Top Down Strategy and Large Cap Stock Picks - the DBS Vickers ...

Regional Equity Strategy Q4 2007
Stock Profile: ICBC
BUY HK$5.04 HSI : 24,599
Price Target : 12-mth HK$ 6.0
Potential Catalyst: Further relaxation of QDII & announcement of
“HK Stock Direct Train” program
ANALYST
Jasmine Lai +852 2971 1926
jasmine_lai@hk.dbsvickers.com
FORECASTS AND VALUATION
FY Dec (RMBm) 2005A 2006A 2007F 2008F
Pre-prov. Profit 90,035 104,241 144,686 175,058
Pre-prov. Profit Gth (%) 5.5 15.8 38.8 21.0
Pretax Profit 63,026 72,065 114,701 141,575
Net Profit 37,555 49,263 81,302 105,436
EPS (HK$) 0.15 0.17 0.25 0.33
EPS Gth (%) 21.7 16.1 42.8 33.8
PE (x) 33.4 28.8 20.2 15.1
DPS (HK$) 0.01 0.10 0.09 0.12
Div Yield (%) 0.3 2.0 1.7 2.3
Book Value (HK$) 1.03 1.39 1.59 1.86
P/Book Value (x) 4.9 3.6 3.2 2.7
ROA (%) 0.65 0.71 1.00 1.14
ROE (%) (29.4) 13.6 16.5 19.0
ROE (ex exceptional) (%) (29.4) 13.6 16.5 19.0
SHARE PRICE CHART
HK$
5.30
4.80
4.30
3.80
3.30
2.80
50-Day MA
ICBC
Oct-06 Jan-07 Mar-07 May-07 Aug-07
AT A GLANCE
Issued Capital - H shares (m shs) 83,057
- Non H shrs (m shs) 250,962
H shs as a % of Total 25
H Mkt Cap (HK$m/US$m) 418,605 / 53,740
Major Shareholders (%)
Ministry of Finance 35.33
Central SAFE Inv 35.33
Major H Shareholders (%)
Social Security Fund 21.07
Goldman Sachs 20.28
Allianz AG 8.83
Credit Suisse 6.87
Merrill Lynch 6.87
H Shares-Free Float (%) 36.08
Avg Daily Volume (m shrs) 961.9
Earnings Rev : FY07: - FY08: -
Consensus EPS: FY07: HK$0.23 ; FY08: HK$0.29
Variance vs Cons: FY07: 10.04% ; FY08: 15.60%
Sector : Financials
Bloomberg/Reuters Code: 1398.HK / 1398.HK
Principal Business: The largest bank in China offering a range of
financial products and services to retail and corporate customers
ICBC
More room to improve than peers
Story: The above-expected 1H07 results illustrated ICBC’s
strength in transactional banking, investment banking and
cross-selling capabilities to its vast customer base. The bank
also has more room to improve NIM and asset quality than
peers, given they are below average.
Point: Fee income growth will continue to be driven by
wealth management fee, custodian fee, bank card fee,
investment banking and remittance & settlement. Its loan
growth is likely to remain slower than peers, but this is
mitigated by further NIM improvement.
Relevance: With CCB rallying, ICBC is likely to catch up
and is now our top-pick in the sector. Our 12-month target
price of HK$6.00 is based on 3.39x August 2008 BVPS,
derived from a two-stage DDM model. This is equivalent to
18.0x 2008 PE.
Optimising asset-liability management. ICBC’s loan growth is
likely to remain slightly below sector average. However, it has more
room to widen NIM than bank peers. Its 1H07 NIM improved (up
19bps h-o-h) more than bank peers due to strengthened asset-liability
management via: 1) shifting into higher-yielding SME and retail loans
from low-yielding discounted bills and 2) increasing the proportion of
low-cost demand deposits as a result of buoyant stock market. In spite
of the slight negative impact from the last three rate hikes during May
07 and Aug 07, we believe ICBC’s NIM should continue to improve, as
it further optimised loan and deposits structure. Moreover, most of
the low-yielding restructured-related MOF receivable and PBOC
Special bill will mature by 2011 and the excess funds can be
redeployed into higher-yielding assets.
Sustainable fee income momentum. Substantial amount of time
deposits have been channelled to wealth management products. New
fee income initiatives, such as bank card, remittance & settlement,
fund custodian and investment banking are also new growth drivers
for the bank. Given its vast customer base and distribution as well as
niche in e-banking and transactional banking, ICBC has better crossselling
potential than many bank peers. It has signed up with over 80
stockbrokers to offer third-party custodian services in order to attract
low-cost deposits. Not only will this continue to boost custodian fee
income, it would also provide low-cost deposits as funding for the
bank.
Room for asset quality improvement. There also exists ample room
for further improvement in asset quality, given its NPL ratio is still
above bank peers. In 1H07, overall asset quality remains good with
NPLs declining in ratio and absolute amount and provision coverage
rising. Its NPL ratio significantly improved to 3.3% as at June 2007
(December 2006: 3.8%), which was still higher than bank peers’
average of 2.6%.
Minimal US sub-prime mortgage exposure. ICBC has minimal
exposure to US sub-prime mortgage and CDO exposure. As of June
2007, ICBC had only US$1.2bn US sub-prime MBS and US$500m
CDO unrelated to sub-prime mortgage. The former is equivalent to
HK$9.4bn or 8% of our 2007 pre-tax profit. That is, every 10%
decline in market value of sub-prime debt securities amounts to
RMB940m provision charge, representing 0.8% of our 2007 forecast
pre-tax profit or 0.2% of shareholders’ funds.
Refer to important disclosures at the end of this report
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