Summary

As the first rural commercial bank and the bank in Western China listed abroad, Chongqing Rural Commercial Bank (“CRCB” or the Bank) is planning to issue the IPO in H Shares, the application is between Dec 3 and 8, and listing on Dec 16.

According to the web proof information pack of CRCB, the bank is going to issue 2 billion new shares in H Shares with the offering price between HK$4.50 and 6.00, and the size of offering will be about HK$9.00-12.00 billion. However, the shares would increase to around 2.185 billion if the Social Security Fund will sell 185 million shares in CRCB, around 24.3% of total stock capital after the IPO. The funds will spend on raising the Bank's capital. As board lots of 1000 shares, the admission fee should be around HK$6,080.48.

In addition, the document shows that the profit of CRCB increases significant in recent years. As at the end of June this year, net profit of the Bank achieved to RMB1,660 million, increased approximately by 80% yoy. We expect the Bank's net profit would increase by 60% to RMB3 billion in 2010.

Due to wide perspective of development of county area in China and strong increase of the Bank's profits, we give 12-month target price of HK$7.50 to CRCB, equivalent to P/E 13.1x and P/B 2.0x of 2011, and around 25% higher than its upper offering price. We suggest speculative subscribe.

Wide market perspective

The business of CRCB mainly focuses on Sannong in Chongqing, including rural scale, industrialization and urbanization, which own the great growth potential in future benefiting from the Go West Policy and rural financial reform of China in recent years.

Chongqing is one of the 4 municipalities in China, which is the largest by size and population. As at the end of 2009, Chongqing's nominal GDP reached to RMB653 billion, the 7th largest in China. The distribution of Chongqing's population is relatively reasonable compared with Beijing, Shanghai and Tianjin, the portion of population in urban and county area were 51.6% and 48.4% respectively, which provide the huge market to the Bank to expend the rural banking business.

The rural banking business is one of the main parts of CRCB. Rural area is still the largest part in China due to the urbanization is at the early stage of development. Currently, there are four types of financial institutions in the banking sector of the county area of China, including Agricultural Bank of China (ABC), Agricultural Development Bank of China (ADBC), Postal Savings Bank of China (PSBC), and rural financial institutions (RFIs) where RFIs play an important role in banking sector of county area due to its wide network coverage.

In all, there are 7 categories of financial institutions in banking sector of China, according to total assets, the market share of rural financial institutions reached to 11% in 2009, which was one of main parts of financial institutions in banking sector of China.

In addition, the assets scale of rural commercial banks of China expands sharply benefiting from the reform of rural financial institutions that changed rural credit cooperatives into rural commercial bank. As at the end of March 2010, total assets of rural commercial banks of China amounted to RMB2 trillion, which was 21.7% of total assets of rural financial institutions, and 2.4% of financial institutions of banking sector. By the end of May, there were 53 rural commercial banks in China.

However, as at the end of 2009, according to total assets, CRCB was 14.1% of all financial institutions of banking sector in Chongqing, and the largest financial institution according to shareholder's equity with 25.9% of market share.

Strong competitive advantages in local area

CRCB was founded in June 2008, an amalgamation of the former Chongqing Rural Credit Cooperatives and Chongqing Wulong Rural Cooperative Bank and so on, which was the third provincial level rural commercial bank with RMB7 billion in total capital, and its total assets was over RMB200 billion, the 21st largest bank in China.

CRCB was the third largest rural commercial bank in China according to total assets, deposits and loans, only smaller than Beijing Rural Commercial Bank (BRCB) and Shanghai Rural Commercial Bank (SRCB), and the second largest one behind SRCB according to shareholder's equity.

The business of CRCB mainly focuses on Chongqing, and owns obvious competitive advantages in local area. The Bank has the largest distribution network among the peers in Chongqing with 1,763 outlets, including 306 outlets in urban area and 1,457 outlets in county area, much higher than 880 outlets of PSBC in Chongqing. Currently, market shares of deposits and loans in county area and loans of small and middle-sized enterprises of CRCB were 27.6%, 25.5% and 16.6% respectively.

Significant increase of profits

As mentioned above, the business of CRCB expands sharply due to more important effects of rural financial institutions in China's banking system and strong local competitive advantages, especially its profits raise significantly because of large increase of both net interest income and intermediate business.

As at the end of 2010H1, net interest income and commission fees of CRCB achieved to RMB3.44 billion and RMB123 million, increased sharply by 47% and 129% yoy respectively. The Bank's net profit increased approximately by 80% yoy to RMB1.66 billion. By the end of August, net profits of CRCB reached to RMB2.77 billion, and we expect it would increase by 60% yoy to RMB3 billion in 2010.

On the other hand, CRCB was established shortly, we think the profits of the Bank increased significantly not only because of the large development of economy of Chongqing in recent years but the performance of the Bank improved obviously due to the IPO, therefore, we estimate the growth rate of profits of CRCB will drop obviously in 2011, but would still increase by 40% yoy.

According to business structure of the bank, CRCB is similar with ABC, the banking business in county area is one of main parts of business in both banks, however, they are not comparable because of the large difference between their assets scale. CITIC and Minsheng Bank are relatively reasonable comparison. As at the end of June 2010, net profits of CITIC and Minsheng Bank increased by 45% and 20% yoy respectively. We think CRCB has more competitive advantages in growth potential of profits due to small base.

Strong growth of deposits and loans

Moreover, CRCB has large quantity of both institutional and individual clients due to its strong local competitive advantages, therefore both its deposits and loans increased largely in recent years.

As at the end of 2010H1, CRCB owned 62,000 corporate clients and 17.47 million retail clients. The Bank's total deposits and loans amounted to RMB185.4 billion and 114.5 billion, increased by 21% and 12% respectively compared with 2009.

Loan is the main parts of the Bank's assets, as at the end of 2010H1, total loans to customer of total assets were 43.8%. Different with other commercial banks, CRCB put large parts of its loans into county area.

Retail loan is one of main parts of the Bank's loans due to its unique clients in county area, which is similar with ABC. Compared with two banks, we can see the portion of retail loans to total loans of CRCB is higher than ABC. As at the end of June 2010, retail loans of total loans of CRCB and ABC were 29.3% and 22.1% respectively.

Additionally, as at the end of June, the Bank's loans in county area was 47.1% of total loans, 1.8 percentage points higher than such rate in 2009, the portion was slightly down during last 3 years, and we estimate it would increase to 50% in 2010.

The ability of risk control need improve

The ability of the Bank's clients to pay the liabilities is weaker relatively in county area. Therefore, the NPL ration of CRCB is quite high and the risk control capability need to be improved.

According to five categories of loans, by the end of 2007, the NPL ratio of CRCB was 13.2% of which special mention loans was 25.1% of total loans. As at the end of 2010H1, the Bank's loans reduced to 2.99% and special mention loans were 13.6% of total loans, which was much higher than the peers in H Shares during the same period of time.

Moreover, although the coverage ratio of the Bank increased significantly from 63.33% in 2007 to 148.85% in 2010H1, it was still lower than the average level of the peers in H Shares.

Risk

The profitability decrease due to strong competition;

The quality of assets deteriorate due to the increase of NPLs；

Shareholder's ownership is dispersed and fuzzy development strategies. We note that the largest shareholder of CRCB is Chongqing Yufu Assets Management under controlled by the government of Chongqing with 10% of the Bank's total shares. Other major shareholders are including City Investment Chongqing City Construction Investment Company, Loncin Holdings and Chongqing Transport and Travel Investment Group with 9.56%, 8.14% and 6.73% of total shares respectively. After the listing, the shares of 4 major shareholders would dilute to 7.09%, 6.78%, 6.33% and 4.77%. The wide diversion of shares ownership is not good for strategies making of the Bank, and its strategy position is fuzzy due to the conflicts of different shareholders` interests.

Valuation

In all, the profits of CRCB increased significantly. Considering wide prospective of market development of county area in Chongqing, we hold an optimistic view on its future business development, but the Bank's ability of risk control need improve, and its development strategies is fuzzy currently, the portion of banking business in county area decreases in recent years, and it will face larger competition from others city commercial banks if CRCB increases its business in urban area. However we recommend speculative subscribe to CRCB considering the trend of ABC's stock price because both of two banks have similar business structure relatively.

We estimate 2011 P/B of CRCB should be around 1.41x according to the average price of the offering price as HK$5.25, and anticipate12-month target price of the Bank would be HK$7.50, around 25% higher than its upper offering price, equivalent to P/E 13.1x and P/B 2.0x of 2011 respectively, the valuation is quite attractive.

Financial data

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