A trillion-dollar provincial agricultural commercial bank that is deeply involved in the suburbs of Shanghai. The Shanghai Agricultural Commercial Bank was established on August 25, 2005. It is the first provincial joint stock bank in the country to be restructured and established on the basis of the Agricultural Credit Cooperative. It has been rooted in Shanghai for 70+ years. In 2023, the proportion of branches in the Shanghai region was over 98%, of which nearly 77% were in the suburbs of Shanghai. The overall operation of the Shanghai Agricultural Commercial Bank is steady and improving, and it was listed on the main board of the Shanghai Stock Exchange on August 19, 2021. As of the first quarter of 2024, the total assets of the Shanghai Agricultural Commercial Bank reached 1.44 trillion yuan.

The location advantage is obvious, and the suburbs have great potential for growth. As an international financial center, Shanghai's economy is rich, the per capita income level of residents is high, the proportion of high-net-worth people is relatively high, and the industrial structure is optimized, which is conducive to the development of financial business. In 2023, Shanghai's GDP reached 4.7 trillion yuan, ranking first among cities in the country. Shanghai's per capita disposable income and per capita consumption expenditure were 8.48 and 52,500 yuan respectively, ranking first in the country. The suburbs of Shanghai continue to be attractive to the population. The resident population of the suburbs all achieved positive growth in 2018-2023, and the “five new cities” of Shanghai's key development are mainly distributed in the suburbs of Shanghai. The corresponding supporting urban infrastructure will drive economic growth in the suburbs, and there is room for growth in the demand for comprehensive financial services from banks. Shanghainong has a relatively large number of outlets in the five new cities, and has a deep foundation in the suburbs of Shanghai, so it is expected to obtain more business opportunities.

Shareholders are mainly state-owned assets, and the management is experienced. 1) The top nine shareholders of the Shanghai Agricultural Commercial Bank all have state-owned assets. They are mainly leading companies in shipping, steel, finance, and highways, which helps Shanghai farmers obtain high-quality public resources from Shanghai. The total shareholding ratio of the top ten shareholders is about 61%. The remaining restricted shares will all be unbanned on August 19, 2024. Based on the fact that the majority shareholders currently restricted are state-owned enterprises with sufficient capital, and some of the majority shareholders have increased their holdings during the sales restrictions period, we do not expect large-scale holdings reduction after the restrictions are lifted; 2) Most of the executive teams are in the bank's listing phase, and all have many years of experience working in financial institutions in Shanghai. They have a full understanding of Shanghai agriculture, and have the advantage of being familiar. Since its listing in 2021, the executive team has successively increased their shares in the bank, which not only shows confidence in the future development of Shanghai and agriculture, but also strengthens the unity of interest and sufficient equity incentives.

On the public side: Create two new business cards, “Sannong Xiaowei” and “Science and Innovation Finance.” In the past, Shanghai Agricultural's real estate business developed rapidly. Now, with the transition between old and new momentum, the pressure on the real estate business has dropped, and Sannong Xiaowei and Science and Technology Innovation Finance are providing new momentum for growth. 1) Business card 1: Serve the three rural areas, benefit small and micro development well. The Shanghai Agricultural Commercial Bank has established an inclusive financial service system based on “three rural” finance. Deeply cultivating the suburbs is beneficial to the development of Sannong's business. Inclusive small and micro loans are developing rapidly. The CAGR reached 28.6% in 2018-2023, and the average loan size for inclusive small and micro households in 2023 decreased by 330,000 yuan to 1.55 million yuan compared to 2022; 2) Business card 2: Create a special business card for science and innovation finance. Science and innovation finance started early, continued to cultivate, and already has brand influence. Since the Shanghai Science and Technology Park is mostly planned in the suburbs, the Shanghai Agricultural Commercial Bank also has a branch advantage in developing science and innovation finance. The loan balance for technology-based enterprises in 2023 was 92,516 billion yuan, an increase of 29.9% over the previous year, accounting for an increase of 1.8 pct to 20.5% of public loans compared to 2022.

Retail side: Develop non-residential retail loans and wealth management businesses. The retail transformation of the Shanghai Agricultural Commercial Bank has intensified, business lines and retail loan structures have been optimized, and the wealth management strategy has become more clear. 1) Retail loan restructuring: In a situation where mortgage loans are pressurized by regulatory requirements and mortgage repayment is early, personal consumer loans and personal operating loans are mainly used; 2) The wealth management business started early, and its strategic importance has become increasingly prominent in recent years.

Among them, the financial management and consignment business started early. In 2023, it ranked first among agricultural commercial banks in terms of financial management scale. It has obtained a custodian license, and the financial management license can be expected. In terms of pension finance, the Shanghai Agricultural Commercial Bank began issuing pensions on behalf of others earlier and already has a certain base of pension customers. In the 2023s, 1.22 million pensioners were issued, ranking second in the Shanghai region in terms of market share. Under the aging trend in Shanghai, the contribution of pension finance is expected to increase.

Financial analysis: Profitability is superior, and costs and revenue are advantageous. Since the end of 2021, the net profit growth rate and ROE of the Shanghai Agricultural Commercial Bank have continued to be higher than the average of agricultural and commercial banks. In terms of splitting, it mainly has a comparative advantage in costs (debt costs, management costs, credit costs) and revenue. First, it is deeply cultivated in the suburbs of Shanghai, and the advantages of low debt costs are obvious; second, management cost control is good; third, the asset quality is stable. Shanghai farmers are located in a high-quality area of Shanghai, and the risk appetite is low, and the non-performing rate is less than 1% for a long time; fourth, the middle income business with an early layout has a comparative advantage, and its share of income is high among comparable peers.

Investment advice: The Shanghai Agricultural Commercial Bank is deeply involved in the suburbs of Shanghai, while actively laying out the Yangtze River Delta region. In the context of Shanghai's development of the “Five New Cities” and “Five Centers”, there is still plenty of market space for future business growth. The company has a solid customer base, steady business development, and excellent asset quality. We expect 2024E-2026E's revenue to grow by 2.1%, 5.3%, and 6.9%, respectively, and net profit growth rates of 2.9%, 6.2%, and 10.0%, respectively.

The company paid out the 2023 dividend on June 20. The estimated dividend rate is 5.5%, which is still high and has good investment value. The current stock price corresponds to 2024E PB of 0.54X. The average PB of the company in the past five years is 0.61X, and the average 2024E PB of the company is 0.54X. Combined with the current macroeconomic environment, considering the current macroeconomic environment, the company's current regional advantages, business characteristics and growth potential given by the high-quality customer base, the company was given a 2024E target PB 0.62X, corresponding to the target price of 7.67 yuan. For the first time, coverage was given a “recommended” rating.

Risk warning: 1) Macroeconomic growth is declining faster than expected, and asset quality may deteriorate drastically. 2) If external interest rate policies and regulatory policies change adversely in the future, net interest spreads may narrow drastically. 3) If competition within the region intensifies, it will affect the company's business expansion and pricing, and will adversely affect asset quality.