Investment advice
We expect the Chongqing Agricultural Commercial Bank's stock of bad debts to come to an end. The bad generation rate and credit costs will fall, supporting its net profit growth rate to remain at 5-7% for the next two years, and ROE at 9-10%. We believe that the company's current dividend ratio of 0.4x PB and 6.2% of A-shares is cost-effective. Furthermore, we are optimistic that the company's retail strategy, technology promotion, and talent enforcement will help guarantee its high market share. In terms of regional economy, the construction of a new Chongqing is also expected to bring new business opportunities to the company and open up room for potential valuation increases.
rationales
Deeply cultivated in the Chongqing County area, leading the local share. At the end of 2023, the total assets of Chongqing Agricultural Commercial Bank were 1.44 trillion yuan, making it the largest agricultural commercial bank in the country. The company has been rooted in the local market in Chongqing for many years, with deposit and loan shares reaching 17% and 12% respectively. Chongqing Agricultural Commercial Bank is deeply involved in local counties. At the end of 2023, the company had 1,751 county networks, accounting for 83% of the total number of branches, and 72% and 49% of the company's county deposits and loans, respectively.
Retail-enabled, “all-in-one four-wheel drive” with “big retail” as the main focus. The Chongqing Agricultural Commercial Bank itself has a major advantage in the retail business. The number of local outlets and deposit market share in Chongqing are in a leading position. On this basis, the company actively promotes service model innovation, actively builds a “BBC financial ecosystem”, and further strengthens customer stickiness. Benefiting from a good retail business foundation, the debt cost of the Chongqing Agricultural Commercial Bank is low. At the end of 1H23, the deposit cost ratio of the Chongqing Agricultural Commercial Bank was 1.91%, lower than the average of listed regional banks of 2.23%.
Technology is on the rise, and digital transformation requires benefits. In 2024, the Chongqing Agricultural Commercial Bank deepened the “customer-centric” concept, optimized the organizational structure and operation mechanism, and established four major front desk headquarters of “fintech, inclusive finance, corporate finance, and financial markets” to directly meet customer needs and enhance product design capabilities and comprehensive service capabilities. Notably, the Chongqing Agricultural Commercial Bank emphasized the development of technology, established the Ministry of Fintech as one of the four major front-office departments, and formed a “one meeting, one headquarters, one company” fintech organizational structure in 2024.
Focus on “New Chongqing” bringing new opportunities for banks. After 2016, Chongqing faced pressure from industrial transformation and upgrading. The growth rate of the two pillars of computer manufacturing and automobile manufacturing slowed down, dragging down the asset quality of the Chongqing Agricultural Commercial Bank. After 2018, the bad generation rate and credit costs rose rapidly, and stock valuations fell to a low level. Since then, the company has vigorously cleared up stock risks, peaking and falling back from 2020-21. In 2021, the country proposed the construction of Chengdu and Chongqing Shuangcheng, the new Chongqing Municipal Committee proposed the construction of a new Chongqing at the end of 2022, and the country introduced a package of financial bonds in 2023. In this context, we have continued to pay attention to the asset quality improvement, industrial restructuring, and high-quality economic development of the new Chongqing, providing potential new opportunities for the business development of the Chongqing Agricultural Commercial Bank.
Profit forecasting and valuation
Keep profit forecasts unchanged. A shares are currently trading 0.4 times, 0.4 times the 2024E and 2025E net market ratios, while H shares are currently trading 0.3 times and 0.2 times the 2024E and 2025E net market ratios. Maintain the outperforming industry rating and target prices of HK$5.71 and HK$4.43 for A and H shares. A shares correspond to 0.5 times, 0.4 times 2024E and 2025E net rates, and H shares correspond to 0.3 times and 0.3 times 2024E and 2025E net ratios, respectively, with 22.3% and 32.2% upside compared to the current stock price.
risks
Interest spreads narrowed more than expected, and asset quality performance fell short of expectations.