and Management of Tsinghua University. Mr. Xu Zewei and Fang Jianyi have accumulated rich experience in the industry.

4) characteristic business one: building a cross-strait financial platform. It mainly serves Taiwan-funded enterprises and residents, and increases cooperation in cross-strait settlement and inter-industry business. At present, the business contribution of this platform is small (Taiwan enterprises' deposits to the public is 3.38 billion, Taiwan retail customers 49000, AUM45 billion yuan), but it has accumulated customer resources and business experience for Xiamen Bank, and laid the foundation for future business development.

5) characteristic business 2: focus on small and medium-sized inclusive benefits. Based on the "credit factory + bank-tax interaction", Xiamen Bank has formed a characteristic small and micro financial service system, with loans for small and micro enterprises of 37.39 billion yuan, personal operating loans of 16.7 billion, and bill discount of 13.7 billion, accounting for 30%, 13% and 11% of the total loans respectively. The small and micro business has helped Xiamen Bank to increase the rate of return on the loan side (5.78%), while the risk management is good, and the bad rate of its personal operating loans is only 0.31%. If the proportion of small and micro business can continue to increase in the future, it will support the future interest margin.

Xiamen bank fundamentals analysis: asset quality is better.

1) negative asset structure: a, retail accounts for 36% of the total assets, which is higher than the average 4pc of city commercial banks, and mainly invests in housing loans (52% of individual loans) and operating loans (37%); B, investment assets are mainly invested in low-risk and low-yield treasury bonds and government bonds (accounting for 21% of total assets), while non-standard investment accounts for less than 4% of total assets, while deposits on the liability side account for only 58.5%.

2) from the point of view of pricing and interest spread, thanks to the relatively high proportion of small and micro, the loan yield of Xiamen bank is 5.78% higher than the average level of city commercial banks. However, under the influence of fierce local competition, its deposit cost rate is as high as 2.67%, coupled with the low rate of return on investment assets (only 3.18%), dragging down Xiamen Bank 2020H interest margin of only 1.56%, which is significantly lower than that of the same industry.

If the "comprehensive income" of investment-side government bonds is taken into account, Xiamen Bank (net interest income + other non-interest income-income tax) / average total assets is 2.03% in 2020H, which is actually higher than the average 0.02pc of city commercial banks.

3) from the perspective of asset quality, the asset quality of Xiamen Bank is obviously better than that of the same industry. The 2020H defect rate (1.12%), overdue rate (1.14%) and bad generation rate (0.26%) are significantly lower than those of the same industry, while the provision coverage rate of 322.5% is higher than that of the same industry. From the point of view of the trend, its asset quality as a whole maintains the trend of "steady improvement".

4) from the perspective of comprehensive performance: benefiting from the general environment of downward interest rates, Xiamen Bank's non-interest income grew rapidly, driving its 2020H income and PPOP growth rate as high as 26.96% and 34.65% respectively, and the profit growth rate was also high, 13.34%. High performance growth has also led to a narrowing of the gap between its ROE level and that of its peers, to 11.70% by 2020H. As market interest rates have begun to stabilize and pick up since May, the sustainability of future performance improvement needs to track the stabilization and improvement trend of core profitability (such as spreads, middle income).

Investment suggestion: Xiamen and Fujian have developed regional economy, diversified industrial structure and excellent small and micro foundation, which has brought a good soil for the future development of Xiamen Bank. Xiamen Bank serves both sides of the strait, focusing on small and medium-sized enterprises, has formed its own characteristic business system, and transformed into a good financial structure, especially the asset quality is better in the city commercial banks. Looking to the future, as the impact of the epidemic gradually fades, the capital replenishment channel of Xiamen Bank has been further opened after listing, and there is a good space for business growth in the future. Considering the company's regional economy and its own characteristics, we think that we should give the company IPO a reasonable valuation of 1 times PB. The issue price corresponding to the company 2020E, 2021E PB is 0.95X, 0.87x.

Risk tips: 1) the pressure of macroeconomic decline is increasing, and asset quality is deteriorating rapidly. 2) Financial supervision is stronger than expected, which has a negative impact on the operation of the banking industry. 3) the competitive pressure on deposits increases, and the cost on the debt side of banks goes up. 4) the development of the epidemic situation exceeded expectations.