Rights issue addresses capital concerns
? CITIC’s up-to-Rmb40bn 3-for-10 right issue would raise 1Q22’s core Tier 1
ratio by 66bp to a pro-forma level of 9.31% (8% is the regulatory minimum).
? This is its first ordinary equity capital raising since 2015. H-share investors
look better positioned vs. A-share investors, given their 49% valuation gap.
? Given its low P/BV valuation multiples, it is also possibly its first ordinary
equity capital raising below 1x historical audited book value.
? Reiterate Add rating with an unchanged TP of HK$4.80.
A consistently low capital ratio has been a concern for some time
? With CITIC’s core Tier 1 ratio consistently near the low-end of peers, we saw its low
capital ratios as a key concern for quite some time. This was especially since its 1Q22
core Tier 1 ratio fell further to 8.66%, only 66bp above its regulatory minimum
requirement (see ROE continues its rebound, dated 3 May 2022).
? Its low core Tier 1 ratio, coupled with its greater focus on unsecured lending, is a key
reason why we have consistently applied a much-higher-than-peer stress-test-adjusted
valuation discount (as of the last stress-test, we computed this to be 45%) when deriving
our target price for CITIC (see Asset quality standing out, dated 25 Mar 2022).
Helps address capital concerns, possibly for the next three years
? This 3-for-10 rights issue, which raises up to Rmb40bn, should help to address its capital
concerns, with its 1Q22 pro-forma core Tier 1 ratio rising 66bp to 9.31%. CITIC stated
that the purpose of the capital raising is to replenish its core Tier 1 capital and to support
its sustainable and healthy business development, with the capital raising taking into
consideration its core Tier 1 capital requirements over the next three years.
? Following its capital raising, we believe that CITIC should be better able to grow its loan
portfolio. Its 1Q22 loan growth was only 6.6% yoy, well below the system average.
A-share 49% valuation premium makes pricing interesting
? With CITIC’s A-share price trading at a 49% premium over its H-share price as of the
end of 2 May, it makes the pricing of the rights issue very interesting.
? CITIC states that it will consider various valuation indicators, including P/E and P/BV
and price, and the subscription price would be determined using a market discount
method after considering the market conditions of the A-shares and H-shares prior to
the publication of the rights issue announcement. The subscription price of the A-share
rights and the H-share rights “shall be consistent after exchange rate adjustment”.
? 69.59% of CITIC’s issued shares are currently A-shares, with the remaining 30.41%
being H-shares. Its parent, CITIC Corporation Ltd owns 65.37% of the issued shares,
with China National Tobacco Corporation owning another 4.39%, as of end-1Q22.
? As CITIC traded at 0.33x FY21 P/BV as of 2 May 2022, we believe that it is highly
possible that this ordinary equity capital raising could be its first capital raising below 1x
historical audited book value.
Reiterate Add rating; CITIC remains a top four China bank pick
? We value CITIC using a stress-test adjusted GGM, with an unchanged TP of HK$4.80.
Potential re-rating catalysts are improving asset quality and economic recovery. Key
downside risks: a worse-than-expected NIM trend and greater social responsibilities.