Investment highlights

Once again, it covered Minsheng Bank (600016) to give it an outperforming industry rating. The target price was 5.05 yuan, corresponding to 0.4 times P/B in 2024. Once again, Minsheng Bank (01988.HK) was covered to give it an outperforming industry rating. The target price was HK$3.73, corresponding to 0.3x P/B in 2024. The reasons are as follows:

Strong risk management and internal control compliance capabilities to improve quality: After the new leadership team took office in 2020, the company emphasized “compliance management is core competitiveness” at the strategic level, and the emphasis on risk control increased dramatically, gradually solidifying the foundation in the three areas of risk management, internal control management, and settlement and disposal of problematic assets.

Inventory risk management is active, and net bad generation has entered a downward channel: in the past three years, the pressure on bad burdens such as personal operating loans, transportation/mining, and non-standard assets of Minsheng Bank has been greatly relieved, providing room for profit release. In addition, benefiting from the company's prudent risk appetite after the transformation of risk control, the net generation rate of bad loans peaked and declined. The net bad generation rates for 20-year/21-year/22-year/1-3Q23 were 2.35%, 1.47%, 1.26%, and 0.90% (annualized), respectively.

Net interest spread resilience is better than that of the industry: We expect the company's NIM to decrease by 5.5 bps to 1.41% year-on-year in 2024, mainly due to: 1) the relatively low share of mortgages and CITI loans, and less pressure to replace mortgages and CITI debt; 2) the high share of time deposits, which benefit more from lower deposit interest rates; 3) the net interest margin base is low, and there is limited room for downside.

What is our biggest difference from the market? 1) The capital market has not paid sufficient attention to the effective changes in Minsheng Bank's risk management system in the past three years. In 2023, Minsheng Bank received attention due to its low valuation level, and its stock price in the second quarter ushered in a phased rise; however, investors still have certain doubts about the future trend of asset quality restoration. We believe that the consolidation of internal governance mechanisms is expected to guarantee future asset quality, and the company's stock price is expected to further interpret the balance sheet repair logic. 2) Against the backdrop of economic shocks and recovery, performance determination performance brought valuation premiums. Minsheng Bank's revenue and profit base is low, and the performance growth rate is highly deterministic in the context of improved asset quality; while bank targets with high institutional positions and strong early growth may face relatively greater downward pressure on fundamentals and valuation discounts.

Potential catalysts: Looking ahead to the next 3-6 months, we believe that the stock price catalysts include: 1) there is a clear recovery trend in revenue and profit growth, and the certainty of performance is guaranteed; 2) the net generation rate of bad net generation remains relatively low, and non-credit impairment losses are experiencing a rapid drop in pressure; 3) leading industries with net interest margin resilience.

Profit forecasting and valuation

We expect the company's 23-25 EPS to be 0.81/0.86/0.92 yuan, respectively, and the CAGR is 4.7%. A revenue forecast of 1393/1407/145.8 billion yuan for 23-25 was introduced, corresponding to a year-on-year growth rate of -2.2%/1.0%/3.7%; introduced a net profit forecast of 353, 378, and 40.5 billion yuan for 23-25, which corresponds to a year-on-year growth rate of 0.2%/7.0%/7.1%. Once again, we covered the company's A/H shares. Using the DDM absolute valuation method, we gave the company a target price of HK$5.05 /3.73 for A/H shares, respectively, corresponding to 0.4x/0.3x 2024E P/B and 32.9%/45.1% growth space, respectively, all of which outperformed the industry.

risks

Risk exposure and pressure to dispose of asset burdens in real estate and other industries have exceeded expectations; the equity structure is highly fragmented.