Cultivate fertile soil on the Xiangjiang River and link the ASEAN Bay Area

Bank of China Hong Kong's high profitability continues to be stable, and its business footprint is expanding steadily. The company has a strong base and excellent quality of the public and retail customer base, continuous improvement of the comprehensive layout, high profit contribution from treasury business, and continuous excellent asset quality. At the same time, it is accelerating the development of the Greater Bay Area and Southeast Asia regional layout, and seizing regional dividends is expected to open up higher development space. We forecast Bank of China Hong Kong BVPS forecasts for 2023-25 to be HK$30.51, 32.35, and HK$34.16, respectively, and the corresponding PB is 0.73, 0.69, and 0.66 times, respectively. Comparable to the public bank Wind in 2023, unanimously predicted a PB average of 0.83 times. We believe that the company's strategy is advancing in depth and should enjoy a certain valuation premium. We gave it 1.05 times the 2023 target PB and a target price of HK$32.04, covering the “buy” rating for the first time.

Profit breakdown: Profitability is top, debt advantage is stable

As a high-quality bank rooted in Hong Kong, China and linked regionally, it has three major advantages: business qualification, group linkage, and location coordination. The company's scale has grown rapidly in recent years. At the end of December 2022, the assets reached HK$3.69 trillion, with a 3-year CAGR of 6.79%, ranking first in the Hong Kong industry in terms of compound annual growth rate. Since 2010, the company has ranked among the top 2 in terms of ROA and ROE in the industry, with high profitability and sustainability.

The main drivers of high profitability include: high demand deposits, which shape debt-side cost advantages; high contribution of non-interest income, outstanding insurance business strength; low cost revenue ratio, and high operational efficiency.

Business management: business blossoming at more points, perfect comprehensive layout

Bank of China Hong Kong takes public business as its main pillar. The retail business has been active in recent years, and the treasury business has contributed a high level of profit. For the public sector, public loans/total loans at the end of 2022 were 66.5%. The customer structure was excellent, investment directions were diverse, and industries such as property development, property investment, transportation and transportation equipment ranked first. Continuously improving comprehensive service capabilities to meet the diversified business needs of enterprises, Hong Kong and Macao syndicated loans have been ranked first for 18 consecutive years, leading the IPO payroll banking business. On the retail side, the company is deeply involved in the high-quality mortgage loan market, focusing on developing wealth management and insurance business, expanding cross-border business, and shaping the advantages of the insurance business. In 2022, the value of China Bank Life Insurance's new development business was +32% to HK$1,374 billion. On the treasury side, the pre-tax profit contribution of treasury business in 2022 was over 40%, and net transactional income increased.

Asset quality continues to be excellent, and risk resistance is strong

The company's asset quality is stable, and hidden risks are manageable. Benefiting from high-quality customer positioning and a perfect risk prevention and control system, the defect rate at the end of '22 was 0.53%, lower than the industry average defect rate of 0.85pct; the attention rate and bad generation rate were 0.76% and 0.33% respectively, and the hidden risk level was low. Looking at the segment: on the retail side, the focus is on the high-quality mortgage market in Hong Kong, and the loan quality is excellent; on the public side, loan investment is concentrated on leading local enterprises and large enterprises with Chinese investment backgrounds, and the risk exposure to domestic housing is manageable. The provision coverage rate has been at a high level in the industry for a long time. It has ranked first in the industry for five years since 2015, and has strong risk resistance.

Risk warning: The duration of the economic downturn exceeded expectations; the deterioration in asset quality exceeded expectations.