Why Zhejiang Agricultural Credit?
Leading the tide of the times, it has become the most capable “agricultural and commercial railway army” in China. In the commercial reform phase of agricultural credit cooperatives, Zhejiang Nongxin seized policy opportunities and took the lead in initiating shareholding system reform, clarifying the path of “clear property rights” and “supporting agriculture with small support”, contributing to the healthy development situation of commercial banks “competing for common prosperity.” The banking industry in Zhejiang was the first to get rid of its historical burden. The non-performing rate dropped to 2.06% in 2005, far ahead of the rest of the country. The “One Province, One Policy” provincial association deepened the reform phase. The members of the Agricultural Credit Cooperative invested in the establishment of the Zhejiang Agricultural and Commercial Joint Bank from the bottom up to reduce management functions and strengthen service functions. The pioneering layout penetrated more than 10,000 “Fengshou Post Stations” in every administrative village, providing a general information technology base for agricultural commercial banks within the system and solving the problem of fintech investment in small banks. The scale of deposits and loans has remained at the top of the banking industry in Zhejiang Province and the national agricultural credit system for many years. In 2023, Zhejiang agricultural credit savings and loan size growth rates were 17.2% and 17.52% respectively, ranking first in total volume and far leading the growth rate. The regulation encourages agricultural and commercial banks in the province to hold shares with each other. Among the listed banks, Ruifeng Bank can share the growth dividends of Zhejiang's “Agricultural and Commercial Railway Army”.
Why Shaoxing?
The Chinese economy looks at Zhejiang, the Zhejiang economy looks at Shaoxing, and the Shaoxing economy looks at Keqiao. Shaoxing's GDP grew 7.8% in the first quarter of 2024, ranking first in Zhejiang Province. The total GDP and growth rate of Keqiao District is the highest in Shaoxing. As a local bank, Ruifeng Bank can fully enjoy the high growth brought about by increased regional prosperity. Keqiao has a complete textile industry chain system “from silk to cloth to clothing”, the country's largest printing and dyeing base and the world's largest textile trading market “China Textile City”. Against the backdrop of intensifying international competition and declining exports, the textile industry remains booming, and Keqiao, Shaoxing has also shown advantages in the industrial chain that are difficult to replace. Ruifeng Bank has an absolute advantage among financial institutions in Keqiao District. The branch coverage rate is far ahead, accounting for 1/3 of the total number of outlets in Keqiao District. The market share of loans and deposits in 2023 was over 20% and 33% respectively. The “small but scattered” characteristics of the textile city stores fit naturally with the business philosophy of local agricultural and commercial banks to be small, providing Ruifeng Bank with a steady stream of incremental customers.
Why Ruifeng Bank?
Macroeconomic recovery has had many twists and turns, showing the bank's heroic character. Ruifeng Bank, formerly known as Zhejiang Shaoxing Credit Union, is a local bank in Keqiao District of Shaoxing. It is the only listed bank under the Zhejiang Agricultural Credit System. We have been deeply involved in the region for more than 70 years and have insight into regional economic characteristics. The textile industry, small and micro, agricultural, government and banking cooperation have all formed specialized competitive advantages. Most of the management team are veterans of Ruifeng Bank. They have rich experience in frontline work and strong strategic strength. In terms of operating indicators, scale expansion is steady (1Q24 total assets +13.76% YoY, loan ratio +12.47%), leading profitability (1Q24 revenue +15.32% YoY, net profit +14.47% YoY), continuous improvement in asset quality (1Q24 defect rate 0.98%, provision coverage rate 304.84%), and rapid exposure and clearance in the wholesale and retail industry. The net interest spread (1.73% at the end of 2023) is mainly affected by a combination of factors such as declining market interest rates and the restructuring of Ruifeng Bank's loan structure. The decline is expected to slow down in the future.
Investment advice
Ruifeng Bank has the highest coverage rate in Keqiao District of Shaoxing, leading the market share of deposits and loans all year round. Offsite operations have achieved remarkable results in the past three years, and the share of Yuecheng and Yiwu markets has steadily increased. In the medium to long term, under the transformation of the economic structure, the gap between urban and rural areas has been further narrowed, and the incremental financial market in the county area is broad. The formation of the pioneering layout advantages, risk resilience, and incentive mechanism advantages of Ruifeng Bank and the Zhejiang Bank behind it was not a one-day success; they have built a strong moat. In the short term, benefiting from strong economic growth in Keqiao, Shaoxing, the strengthening of the industrial agglomeration effect, credit prosperity is expected to take the lead. Ruifeng Bank has stable asset quality and focuses on small and micro retail customers. The risk exposure caused by macroeconomic disturbances is expected to be cleared up first. If the credit boom recovers beyond expectations, net interest spreads are also expected to improve markedly during the year. Ruifeng Bank's capital adequacy ratio is in the first tier of listed banks. By taking a stake in Zhejiang Nongxin Brother Bank, it has further increased profits and capital, and entered an endogenous growth cycle. As a result, we forecast that the company's revenue for 2024-2026 will increase 8.43%/8.23%/7.96% year on year, respectively, and net profit to mother will increase by 12.45%/10.44%/10.47% year on year, respectively. On June 11, 2024, the closing price of Rui Fung Bank was 4.90 yuan, corresponding to 0.53 times PB in 2024. Based on comparable agricultural and commercial bank valuations and combined with the above analysis, considering that Rui Fung Bank has long-term growth potential, a reasonable valuation of 0.65 times PB in 2024 was covered for the first time to give it a “buy” rating.
Risk warning
Interest rate risk: Market interest rates continue to decline, competition for high-quality assets intensifies, and interest spreads narrow.
Market risk: The sharp decline in macro and regional economies has led to a deterioration in asset quality and a sharp increase in defects.
Business risk: Economic growth falls short of expectations, and a sharp drop in financing demand is dragging down credit growth.