The company's recent situation

We recently organized a roadshow exchange event between Chongqing Agricultural Commercial Bank and investors after the 1H24 results. The market paid more attention to the company's performance in terms of credit investment, net interest spread, non-interest income, asset quality, and dividend plans.

reviews

Make efforts to hedge against poor retail demand. 1H24 added $30.2 billion in credit, of which $2.86 billion and $1.5 billion for public and retail sales respectively. 1H24 Chongqing's nominal GDP grew 6.1% year on year, faster than the country's 4.0%, mainly due to the faster industrial growth rate. Furthermore, the decline in the real estate industry was lower than the national average, or due to base figures. Looking forward to the future, we believe that the company will continue to focus on national key projects such as the construction of the Chengdu-Chongqing Shuangcheng Economic Zone, a new land and sea corridor in the west, and a modern industrial cluster system to achieve steady growth of about 5-6% in terms of asset size.

Debt costs hedge against the downward impact on return on assets. On the asset side, the market is more concerned about the impact of urban investment chemical bonds on the net interest spreads of the Chongqing Agricultural Commercial Bank. The company said that currently, the main methods of debt conversion include loan issuance, replacement, and rollover. Since last year, the amount involved has exceeded 20 billion yuan. The adjusted average interest rate level is 4-5%, and the average interest rate drop is about 100 bps. Debt-side companies take the initiative to adjust product structures and reduce deposit costs. We expect to be able to hedge against downward pressure on return on assets to a certain extent, and interest spreads will fall or tend to narrow.

The surplus on bonds in other comprehensive income is expected to support non-interest growth in the second half of the year. Among other comprehensive income of 1H24, the FVOCI debt instrument surged 2.6 billion yuan. We expect that it will still provide good support for subsequent growth in other non-interest income. 1H24's investment income and fair value changed by 2.5 billion yuan, accounting for 17% of revenue.

Expense control hedges the pressure on revenue growth. 1H24's operating expenses decreased by 20% year-on-year, and the cost-revenue ratio was 24%. The company's target cost-revenue ratio for 2024 was controlled at 32%, down 1ppt from last year.

Poor retail sales have increased, and 360% provision coverage provides a buffer for net profit. We estimate that the net generation rate of 1H24 non-performing loans was 0.84%, an increase of 10 bps over the previous year, mainly from retail loans, while the non-performing generation of public loans declined compared to the same period last year. At the end of 1H24, the share of concerned loans was 1.41%, up 27 bps from the end of the previous year. The company said that some customers had reduced their ability to repay, but collateral was sufficient. Also, we will continue to pay attention to the large amount of revenue that was previously planned or further postponed (link).

Profit and dividend expectations are stable. Considering that many of the above factors hedge against the operating pressure caused by the macroeconomy on banks, we expect the company to maintain a net profit growth rate of about 5% this year and next. At the end of 1H24, the core Tier 1 capital adequacy ratio was 13.83%. The higher capital adequacy ratio also guarantees a stable dividend ratio.

Profit forecasting and valuation

Keep profit forecasts unchanged. The current stock price corresponds to 0.4x/0.4x 2024E/2025E P/B for A shares and 0.3x/0.3x 2024E/2025E P/B for H shares, and the valuation still has a margin of safety. If the recovery process of the regional economy is good, there is room for further upward valuation. Maintain the outperforming industry rating and target prices of HK$6.37 for A-shares and HK$4.78 for H shares, corresponding to 0.6x/0.5x 2024E/2025E P/B, 0.4x/0.3x2024E/2025E P/B, respectively. There is room for 25.4%/29.5% increase compared to the current A/H stock price.

risks

The improvement in the regional economy fell short of expectations, and the decline in net interest spreads exceeded expectations.