Ping An's point of view:

The county market can be expected in the future, and the regional comparative advantage is outstanding. In the current context where the banking industry is generally facing an “asset shortage,” county finance may become an important area for future policy focus and breakthroughs in banking business transformation. Looking at the situation in Hunan Province, according to the Hunan Provincial Department of Natural Resources, by the end of '22, counties in Hunan Province accounted for 55% of the province's GDP and 70% of the population, all exceeding the national average. Furthermore, data such as the number of regulated enterprises in the province, the number of national-level innovative counties, and the number of “100 billion” counties and cities all rank among the highest in the country. The vast market space has become the foundation for the Bank of Changsha to fully expand its business in the county area.

Channel first, cultivate the local community to build a differentiated growth pole. As a high-quality regional bank that continues to be deeply involved in the local area, the county market has become the main focus of the Bank of Changsha. Relying on the “county branch+township branch+Huinong payment service point” trinity channel network to create a lightweight and flexible service model, it has achieved full coverage of counties throughout the province in terms of scope. On the basis of guaranteeing a relatively high density of branches in the province, the Bank of Changsha had an annual cost-to-income ratio of only 25.6% in '23, which is at the midstream level of the same industry, and the cost advantages of a tertiary network are prominent. The business side used the “one county, one policy” and “one county, one product” approach to continue to open up breakthroughs in the county market, and the county financial management department of the head office was used as the strategic center to assess county business development in a targeted manner. The differentiated service strategy also brought high-yield high-quality customers to the Bank of Changsha. The bank's loan yield reached 5.78% at the end of '23, ranking first among commercial banks in listed cities. The three systems of “channel+strategy+play” form the “moat” of competitive advantages of Bank of Changsha's county business. As of the end of half a year 2023, Bank of Changsha's regional deposit and loan scale and retail customer share reached 31.0%/33.8%/34.7% respectively. In particular, the growth rate of county deposits and loans continued to be higher than that of the entire bank. The year-on-year growth rate of county deposits and loans in the first half of '23 reached 17.6%/24.0%, respectively, higher than the bank level of 2.4pct/5.4pct. The first-mover advantage is gradually being released, business contribution continues to increase, and the county market is beginning to flourish.

Location dividends continue to be released, and asset quality continues to improve. The Xiaoxiang region is blessed with regional advantages. It runs through the north and south, connecting east and west, and is a transportation hub city in the central region. At the same time, Changsha is at the intersection of several key economic belts. The rapid development of regional industries under policy dividends has given birth to representative industrial leaders such as Sany Heavy Industries and Shanhe Intelligence. The vitality of the regional industry supports the development of the banking business side. Bank of Changsha's public loans increased by 21.8% year-on-year at the end of '23. The absolute level of growth rate is at the forefront of comparable peers. Against the backdrop of general pressure on the industry, it achieved contrarian growth. In particular, the share of manufacturing loans continued to rise. The risk side continues its positive trend, and the core asset quality index is stable, moderate and positive. According to the company's semi-annual report, the non-performing rate at the end of '23 was 1.16%, continuing the downward trend. Considering the company's continuous improvement in risk control capabilities in recent years, it is expected that there is still room for improvement in asset quality.

Investment advice: The regional advantage is obvious, and the county's contribution is beginning to shine. As a high-quality local commercial bank deeply involved in Hunan, Bank of Changsha has created a broad public business market through the continuous release of regional strategic dividends. Abundant consumer consumption activity has created favorable external conditions for its retail business development. In particular, the company's broad and deep channel network and mature institutional style in the county area have provided good support for the company's business development, and the competitive advantage in the county market is expected to remain. Furthermore, the orderly progress of the company's 11 billion convertible bond issuance plan will continue to consolidate capital strength and add weight to the company's long-term development. We maintain the company's profit forecast for 23-25. The corresponding EPS is expected to be 1.98/2.30/2.65 yuan, and the corresponding profit growth rate is 16.9%/16.1%/15.4%, respectively. The current stock price corresponding to the PB for 23-25 is 0.44x/0.39/0.35x, respectively, maintaining the company's “recommended” rating.

Risk warning: 1) The economic downturn has caused pressure on industry asset quality to rise beyond expectations. 2) Interest spreads in the industry have narrowed more than expected due to falling interest rates. 3) Financial policy regulation risks.