EAST ASIA SECURITIES COMPANY LIMITED
CRCB can leverage its dominant position in Chongqing to capture the business opportunity arising from the rapid growth in its county areas. Chongqing is the 7th largest city in China in terms of GDP, as of 31st December 2009, with a population of over 32 million. Since 2000, the Go West Policy has resulted in accelerated economic growth to Chongqing. During 2005 to 2009, Chongqing’s nominal GDP and per capita GDP grew at a CAGR of 20.8% and 20.2%, respectively, higher than the CAGR of national nominal GDP and per capita GDP of 16.0% and 15.4% respectively.
In 2009, Chongqing’s banking penetration as measured by total loans over GDP stood at 135.7%, below Beijing’s 261.7%, Shanghai’s 199.2% and Tianjin’s 148.7%.
CRCB owns the strongest asset and deposit base in Chongqing, which is even larger than those Large Commercial Banks (ICBC, CCB, BOC and ABC). This competitive advantage allows CRCB to access stable sources of funding, resulting in higher NIM (CRCB’s 3.04% vs industry average’s 2.43% in 1H10).
CRCB’s relatively low loan-to-deposit ratio (CRCB’s 61.8% vs industry average’s 69.4%) enables it to have faster growth in loan business in the near future.
CRCB’s fee and commission income is still under-explored, which provides a growth driver in short-to- medium run. During 2007 to 2009, less than 3% of total operating income was contributed from its net fee income.
Given the similar business nature, CRCB should be benchmarked with ABC for comparison. Nevertheless, CRCB should trade at a discount with ABC given its risky business nature (focusing on townships or village). Compared with ABC’s FY10E P/B and P/E are 2.13x and 12.1x respectively, CRCB is believed to be reasonably priced (1.76 – 2.08x FY10E P/B; 11.86x – 15.81x FY10E P/E) at in order to reflect its inferior business nature.
CRCB has sealed cornerstone placement agreements with four investors. Each of them is subject to a six-month lock-up period. Details are as follows:-
Cornerstone Investors Chow Tai Fook Nominee Ltd. (owned by Dato’ Dr. Cheng Yu-Tung) Fubon Life Insurance (owned by Fubon Financial Holdings) Nexus Capital Investing Ltd. (owned by Abu Dhabi International United
Subscription US$30 million US$30 million US$100 million
Investments) Value Partners Ltd.
ABC should be CRCB’s best comparable peer as both of them have significant exposure in county areas. Nevertheless, ABC focuses on 2nd & 3rd tier cities whereas CRCB has large number of outlets covering remote townships or village. The latter business exposure should be more risky and unprofitable in nature which may drag CRCB’s performance in the future.
CRCB finished its restructuring as late as 2008. Therefore, its asset quality is rather inferior when compared with those listed peers. Its NPL ratio, coverage ratio and CAR ratio all lagged behind the industry average.
Unlike Large Commercial Banks and National Commercial banks which have business exposure throughout China, CRCB’s business is limited to Chongqing. Regional policy risk will materially impact CRCB’s business. Even though CRCB is going to set up branches outside Chongqing and explore more opportunities, the contribution from business outside Chongqing will be minimal as it will compete with strong rivals such as the existing PRC banks as well as foreign-invested banks.