德银中国银行业企业财务健康跟踪改善持续20171002DeutscheBankChinesebank

DeutscheBankMarketsResearchAsiaChinaBanking/FinanceBanksIndustryChineseBanksDate2October2017IndustryUpdateTrackingcorporatefinancialhealth–ImprovementcontinuesIndustrialenterprisesandSOEprofitgrowthmomentumsustainedinAugust________________________________________________________________________________________________________________DeutscheBankAG/HongKongDeutscheBankdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Thus,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.DISCLOSURESANDANALYSTCERTIFICATIONSARELOCATEDINAPPENDIX1.MCI(P)083/04/2017.HansFan,CFAResearchAnalyst(+852)[e-mail],CFAResearchAnalyst(+852)[e-mail]st(+852)[e-mail]iate(+852)[e-mail]'PBTgrowthMoMchangeMoMchgIndustrialEnterprises0.6%Byownership-IndustrialSOEs2.3%-IndustrialPOEs0.7%ByOvercapacity-Overcapacity0.1%-Non-overcapacity0.5%Bycorporatetype-IndustrialSOEs2.3%-Non-industrialSOEs-9.3%Source:DeutscheBank,NBS,MOF,WINDWevalueChinesebanksusingathree-stageGordonGrowthModel(PV=(ROE-g)/(COE-g)),withtargetpricesbasedon2017Ebookvalues.Downsideriskisapropertypricecorrection.UpsideriskistheremovalorsofteningofGDPtargeting.Formoresectorrisks,seepage16.ToassessChinesebanks'assetqualityrisks,wetrackcloselythefinancialhealthofChina'sindustrialenterprises(22%oftotaldebtinChina)andallSOEs(31%).Ingeneral,inAugust2017Chinesecorporatesshowedgradualbutcontinuedimprovementsinprofitability,decreasesinleverageandbetterEBITcoverage(seesummarytableinFigure1).ThesetrendsshouldrelieveassetqualityrisksforChinesebanksandalsobesupportivetoNIMoverthenearterm.Westaypositiveonbigbanks,ontheirhigherexposuretoindustrialenterprises.Catalysts:3Qresults,furtherimprovingcorporatefinancialhealthandrisingSouthboundinflows.BetterprofitabilityonhigherPPIandlowercostsOna12-monthrollingbasis,industrialenterprises’PBTgrowthacceleratedto16.5%yoyinAugust2017from15.9%inJuly.Inaddition,China’sSOEsrecordedPBTgrowthinAugustof17.1%,4pptslowerthaninJulybutstillatadecentpace.Specifically,industrialSOEs,whichwereperceivedasthemosttroubledsectors,reported12-monthrollingPBTgrowthacceleratingto40%yoy.ThestrongprofitgrowthwasmainlydrivenbyhigherPPIandloweroperatingexpenses.Lookingahead,webelievestrictimplementationofcapacityrationalizationshouldhelpsustainindustrialSOEs’profitgrowth.Balancesheetqualityimprovedmodestly,whileSOEsremainedhighly-leveredChina’scorporateshaverecordedlowerleverageoverrecentyears.Industrialenterprises,forexample,reportedanaverageliabilities-to-assetsratioat55.7%asofAugust2017,0.7pptlowerthaninJuly2017.Lookingatthebreakdownbyownership,privatecompanieshavedeleverednotably,whileindustrialSOEs’leveragestayedelevated.Debtservicingisalsoimproving.AllindustrialenterprisesinaggregatehavebeenreportingimprovingEBITcoverageat7.7xasofAugust2017,vs.6.9xinAugust2016.Lookingintothebreakdown,privatecompaniesclearlyrecordedstrongerdebtservicingthanSOEs.Nonetheless,inefficientallocationofcapitalremainsuntouchedWhilecorporateprofitabilityisimproving,China’scapitalallocationremainsinefficient.AllSOEsarestillgrowingtheirliabilitiesat14%yoy,whichismuchfasterthanoverallcorporatedebtgrowthof7%yoy.IncontrasttoindustrialSOEs’strongPBTgrowthof40%yoyandslowerdebtgrowth,non-industrialSOEs’PBTdroppedby3%yoyandstillleveredupquickly.Whileweremainsanguineaboutcreditrisksinthenearterm,wenotecapitalallocationissuesinChinamightdragdownbanks’assetyieldoverthelongerrun.Recentunderperformanceunjustified;stayingpositiveonbigbanksChinesebigfourbankshaveunderperformedtheHangSengIndexby4%sincestronger-than-expected2Qresults(seereportQualityresultsfromqualitybanks),whichwebelievewasduetoinvestors’profit-takingandsomeworriesaboutpotentialUSsanctions.Thiswasnotjustifiedbyfundamentals,inourview.Weseethreecatalysts:1)3QresultstoshowgradualimprovementinNIMandassetquality;2)strongerinflowsfromSouthbound,givenwidenedA-Hpremium(27%)anddividendyieldof5.7%;and3)sustainedcorporateprofitability.Distributedon:01/10/201719:36:27GMT0bed7b6cf11c2October2017BanksChineseBanksPage2DeutscheBankAG/HongKongTrackingcorporatefinancialhealthOverall–continuedimprovementincorporatefinancialpositionsInordertoassessChinesebanks'assetqualityrisks,wetrackcloselythefinancialpositionsofcorporatesinChina.Therearetwodatasets:Above-scaleindustrialenterprises,whosedebtmadeuproughly22%ofChina’stotalnon-financialdebt.Thisdataset,whichincludesapproximately370,000industrialenterprises,isreportedbyNationalBureauofStatistics(NBS)monthly.AllSOEsinChina,whosedebtaccountedforabout31%ofChina’stotalnon-financialdebt.Thisdataset,whichincludesallnon-financialSOEsinChina,isreportedbyMinistryofFinance(MoF)monthly.Thereareoverlapsbetweenthetwodatasets,whichareindustrialSOEs.IndustrialSOEsmakeup11%ofChina’stotalnon-financialdebt.Wemainlylookatcorporateprofitability,balances