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Attractive valuations, attractive yields

  • We like BOCOM for its cheap valuations (FY21F P/BV of 0.44x and FY21F P/E of 4.4x) and attractive dividend yield (FY21F: 7.2%).
  • We believe that BOCOM will continue to deliver stable profits even amid a weaker macroeconomic environment.
  • Downgrade to Hold from Add. TP cut to Rmb4 as we lift the corporate NPL ratio assumption in our stress-test adjusted GGM by 1.5% pts to 10.5%.

Elevated investor concerns over asset quality & policy risks

We think rising asset quality pressures are manageable from an EPS point of view for Bank of Communications (BOCOM), given its conservative non-performing loan (NPL) recognition ratio (NPLs/loans that are more than 90 days overdue) of 148% in 1H21.
Nevertheless, we think bank share prices could struggle to perform as we think both property sector’s stress and macroeconomic indicators are not likely to materially improve over the next few months. This could see investor concerns over asset quality and policy risks (such as ‘surrendering’ profits, which occurred in 2020. See Between a rock and a hard place, dated 18 Jun 2020) remain elevated, and thus make it difficult for these banks to materially re-rate in the near term.

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Incorporating concerns via a 10.5% corporate NPL ratio assumption

We incorporate elevated investor concerns about the macroeconomy and asset quality by raising the corporate NPL ratio assumption that we use in our stress-test adjusted Gordon Growth Model (GGM), which is the basis of our target prices. Our new corporate NPL ratio assumption used in this stress test is 10.5% (vs. 9% previously).

Downgrade to Hold from Add; TP cut to Rmb4

We value BOCOM-A using a stress-test adjusted GGM, after factoring in historical A-H share valuation premiums. There are no changes to our FY21F-23F EPS estimates. However, due to a 1.5%-pt higher corporate NPL ratio assumption used within our stress test, our TP is cut to Rmb4 from Rmb5.40. Given the lower target price, we thus downgrade to Hold due to valuation reasons. Key upside/ downside risks: a better-than- /worse-than-expected economy and lesser/greater social responsibilities.