Key points of investment
Industrial Bank has high dividends, undervaluation, low holdings, and low expectations. The fundamentals have bottomed out. The logic is similar to that of high-dividend banks, and it is expected to usher in a valuation repair.
What is the core logic of Industrial Bank? ——The next major high-dividend bank, Societe Generale Bank, is expected to repeat the high-dividend market. The similarities are: ① Systematic importance and ability to operate continuously. Industrial Bank is the second-tier domestic systemically important bank (second highest in terms of system importance score), after China Construction for Industry and Agriculture. It is the same tier as China Merchants Bank and Bank of Communications, so it also has the advantage of continuous operation capabilities. ② It is also high dividends, undervaluation, low positions, and low expectations. At the trading level, institutional holdings are low and benefit from ETF expansion as an important component of the index. ③ Uncertainty about operating fundamentals has declined, and the revenue and profit growth rate is expected to return to around 0% in 2024.
Where did the decline in uncertainty come from? ——Pay attention to the three major uncertainties to improve Industrial Bank's current performance, valuation, and transactions, and the three major uncertainties are expected to improve.
Performance: Performance is expected to stabilize after a long period of time, and revenue and profit have bottomed out and improved. Industrial Bank's revenue and profit declined by 5.2% and 15.6% respectively in 2023. The main sources of pressure were the 2022 financial management one-time revenue base and credit card depreciation pressure. Excluding the impact of consultancy fees, it is estimated that Societe Generale Bank's revenue increased by 1.3% in 2023; the credit card defect rate at the end of 2023 was 3.93%, down 1 bps from the end of 2023H1. The credit card overdue rate was 6.75%, and the gap with bad scissors narrowed significantly compared to the beginning of the year. We believe that the pressure on impairment has been released by more than half. According to the March 29 report “Tough Times, See the Inflection Point”, Industrial Bank's 2024 revenue and profit growth rate is expected to return to around 0% growth as these two stressful factors subside.
Valuation: The valuation has a significant current price ratio, high dividends, and stagnant growth targets. As of April 8, 2024, Industrial Bank's 2023 dividend rate was 6.72%, ranking the top three listed banks. PE (TTM) has a valuation of 4.2 times, ranking the third lowest among listed banks. Additionally, Huaxia Bank (4.0 times) and Bank of Guiyang (3.4 times) are lower.
PB (lf) has a valuation of 0.45 times, ranking the 7th lowest among listed banks. Since the beginning of the year, Societe Generale has declined by 4.5%, and the banking index has risen by 12.0%. Societe Generale ranks last among listed banks and national banks in terms of gains and losses.
Trading: Fewer chips, low holdings, and important index constituents. Societe Generale Bank's position level has reached a low level. At the end of 23Q4, active public offering plus North China shares accounted for only 4.8% of freely tradable shares, which is the lowest since 2019. In particular, active public placement ratio was only 0.03%, with few chips and low positions. At the same time, Industrial Bank is a constituent stock of important indices such as the Shanghai Stock Exchange 50, and is expected to benefit from ETF capital expansion.
How to evaluate Societe Generale Bank's target price? ——Benchmark banks have 30% + room in the short term. If Industrial Bank's dividend rate returns to the average of major banks (5.5%), the space is 22%, and PB is valued at 0.52x. In the medium term, as of April 8, 2024, DBank's dividend rate was 3.26pc of premium compared to the 10-year treasury bond yield, which is in the 72% fraction of the past ten years. If the dividend premium rate returns to the average of the past ten years, Dabank's dividend rate will drop to 4.7%. If Societe Generale's dividend rate falls to 4.7%, the space is 44%, and PB is valued at 0.61x. Overall, we gave a target price of 20.62 yuan/share, corresponding to PB 24E 0.56x, and 33% of the current price space.
Profit forecasting and valuation
Net profit to mother is expected to increase by 0.26%/4.27%/6.38% year-on-year in 2024-2026, corresponding to BPS 36.68/39.31/42.15 yuan. The current price corresponds to 0.42 times the 2024 PB valuation.
Risk warning: Asset shortage pressure has improved, and performance has declined beyond expectations.