What’s New
• During the reverse roadshow, PSBC demonstrated its strategy in rural areas as one of five differentiation strategies for growth
• Competitive advantages in rural area finance include data collection and profile, high reputation, client bonding, etc.
• Expect 10.9% earnings CAGR for FY22-25F, factoring in the further LPR cut, and maintain confidence in its future growth
• Reiterate BUY with TP revised down to HK$5.6
Reverse roadshow takeaway: Growth opportunities in Sannong field
Investment Thesis
“Sannong” strategy as one of its key growth drivers. As an SOE bank with focus on the retail side and one that’s also relying on the strong network of China Posts, PSBC has a strong presence and high reputation in rural areas. It has made “Sannong Business” (agriculture, countryside, and farmers) one of its five key growth strategies to differentiate itself from competitors. Compared with other industries, the Sannong area has higher growth potential and relatively stable credit demand, as it has a weak correlation with the business cycle.
Expect 11% earnings CAGR in FY22-25F, aided by 1) strong loan growth backed by the bank’s differentiation strategy for growth and 2) robust fee income momentum of over 20% y-o-y in FY23/24F, as PSBC focuses more on its wealth management (WM) business. We see its strategies in 1) SME and rural exposure, 2) interbank exposure, and 3) wealth management to partly offset the negative revenue impact brought about by downward pressure on NIM.
China retail consumption recovery is the key share price driver. As a retail bank, PSBC’s share price is more related to retail side recovery, including consumption and mortgages. Our empirical study shows that PSBC tends to outperform its peers during economic booms while the Big Four banks are more “defensive” players. With the expectation of a slow and gradual recovery in retail consumption in 2H23, we expect more signals of improving retail loan demand to drive up the share price re-rating.
Reiterate BUY with TP revised down to HK$5.6. We revised down our earnings assumptions by 8%/14% for FY23/24F following the weaker-than-expected earnings performance for FY22 and 1Q23 and the further LPR cut in June. Our valuation is based on DDM methodology, assuming 15.8% COE, 10% ROE, and 1% terminal growth, to reflect the slower growth in the China economy in the long term. Our TP implies a 0.7x FY23F P/BV, in line with its five-year average. We also have a BUY rating on the A-share with TP of Rmb5.9, assuming an A-H discount of 20%.
