On December 17, 2024, the Bank of Chengdu issued an announcement stating that it had triggered a “bank to bond” conditional redemption clause. We believe: 1) Strong redemption of convertible bonds will supplement capital ammunition and support business expansion; 2) the strategic positioning of Sichuan will be upgraded to provide room for expansion; 3) the company's debt costs are expected to continue to be optimized, and asset quality is superior to moderate. Strong redemptions of convertible bonds have diluted dividend rates and ROE in the short term, but as capital strength is further consolidated, we believe there is room for improvement in the company's operations and maintain a “buy” rating.

Debt conversion triggers strong redemption and provides momentum for table expansion

The company announced that from November 7, 2024 to December 17, 2024, the closing price for 15 trading days was not less than 130% (including 130%) of the current share conversion price of 12.23 yuan/share, which has triggered the conditional redemption clause of “mature bank to bond”. The company decided to exercise the right to early redemption of convertible bonds and redeem all “bank to bank bonds” that have not been converted into shares after the closing of the redemption registration date at the price of the face value of the bond plus accrued interest for the period. After the early redemption of this convertible bond is completed, it will further enhance the company's capital strength and provide support for the expansion of the balance sheet. As of 12/17, the unconvertible balance of convertible bonds was 2.8 billion yuan. If calculated using the unconverted balance of 5.2 billion yuan at the end of Q3 and the risk-weighted asset size at the end of Q3, it would increase the core Tier 1 capital adequacy ratio of 0.61 pct to 9.01%.

Upgrading regional positioning to open up development space

With the implementation of a favorable regional economy+capital replenishment, the Bank of Chengdu continues to lead the industry in terms of expansion speed. At the end of 24Q3, the company's total assets and total loans were +14.9% and +22.2%. The growth rate ranked fifth and first among listed banks, respectively. Sichuan is clearly defined as a strategic hinterland for China's development over the next 10 years, and the hinterland's economic construction may boost credit investment. In '23, the Central Economic Work Conference first proposed “optimizing the layout of major productivity and strengthening the country's strategic hinterland.” In September '24, the central government issued a document stating that “it will guide the orderly transfer of capital, technology, and labor-intensive industries from the east to the midwest, and from central cities to the hinterland.” The “2024 List of Key Projects to Accelerate Early Work in Sichuan Province” includes 330 major projects to be started in the next 2 to 3 years, with an estimated total investment of 2.15 trillion yuan. Incremental infrastructure investment is expected to leverage loan investment.

Debt costs can be expected to improve, and solid fundamentals continue

After considering the additional share capital for strong redemption of convertible bonds, we forecast EPS of 3.08/3.40/3.77 yuan for 24-26, and a BVPS forecast value of 20.25 yuan for 25 years, corresponding to 0.81 times PB. Comparatively, the company's 25-year Wind consistently predicted a PB average of 0.60 times. As long-term time deposit maturities+deposit listing interest rates are lowered, debt-side costs are expected to continue to improve, hedging downward pressure on asset-side pricing. At the end of 24Q3, the company's non-performing ratio was 0.66%, the lowest level for listed banks; the provision coverage rate was 497%, ranking fourth among listed banks, and hidden debt swaps are expected to improve the quality of government-related loan assets. The company's fundamentals are in the first tier of the industry, and the scale growth rate is at the leading level of listed banks. It should enjoy a valuation premium, with a 25-year target of PB1.00 times (0.95 times the previous value) and a target price of 20.25 yuan (previous value 21.19 yuan) to maintain a “buy” rating.

Risk warning: Economic recovery fell short of expectations, and asset quality deteriorated beyond expectations.