Model adjustment
? We adjust FY21F-23F EPS by -0.7% to +2.0% to reflect our view of a stronger-than-expected FY21F and a weaker economy in FY22F – 23F.
? Policy risk has also been milder than we had previously expected and hence we cut our policy risk valuation discount from 50% to 40%.
? Upgrade to Add from Hold. Our TP rises to Rmb3.70 from Rmb2.90 due to valuation roll-forward and a reduced policy risk valuation discount.
Stronger-than-expected FY21F and a weaker FY22F-23F
We forecast FY21F EPS growth to accelerate to 11%, the strongest since FY13’s 12.5%, mainly due to lower credit costs. We then conservatively expect FY22F EPS growth to slow to 8% on a weaker economy, before rebounding to 9.3% in FY23F.
Better-than-expected policy risk
We had previously been concerned that given the worsening economy in 2H21, EPS growth would have been more significantly impacted due to policymaker pressure to ‘surrender’ profits; China banks were asked to surrender Rmb1.5tr of profits back in 2020 (see Between a rock and a hard place dated 18 Jun 2020). However, policy risk has been milder than expected, with BOC likely to report an eight-year high EPS growth in FY21F, in our view. As such, we narrow our policy risk valuation discount from 50% to 40%.
Upgrade to Add from Hold; TP raised to Rmb3.70 from Rmb2.90
We value BOC-A using a stress-test adjusted GGM, after factoring in historical A-H share valuation premiums. There are no changes to the ‘true’ corporate NPL ratio of 10.5% used in our stress test. However, due to the lower policy risk valuation discount and a valuation roll-forward where we now derive our target price by applying our target P/BV multiple to FY22F BVPS, our TP rises to Rmb3.70 from Rmb2.90. Potential re-rating catalysts are improving asset quality and economic recovery. Key downside risks: a worse-than-expected NIM trend and greater social responsibilities.