Key points of investment
The Bank of Chongqing was founded on September 19, 2007. Its predecessor was the Chongqing City Cooperative Bank, which was established in 1996.
In 2013, it was listed on the main board of the Hong Kong Stock Exchange, becoming the first urban commercial bank to be listed on the Hong Kong Stock Exchange.
It entered A-shares in 2019 and became the 15th bank to be listed on A and H shares at the same time. By the end of 2021, the company had a total of 156 branches, including the head office sales department, a small enterprise credit center, and 4 first-level branches, covering all districts and counties of Chongqing and parts of Sichuan, Shaanxi, Guizhou, etc. The shares of the Bank of Chongqing are diversified, and the shareholding of the city's state-owned, Hong Kong-funded banks, and private enterprises is relatively balanced. By the end of 2021, there were 6 shareholders holding more than 5% of the Bank's shares, namely Hong Kong Central Settlement, Chongqing Yufu, Daxing Bank, Lifan Co., Ltd., SAIC Motor Group and Fude Life Insurance. Among them, Chongqing Yufu, Chongqing Road and Bridge, Chongqing Real Estate, and Chongqing Water Resources were also companies under the Chongqing Municipal State-owned Assets Administration Commission. The company's shareholders were diversified, and local resource advantages were obvious.
The Bank of Chongqing created a “1-3-3” development strategy pattern to promote high-quality development. “1” strategic vision:
It has become a first-class listed commercial bank in the country that “sticks to its roots, has distinctive characteristics, is safe and stable, and has excellent value”.
“Three” key tasks: implement the strategic vision, achieve high-quality development, and make every effort to advance the three key tasks of “service improvement, digital transformation, and characteristic development”. “3” Big Empowerment System: Build three systems of “scientific and technological empowerment, talent empowerment, and management empowerment” to deeply stimulate business development vitality and fully support high-quality development.
The impact of the issuance of convertible bonds on the company's financial indicators: 130 billion convertible bonds were successfully issued, and static estimates increased the core Tier 1 capital adequacy ratio by 2.82 pct. The Bank of Chongqing successfully issued 13 billion convertible bonds on March 29, 2022, and entered the share conversion period on September 29, 2022. The initial conversion price of Heavy Bank bonds was 11.28 yuan (corresponding to 1 times PB in 2020), the compulsory conversion price was 14.67 yuan (corresponding to 1.3 times PB in 2020), and the current price was 9.20 yuan (closing price on April 1), which is 59.5% away from the compulsory conversion space. Assuming that all 13 billion convertible bonds are converted to shares, static estimates can increase the core Tier 1 capital adequacy ratio of the Bank of Chongqing by 2.82 pct to 12.17%. Capital strength has been greatly consolidated. 2. Impact on ROE: Short-term ROE decreased by 1.42%. Assuming that convertible bonds are converted to shares in 2022, based on an estimate of 7.59% year-on-year increase in 202E net profit, the return on 2022E net assets will drop 1.42 percentage points after the debt-to-equity conversion.
ROE is being diluted in the short term, but capital consolidation in the medium to long term guarantees the company's continued profitability.
Highlights of the annual report: 1. Revenue maintained double-digit growth throughout the year, and profit growth rate remained high before provision, achieving 10.2% growth. Since 2020, the company has maintained a high level of provision and planning, and the net profit growth rate has continued to increase quarterly, with a 5.4% year-on-year increase throughout the year. 2. Investment in public loans remains high. Public credit increased by 61% in '21, and investment in the infrastructure category of leasing business and public water management was very strong, accounting for 32.1% and 37.1%, supporting loan investment throughout the year. 3. Poor asset quality has both declined, and provisions have been steadily increased. The non-performing amount was 4.106 billion, and the non-performing rate was 1.30%, which continued to decline 3 bps from the 3rd quarter. The extent to which the provisions covered bad conditions increased 0.6 percentage points month-on-month to 272.24%. 4. The year-on-year decline in annualized cost and revenue for a single quarter. Q4 The quarterly annualized cost revenue ratio was 27.7%, down 1.3 percentage points from the same period last year. Accumulated management fees increased 15.6% year over year, a significant improvement from 23.4% year on year in the 3rd quarter. 5. The core Tier 1 capital adequacy ratio increased month-on-month. The core Tier 1 capital adequacy ratio, Tier 1 capital adequacy ratio, and capital adequacy ratio in 2021 were 9.36%, 10.45%, and 12.99%, respectively, +11 bp, +11 bps over the previous month.
The annual report is insufficient: net interest income for the first and fourth quarters was -2.8% month-on-month, and the annualized interest spread for a single quarter fell 8 bps to 1.93% month-on-month.
The narrowing of interest spreads was mainly a drag on the asset side. Asset-side returns fell 5 bps month-on-month. It is expected to be mainly affected by structural and interest rate factors. The company's overall credit growth remained stable in the fourth quarter. Judging from the internal structure of credit, the scale of retail loans declined month-on-month. The proportion of assets accounted for a clear decline. At the same time, interest rates on newly issued loans are expected to decline. 2. Personal loans were mainly affected by the contraction in consumer loan investment, and the share of new operating and consumer loans fell back to 15.3%. Consumer loans were affected by the new Internet loan regulations. The scale fell by 11.25 billion from 2020, dragging down individual loan investment throughout the year. 3. Net fee revenue was -25.9% year on year, mainly agent financial management revenue falling 28.9% year on year.
Wealth management products are shifting to net worth, and lower excess returns affect agency financial management business income.
Investment recommendations: Company 202E, 2023E PB 0.68X/0.62X, PE 6.37X/5.88X (Urban Commercial Bank 202E, 2023E PB 0.77X/0.68X; PE 6.47X/5.72X). The company is located in the Chengdu-Chongqing economic circle. The regional economy is undergoing transformation and development, and the shareholding structure is distributed and balanced. Profitability has been picking up in recent years, driven by net interest income and management expenses, and ROA is at a high level in the industry in comparable industries. The company's loans have increased markedly in recent years, accounting for a higher share than peers. At the same time, comprehensive loan pricing has remained at a reasonable level. Asset quality has improved year by year as Chongqing's economy recovers, and the non-performing rate is below the average of urban commercial banks. For the first time, coverage gave an “increase in holdings” rating, so it is recommended to maintain active attention.
Risk warning: Macroeconomics is facing downward pressure, and there is a risk that performance will fall short of expectations and that research reports and usage information data will not be updated in a timely manner.