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Baidu
- Sector: Media and TelecommunicationsTechnology
- Sub Sector: Technology
- Country: China
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Fundamental View
AS OF 10 Sep 2024We maintain our Market perform recommendation on Baidu post its 2Q24 results; topline growth contracted, EBTIDA margin was flat, and free operating cash flow declined YoY during the quarter. Looking into 2H24, we expect Baidu’s topline growth to turn around to a low single digit in 2H24 thanks to higher AI cloud revenues but online ads and iQiyi revenues to continue facing headwinds; we expect EBITDA margin to sequentially improve. We expect the better topline growth and EBITDA margin to support higher FOCF, and total leverage to improve over the next 6-12 months. Baidu $ bond spreads trade roughly in line with the comparable $ bonds of Tencent and Alibaba, which we view as rich. We prefer BIDU 4.125% Jun-25 for total return investors, and BIDU 3.625% Jul-27 for spread investors.
Business Description
AS OF 10 Sep 2024- Founded in 2000, Baidu started out as a search engine business and began its development into artificial intelligent (AI) since 2010.
- Baidu Core is the main revenue driver of the company (79% of 2Q24 revenues) which provides search-based, feed-based and other online marketing services (total: 57% of 2Q24 revenues), as well as products and services from new AI initiatives (22% of revenues); Baidu's AI initiatives include AI cloud (enterprise & public sector cloud, and personal cloud), Intelligent Group Driving (Apollo Go, Apollo auto solutions, and intelligent EVs under Jidu Auto), Mobile Ecosystem (Baidu App, ERNIE Bot, Haokan and Baidu Post), and other growth initiatives (ie. Xiaodu smart devices powered by DuerOS smart assistant and AI chips).
- iQiyi accounts for the remaining revenues of Baidu; iQIYI is an online video platform with a content library that includes licensed movies, television series, cartoons, and other programs.
- Baidu launched ERNIE bot in Mar-23, a generative AI chatbot powered by ERNIE, Baidu's in-house foundation model.
- Baidu has a market capitalization of RMB 203.8 bn as of 10 September 2024.
Risk & Catalysts
AS OF 10 Sep 2024Any regulatory clampdowns abroad and domestically (e.g. potential US investment ban, antitrust rules, data security and personal information protection laws) may adversely affect the business of Baidu. The interpretation of Chinese laws and regulations involves some degree of uncertainty.
There are regulatory risks given the corporate structure which uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs).
Baidu has made significant investments into long-term AI-related projects, which may take time to turn profitable. A potential escalation of the US chip restriction could have a material negative impact its AI related business (ie. cloud, ernie bot, autonomous driving).
Key Metric
AS OF 10 Sep 2024| RMB bn | FY20 | FY21 | FY22 | FY23 | LTM 2Q24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 30.4% | 29.7% | 28.5% | 25.0% | 24.0% |
| Debt/Total Equity | 43.8% | 42.2% | 39.8% | 33.4% | 31.5% |
| Debt/Total Assets | 24.8% | 24.1% | 23.4% | 20.8% | 19.9% |
| Gross Leverage | 2.7x | 3.3x | 2.8x | 2.2x | 2.1x |
| Interest Coverage | 9.8x | 8.2x | 11.4x | 12.1x | 12.6x |
| EBITDA Margin | 28.5% | 22.6% | 26.8% | 29.2% | 29.3% |
CreditSight View Comment
AS OF 23 Aug 2024We maintain our Market perform recommendation on Baidu post its 2Q24 results; topline growth contracted, EBTIDA margin was flat, and free operating cash flow declined YoY during the quarter. Looking into 2H24, we expect Baidu’s topline growth to turn around to a low single digit in 2H24 thanks to higher AI cloud revenues but online ads and iQiyi revenues to continue facing headwinds; we expect EBITDA margin to sequentially improve. We expect the better topline growth and EBITDA margin to support higher FOCF, and total leverage to improve over the next 6-12 months. Baidu $ bond spreads trade roughly in line with the comparable $ bonds of Tencent and Alibaba, which we view as rich. We prefer BIDU 4.125% Jun-25 for total return investors, and BIDU 3.625% Jul-27 for spread investors.
Recommendation Reviewed: August 23, 2024
Recommendation Changed: August 31, 2022
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Search topics about wealth insights and investments.Tencent
- Sector: Technology Media and Telecommunications
- Sub Sector: Technology
- Country: China
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Fundamental View
AS OF 10 Sep 2024We maintain our Outperform recommendation on Tencent (A1/A+/A+) post its strong 2Q24 results; Revenues accelerated on a pick of its gaming/social networking segment; EBITDA margin was higher on a better revenue mix, monetization and cost efficiencies; cash blow notably improved and debt metrics were largely stable despite the increased shareholder rewards. We expect the company’s debt metrics to further improve in 2H24. We continue viewing Tencent $ bonds as core holdings in China and Asia IG credits; most $ bonds of Tencent trade wider than A-rated US tech, Asia corporates and Chinese SOEs of similar tenors, which we view as attractive given our constructive credit outlook on the company. For investors looking to add duration in Asia credits, we recommend Tencent 30 & 31.
Business Description
AS OF 10 Sep 2024- Founded in November 1998, Tencent is a leading provider of Internet value added services in China. Since its establishment, Tencent has ventured into instant messaging, social networking, online payments, digital entertainment, and PC and smartphone gaming. Most recently, it has also forayed into high-tech areas such as artificial intelligence, and cloud computing.
- Tencent's leading Internet platforms in China include Weixin/WeChat (online messaging), QQ Instant Messenger (online messaging), Tencent Games (gaming), Tencent Video/Weixin Video Accounts (video platforms), WeChat Pay (payments), and Tencent Cloud. The combined monthly average users (MAU) of Weixin and Wechat reached 1.37 bn as of 30 June 2024.
- In 2Q24, 49% of revenues came from Value Added Services (which consist of Domestic Games, International Games, and Social Networks), 31% came from FinTech and Business Services (e.g. commercial payments and cloud), 19% from Online Advertising and 1% from Others.
- Tencent is currently primarily listed on the Hong Kong Stock Exchange, with a market capitalization of HKD 3.5 tn as of 10 Sep 2024.
Risk & Catalysts
AS OF 10 Sep 2024While Chinese regulators have adopted a more friendly stance towards tech companies, any regulatory clampdowns abroad and domestically (e.g. antitrust rules, data security, personal information protection laws) may affect Tencent’s business. Tencent’s gaming, music streaming, and online payment units are among those that have come under regulatory scrutiny in the past.
Tencent uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers, which poses regulatory risks. Specifically, VIE transactions involving “change in control” will be subject to antitrust regulatory processes.
Key Metric
AS OF 10 Sep 2024| RMB bn | FY20 | FY21 | FY22 | FY23 | LTM 2Q24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 25.2% | 27.0% | 31.4% | 29.8% | 28.2% |
| Net Debt to Book Cap | 4.0% | 6.0% | 8.5% | 1.0% | 0.8% |
| Debt/Total Equity | 33.7% | 36.9% | 45.9% | 42.5% | 39.3% |
| Debt/Total Assets | 19.7% | 20.1% | 22.8% | 23.5% | 22.0% |
| Gross Leverage | 1.4x | 1.7x | 1.9x | 1.6x | 1.4x |
| Net Leverage | 0.2x | 0.4x | 0.5x | 0.1x | 0.0x |
| Interest Coverage | 24.8x | 24.7x | 19.0x | 19.9x | 21.6x |
| EBITDA Margin | 38.3% | 34.9% | 34.3% | 38.9% | 41.3% |
CreditSight View Comment
AS OF 15 Aug 2024We maintain our Outperform recommendation on Tencent (A1/A+/A+) post its strong 2Q24 results; Revenues accelerated on a pick of its gaming/social networking segment; EBITDA margin was higher on a better revenue mix, monetization and cost efficiencies; cash blow notably improved and debt metrics were largely stable despite the increased shareholder rewards. We expect the company’s debt metrics to further improve in 2H24. We continue viewing Tencent $ bonds as core holdings in China and Asia IG credits; most $ bonds of Tencent trade wider than A-rated US tech, Asia corporates and Chinese SOEs of similar tenors, which we view as attractive given our constructive credit outlook on the company. For investors looking to add duration in Asia credits, we recommend Tencent 30 & 31.
Recommendation Reviewed: August 15, 2024
Recommendation Changed: August 18, 2022
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Search topics about wealth insights and investments.JD.com
- Sector: Media and TelecommunicationsTechnology
- Sub Sector: Technology
- Country: China
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Fundamental View
AS OF 10 Sep 2024We maintain our Market perform recommendation on JD (A3/A-/NR) post its largely in-line 2Q24 revenue. Growth decelerated due to falling electronics and home appliance sales; gross and EBITDA margin improved on reduced procurement cost and better operational efficiencies; FOCF improved and net cash expanded. We expect JD’s credit profile to marginally improve in 2H24. However, we think that the positive catalyst has largely been priced in given that JD’s $ bonds trades inside Asia A- rated corporates; we see better value in Alibaba and Tencent. Moody’s upgraded JD to A3 on 5 Sep, as we had expected.
Business Description
AS OF 10 Sep 2024- JD is one of China's leading e-commerce and retail infrastructure service providers.
- JD has a large fulfillment infrastructure which includes over 1,600 warehouses operated by the company, and 2,000 cloud warehouses operated by third-party warehouse owner-operators under JD Logistics Open Warehouse Platform. Its warehouse network had an aggregate gross floor area of approximately over 32 mn square meters, as of 31 December 2023.
- JD has 4 operating segments, namely JD Retail, JD Logistics, Dada and New businesses. Dada began reporting as a standalone segment with effect from 28 February 2022.
- New businesses mainly include JD Property, Jingxi business group, CNLP, overseas businesses and technology initiatives.
- JD had a market capitalization of RMB 304.6 bn as of 10 September 2024.
Risk & Catalysts
AS OF 10 Sep 2024While Chinese regulators have adopted a friendlier stance towards tech companies, any regulatory clampdowns may still adversely affect the business of JD (e.g. antitrust rules, data security & personal data protection laws).
Intensifying competition amongst Chinese eCommerce platforms with the entrance of new live-streaming/short-form video platforms and group buying discount platforms may result in slower topline growth and weaker EBITDA margin for JD as its increase its user/merchant incentives and promotional activities to defend its market share.
There are regulatory risks involving the use of variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs). Specifically, VIE transactions involving “change in control” will be subject to antitrust regulatory processes.
JD cooperates with 3rd party logistics cos to help deliver products to buyers. Failure to provide reliable delivery services or unexpected logistics bottleneck may materially affect the business.
Key Metric
AS OF 10 Sep 2024| RMB mn | FY20 | FY21 | FY22 | FY23 | LTM 2Q24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 12.5% | 12.2% | 19.2% | 18.8% | 23.0% |
| Debt/Total Equity | 14.2% | 13.8% | 23.7% | 23.1% | 29.9% |
| Debt/Total Assets | 7.5% | 6.9% | 10.9% | 10.9% | 13.2% |
| Gross Leverage | 1.4x | 1.8x | 1.9x | 1.5x | 1.7x |
| Interest Coverage | 20.1x | 16.1x | 16.3x | 15.5x | 16.9x |
| EBITDA Margin | 3.0% | 2.0% | 3.3% | 4.1% | 4.5% |
CreditSight View Comment
AS OF 16 Aug 2024We maintain our Market perform recommendation on JD (Baa1/A-/NR) post its largely in-line 2Q24 revenue. Growth decelerated due to falling electronics and home appliance sales; gross and EBITDA margin improved on reduced procurement cost and better operational efficiencies; FOCF improved and net cash expanded. We expect JD’s credit profile to to marginally improve in 2H24, and we expect a positive rating action from Moody’s over the next 6-12 months. However, we think that the positive catalyst has largely been priced in given that JD’s $ bonds trades inside Asia A- rated corporates; we see better value in Alibaba and Tencent.
Recommendation Reviewed: August 16, 2024
Recommendation Changed: November 21, 2022
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Search topics about wealth insights and investments.Alibaba
- Sector: Technology Media and Telecommunications
- Sub Sector: Technology
- Country: China
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Fundamental View
AS OF 06 Sep 2024We maintain our O/P recommendation on Alibaba (A1/A+/A+) post its largely in-line F1Q25 results. Revenues decelerated to due to a small contraction of customer management revenues; EBITDA margin declined due to higher operating losses for its international ecommerce segment. Alibaba’s FOCF fell due to higher capex on GPUs for the cloud business and one-off working capital investment. Net cash decreased (albeit still substantial at RMB 187 bn) as the company allocated idle cash to long-term fixed deposit and debt securities, and fund share repurchase. We expect topline growth to improve and EBITDA margin to stabilize over the next 6-12 months, and Alibaba to maintain a net cash position; we continue to view Alibaba as a core holding in China and Asia IG credits, and we prefer its 31.
Business Description
AS OF 06 Sep 2024- Founded in 1999, Alibaba is the largest retail commerce company in the world based on gross merchandise volume (GMV) as of 31 March 2023.
- The company's business segments comprise Taobao & Tmall Group (43% of F2Q25 revenue; China e-commerce incl. Taobao, Tmall, Taobao Deals, Taocaicai, 1688.com), International Digital Commerce (11%; incl. Lazada, AliExpress, Trendyol and Daraz), Cloud Intelligence Group (10%; incl. AliCloud, AI), logistic provider Cainiao (10%), Local Consumer Services (6%; incl. Ele.me, Amap), and Digital Media and Entertainment (2%, incl. Youku & Alibaba Pictures) and Others (18%; incl. Freshippo, Fliggy, Alibaba Health, Intelligent Information Platform, SunArt, DingTalk).
- Taobao/Tmall is Alibaba's core business and the main EBITA & cash generation unit of the group. Alibaba's annual active consumer exceeded 1 bn in June-2022.
- Alibaba had a market capitalization of RMB 1.4 tn as of 6 September 2024.
Risk & Catalysts
AS OF 06 Sep 2024While Chinese policymakers have adopted an increasingly friendly stance towards tech platforms, regulatory clampdown (e.g. anti-monopoly guidelines, data security laws, personal information protection laws) may still affect Alibaba as it increases compliance cost. There are regulatory risks given the corporate structure which uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs).
Alibaba does not control Alipay but relies on Alipay to conduct substantially all the payment processing and escrow services on its marketplaces.
Alibaba may be subject to lawsuits for items listed on its marketplaces, which may be pirated, counterfeit, or illegal.
Intensifying competition amongst eCommerce platforms may result in slower topline growth and weaker EBITDA margins for Alibaba as its increase incentives and promotional activities to defend its market share.
Key Metric
AS OF 06 Sep 2024| CNY BN | FY21 | FY22 | FY23 | FY24 | LTM F1Q25 |
|---|---|---|---|---|---|
| Debt to Book Cap | 12.1% | 11.6% | 12.6% | 13.3% | 16.5% |
| Debt/Total Equity | 13.8% | 13.1% | 14.4% | 15.3% | 19.7% |
| Debt/Total Assets | 8.8% | 8.3% | 9.2% | 9.7% | 11.6% |
| Gross Leverage | 0.8x | 0.9x | 0.9x | 0.9x | 1.1x |
| Interest Coverage | 39.9x | 32.2x | 29.6x | 24.0x | 22.3x |
| EBITDA Margin | 24.9% | 18.5% | 20.2% | 20.3% | 19.6% |
CreditSight View Comment
AS OF 06 Sep 2024We maintain our O/P recommendation on Alibaba (A1/A+/A+) post its largely in-line F1Q25 results. Revenues decelerated to due to a small contraction of customer management revenues; EBITDA margin declined due to higher operating losses for its international ecommerce segment. Alibaba’s FOCF fell due to higher capex on GPUs for the cloud business and one-off working capital investment. Net cash decreased (albeit still substantial at RMB 187 bn) as the company allocated idle cash to long-term fixed deposit and debt securities, and fund share repurchase. We expect topline growth to improve and EBITDA margin to stabilize over the next 6-12 months, and Alibaba to maintain a net cash position; we continue to view Alibaba as a core holding in China and Asia IG credits, and we prefer its 31.
Recommendation Reviewed: September 06, 2024
Recommendation Changed: August 05, 2022
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Search topics about wealth insights and investments.Agricultural Bank of China
- Sector: Financial Services
- Sub Sector: Banks
- Country: China
- Credit Rating (Moody’s/Standard & Poor’s/Fitch): M/P
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Fundamental View
AS OF 24 May 2024Our credit view on AGRBK (credit ratings: A1(neg)/A(stb)/A(neg)) is based on a strong likelihood of state support, given its large size, systemic importance and majority state ownership. This is enhanced by AGRBK’s extensive presence in rural areas.
AGRBK’s capital standing is weaker than those of peer-group leaders ICBCAS and CCB and in line with BCHINA; however it has peer-leading reserve coverage ratio. The Big 4 have been managed more prudently in recent years than the smaller and more aggressive joint stock banks.
We view it as a strong credit taking into account its structural profitability, robust balance sheet metrics, large size, and systemic importance that assure it of state support if needed.
Business Description
AS OF 24 May 2024- AGRBK has surpassed CCB to become the second-largest bank in China in terms of total assets and has been moved from bucket 1 to bucket 2 in the G-SIB list with a capital surcharge of 1.5%.
- It was founded in 1951 as the Agricultural Cooperative Bank, merged with the central bank and spun out as AGRBK in 1979, charged with financing the rural and agricultural sectors. It was recapitalised in 1999 and again in 2007 by special MOF bonds. It also received $19 bn in equity capital from Huijin, funded by China's FX reserves.
- Due to its poorer asset quality and weaker profitability, AGRBK was the last of the Big 4 banks to be listed in 2010.
- The Chinese government is a majority shareholder of AGRBK via Central Huijin (40.14%), MOF (35.29%) and the Social Security Fund (6.72%).
- AGRBK has the second largest branch network in China after Postal Bank, with a particularly good presence in rural areas.
Risk & Catalysts
AS OF 24 May 2024China’s sovereign ratings (A1(neg)/A+(stb)/A+(neg)) are a key factor behind AGRBK’s credit standing.
AGRBK’s loan growth has been the strongest among the Big 5 banks since FY22, but the impact on net interest income growth was largely offset by a significant contraction in NIM. Rapid loan growth has led to a widened capital ratio differential between AGRBK and other Big 4 banks. It was promoted to a Bucket 2 G-SIB in Nov-23 and currently has a substantial TLAC shortfall to meet by 1 January 2025 and 1 January 2028. It plans to issue up to RMB 50 bn of TLAC notes this year.
AGRBK is managed on commercial terms but the government may call on it to perform “national service” that overrides profitability considerations. However, we do not see it as a clear credit negative as these actions reflect close state links that underpin ABC’s credit standing.
Key Metric
AS OF 24 May 2024| RMB bn | FY20 | FY21 | FY22 | FY23 | 1Q24 |
|---|---|---|---|---|---|
| PPP ROA | 1.65% | 1.64% | 1.43% | 1.20% | 1.32% |
| Reported ROA | 0.83% | 0.86% | 0.82% | 0.73% | 0.69% |
| Reported ROE | 11.4% | 11.6% | 11.3% | 10.9% | 11.4% |
| Total Equity/Total Assets | 8.1% | 8.3% | 7.9% | 7.2% | 7.1% |
| CET1 Ratio | 11.0% | 11.4% | 11.2% | 10.7% | 11.4% |
| NPL Ratio | 1.56% | 1.43% | 1.37% | 1.33% | 1.32% |
| Credit Costs | 1.16% | 1.03% | 0.79% | 0.64% | 0.96% |
| Loan-Deposit Ratio | 74% | 78% | 79% | 78% | 77% |
CreditSight View Comment
AS OF 26 Sep 2024AGRBK is the 2nd-largest Chinese banks by assets and has a strong presence in rural areas, which gives it access to a large pool of low-cost deposits. We view it as a strong credit due to its structural profitability, robust balance sheet metrics, large size and systemic importance that assure it of state support. Its loan growth has led peers for many years, which has put its capital ratios under pressure, with some distance vs. the other Big 4 banks. Reserve cover is a strength at ~300%. AGRBK was the only Big 5 bank that reported profit growth in 1H24, due to stronger loan growth. We are moving AGRBK from Underperform to Market perform on the back of fair $ FRN notes trading levels and the upcoming state capital injection.
Recommendation Reviewed: September 26, 2024
Recommendation Changed: September 26, 2024
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Search topics about wealth insights and investments.Bank of China
- Sector: Financial Services
- Sub Sector: Banks
- Country: China
- Region: China
- Credit Rating (Moody’s/Standard & Poor’s/Fitch): M/P
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Fundamental View
AS OF 24 May 2024The Bank of China (BCHINA; ratings: A1(neg)/A(stb)/A(neg)) is one of the Big 4 banks in China. Its subsidiary, BOC Hong Kong, is one of the major banks in HK.
BCHINA’s systemic importance is enhanced by the leading role it plays in China’s international trade and investment and strong government links.
BCHINA’s capital standing and reserve cover are a little weaker than ICBCAS and CCB, but the Big 4 banks have generally been managed more prudently compared to the smaller and more aggressive joint stock banks.
Business Description
AS OF 24 May 2024- While its origins date back to China's last imperial dynasty, BCHINA was formally established in 1912 and has played the role of China's international bank for more than a century. Its operations outside mainland China include its 66.06%-owned subsidiary Bank of China (HK).
- After 1949, BCHINA became a state entity but was focused on FX and financing of foreign trade. It was set on a path of commercialisation in 1994 but only became a corporate entity in 2003 prior to its listings in HK and Shanghai in 2006. BCHINA is controlled by the government via a 64.13% stake held by Central Huijin.
- BCHINA was effectively insolvent in the late 1990s and the removal of NPLs to an AMC in 1999 did not fully deal with its legacy bad loans. In 2003, the bank received another $22.5 bn capital injection, paving the way for BOC's HK listing in 2006.
- BCHINA is a G-SIB with a capital surcharge of 1.5%. BOCHK is a D-SIB in HK and is the holding company for all of BCHINA's Southeast Asian operations excluding Singapore.
Risk & Catalysts
AS OF 24 May 2024China’s sovereign ratings (A1(neg)/A+(stb)/A+(neg)) are a key factor behind BCHINA’s credit standing.
BCHINA is managed on commercial terms, but fulfilling the government’s socioeconomic objectives may at times override profitability considerations and require the bank to perform “national service”. We would not regard such actions as credit-negative as they reflect close government links that also underpin the bank’s credit standing.
BCHINA’s overseas footprint has to some extent offset the onshore NIM pressure and led to a stabler NIM compared to peers in FY23. However, its NIM will also be under pressure in FY24 as peak NIMs have largely been hit overseas.
As a G-SIB, BCHINA has a substantial TLAC shortfall to meet by 1 January 2025 and 1 January 2028. It has announced plans to issue RMB 150 bn of TLAC notes.
Key Metric
AS OF 24 May 2024| RMB bn | FY20 | FY21 | FY22 | FY23 | 1Q24 |
|---|---|---|---|---|---|
| PPP ROA | 1.55% | 1.48% | 1.39% | 1.31% | 1.29% |
| Credit Costs | 0.87% | 0.70% | 0.63% | 0.57% | 0.68% |
| Reported ROA | 0.87% | 0.89% | 0.85% | 0.80% | 0.73% |
| Reported ROE | 10.6% | 11.3% | 10.8% | 10.1% | 9.9% |
| Total Equity/Total Assets | 8.4% | 8.3% | 8.4% | 8.1% | 7.9% |
| CET1 Ratio | 11.3% | 11.3% | 11.8% | 11.6% | 12.0% |
| NPL Ratio | 1.46% | 1.33% | 1.32% | 1.27% | 1.24% |
| Loan-Deposit Ratio | 84% | 87% | 87% | 87% | 87% |
CreditSight View Comment
AS OF 26 Sep 2024BCHINA is one of the Big 4 banks (4th largest by assets) with a reasonable capital stack and sufficient liquidity. Its majority government ownership and systemic importance assures it of strong state support. Its NIM and profitability has trailed its more domestically-focused peers due to higher cost-income ratios of its overseas operations, but its credit costs are also the lowest among the Big 5. Its overseas footprint has helped to counter the onshore NIM pressure in 1H23, but the NIM advantage is waning as overseas funding costs catch up and rate cuts loom. It has a slightly larger China CRE exposure (7% of the book) compared to peers. We are moving BCHINA from Underperform to Market perform on the back of fair $ FRN notes trading levels and the upcoming state capital injection.
Recommendation Reviewed: September 26, 2024
Recommendation Changed: September 26, 2024
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Fundamental View
AS OF 11 May 2023CDB’s credit standing is based on its role as a quasi-sovereign policy bank that provides financial support for implementation of the government’s socio-economic policy priorities both domestically and externally.
It is the largest issuer in the Chinese domestic bond market (accounting for near one-tenth of the whole China bond market) after the government itself.
CDB is wholly owned by the Chinese government and can lean on the central bank for liquidity and capital needs. In 2015, the government injected $32 bn in FX reserves into the bank to facilitate financing for Belt and Road Initiative (BRI) projects.
Business Description
AS OF 11 May 2023- CDB was established in 1994 to alleviate the problem of insufficient funds for China's economic growth and to take over the long-term financial agency function and policy loan function of CCB.
- From 1998-2013, under the leadership of Chen Yuan, CDB started its commercialization journey with its management attempting to demonstrate that a policy bank can be run along relatively commercial lines. But the commercialization raised the issue of higher bond financing costs for CDB. Unlike commercial banks, bond financing is the major source of funding for CDB. Since 2013, after a new CEO took over, CDB gradually returned to its original position of a policy bank.
- CDB is owned by the Chinese government via the MOF (37%), Huijin (35%), Buttonwood (27%) - an investment company held by SAFE - and the National Council for Social Security Funds (2%). CDB's main subsidiaries are CDB Capital Co (private equity), CDB Securities Co (underwriting & brokerage) and CDB Leasing, which is listed in Hong Kong.
Risk & Catalysts
AS OF 11 May 2023As its credit standing is strongly linked to the government, CDB is rated in line with the China sovereign (A1/A+/A+). Any downgrade of China’s sovereign rating would affect its own ratings.
Any reduction in the government’s willingness to support CDB would weaken its credit standing. Some uncertainty did arise as the bank moved towards commercialisation pre-2013, but CDB’s policy bank status has since been reaffirmed.
CDB’s policy role may involve it taking on exposure that lead to financial losses, in which case we would expect proactive state support to ensure that the bank remains financially sound.
Key Metric
AS OF 11 May 2023| Key Metrics | FY18 | FY19 | FY20 | FY21 | FY22 |
|---|---|---|---|---|---|
| Operating Income/Average Assets | 1.53% | 1.33% | 0.98% | 1.09% | 1.31% |
| Pre-Impairment Operating Profit / Average Assets | 1.43% | 1.22% | 0.88% | 0.99% | 1.22% |
| ROA | 0.7% | 0.7% | 0.7% | 0.5% | 0.5% |
| ROE | 8.7% | 8.7% | 8.2% | 5.2% | 5.3% |
| CET1 Ratio | 9.7% | 9.9% | 9.9% | 9.9% | 9.3% |
| Credit Costs | 0.86% | 0.45% | 0.05% | 0.59% | 0.85% |
| NPL Ratio | 0.92% | 0.95% | 0.79% | 0.84% | 0.78% |
| Total Equity/Total Assets | 7.90% | 8.30% | 8.51% | 8.82% | 8.66% |
CreditSight View Comment
AS OF 03 Jul 2023CDB is China’s largest policy bank. It is owned by the government and plays a key role in implementing the Chinese government’s economic plans both inside China and overseas. It is a quasi-sovereign entity that is rated in line with China’s sovereign rating. We therefore view its debt as attractive for additional spread pick-up over the $-denominated sovereign curve given that its ultimate risk is that of the Chinese government.
Recommendation Reviewed: July 03, 2023
Recommendation Changed: July 16, 2021
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