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Tencent
- Sector: Technology Media and Telecommunications
- Sub Sector: Technology
- Country: China
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Fundamental View
AS OF 07 Jan 2025We maintain our Outperform recommendation on Tencent post its decent 3Q24 results; Revenues remained resilient on a pick of its gaming/social networking segment; EBITDA margin was higher on a better revenue mix, monetization and cost efficiencies; cash flow notably improved and Total debt/EBITDA trended lower despite the increased shareholder rewards. We expect the company’s debt metrics to further improve in FY25. We continue viewing Tencent $ bonds as core holdings in China and Asia IG credits; we like its 30,31 for investors looking to add duration as it offers a 15-20 bp of spread pick up against US A Tech and China SOEs. We prefer Tencent over Baidu/JD, which are rated 1-3 notches lower but trade only marginally wider/tighter.
Business Description
AS OF 07 Jan 2025- 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 1.38 bn as of 30 Sep 2024.
- In 3Q24, 49% of revenues came from Value Added Services (which consist of Domestic Games, International Games, and Social Networks), 32% came from FinTech and Business Services (e.g. commercial payments and cloud), 18% from Online Advertising and 1% from Others.
- Tencent is currently primarily listed on the Hong Kong Stock Exchange, with a market capitalization of HKD 3.9 tn as of 10 Dec 2024.
Risk & Catalysts
AS OF 07 Jan 2025While 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.
US-China tension may escalate under the new Trump Administration, including additional chip sanctions, which may result in higher volatility. Failing to secure a stable supply of advanced AI chips and/(or) find domestic alternatives could weigh on the long-term AI development of Tencent against international peers.
Key Metric
AS OF 07 Jan 2025| RMB bn | FY20 | FY21 | FY22 | FY23 | LTM 3Q24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 25.2% | 27.0% | 31.4% | 29.8% | 26.3% |
| Net Debt to Book Cap | 4.0% | 6.0% | 8.5% | 1.0% | 0.5% |
| Debt/Total Equity | 33.7% | 36.9% | 45.9% | 42.5% | 35.7% |
| Debt/Total Assets | 19.7% | 20.1% | 22.8% | 23.5% | 20.3% |
| Gross Leverage | 1.4x | 1.7x | 1.9x | 1.6x | 1.3x |
| Net Leverage | 0.2x | 0.4x | 0.5x | 0.1x | 0.0x |
| Interest Coverage | 24.8x | 24.7x | 19.0x | 19.9x | 22.2x |
| EBITDA Margin | 38.3% | 34.9% | 34.3% | 38.9% | 41.9% |
CreditSight View Comment
AS OF 07 Jan 2025We maintain our Outperform recommendation on Tencent. Revenues in 3Q24 remained resilient on a pick of its gaming/social networking segment; EBITDA margin was higher on a better revenue mix, monetization and cost efficiencies; cash flow notably improved and Total debt/EBITDA trended lower despite the increased shareholder rewards. We expect the company’s debt metrics to further improve in FY25. We continue viewing Tencent $ bonds as core holdings in China and Asia IG credits; we like its 30,31 for a 15-30 bp spread pick up against US A Tech and China A SOEs. We prefer Tencent to Baidu/JD, which is rated 1-2 notches lower, but trade only marginally wider. We also view Tencent as a more defensive play compared to BBB-rated China tech given the low beta of its $ bonds.
Recommendation Reviewed: January 07, 2025
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 07 Jan 2025We maintain our Market perform recommendation on JD post its 3Q24 results; the company’s topline growth and margin improved but FOCF turned negative due to higher inventory investment; net cash shrunk while gross debt metrics were flat compared to 2Q24. We expect JD’s credit profile to marginally improve in FY25, which we view as largely priced in. The better debt metrics may be driven by its Home Appliance Trade-In Alliance program which supports topline growth and a continued expansion of the higher-margin 3P sales may result in better EBITDA margin; we expect JD to cover its increased shareholder rewards with FOCF. JD’s $ bonds trade inside A- rated Asian corporates, which we view as fair given its large scale and net cash position. We continue to prefer BABA and TENCNT.
Business Description
AS OF 07 Jan 2025- 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 3 operating segments, namely (1) JD Retail (86% of 3Q24 revenues), which includes JD Health and JD Industrials, and the segment mainly engages in online retail, online marketplace and marketing services in China; (2) JD Logistics (17%) which includes both internal and external logistic businesses; and (3) New businesses (2%) which consist of Dada, JD Property, Jingxi and overseas businesses.
- JD had a market capitalization of RMB 484.0 bn as of 10 December 2024.
Risk & Catalysts
AS OF 07 Jan 2025While 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.
Key Metric
AS OF 07 Jan 2025| RMB mn | FY20 | FY21 | FY22 | FY23 | LTM 3Q24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 12.5% | 12.2% | 19.2% | 18.8% | 22.9% |
| Debt/Total Equity | 14.2% | 13.8% | 23.7% | 23.1% | 29.7% |
| Debt/Total Assets | 7.5% | 6.9% | 10.9% | 10.9% | 13.7% |
| Gross Leverage | 1.4x | 1.8x | 1.9x | 1.5x | 1.7x |
| Interest Coverage | 20.1x | 16.1x | 16.3x | 15.5x | 17.8x |
| EBITDA Margin | 3.0% | 2.0% | 3.3% | 4.1% | 4.6% |
CreditSight View Comment
AS OF 15 Nov 2024We maintain our Market perform recommendation on JD (A3/A-/NR) post its 3Q24 results; the company’s topline growth and margin improved but FOCF turned negative due to higher inventory investment; net cash shrunk while gross debt metrics were flat compared to 2Q24. We expect JD’s credit profile to marginally improve in FY25, which we view as largely priced in. The better debt metrics may be driven by its Home Appliance Trade-In Alliance program which supports topline growth and a continued expansion of the higher-margin 3P sales may result in better EBITDA margin; we expect JD to cover its increased shareholder rewards with FOCF. JD’s $ bonds trade inside A- rated Asian corporates, which we view as fair given its large scale and net cash position. We continue to prefer Alibaba and Tencent.
Recommendation Reviewed: November 15, 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 Jan 2025We maintain our Outperform recommendation on Alibaba post its F2Q25 results; the improving topline growth and take rate of its domestic eCommerce segment was a highlight though the widening losses at its international eCommerce and logistics arm, Cainiao, which are still at a ramp-up stage weighed on overall EBITDA margin and cash flow; shareholder rewards continued burning cash, but was expected and manageable. We expect Alibaba’s debt metrics to be stable over the next 6-12 month, on an acceleration of topline growth, stabilizing EBITDA margin, and healthy FOCF, which can cover its shareholder rewards. We continue viewing Alibaba as a core holding in China and Asia IG credits; and for investors looking to add duration in Asia credits, we recommend Alibaba’s 31 and its new 30.
Business Description
AS OF 10 Dec 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 (38% of F2Q25 revenue; China e-commerce incl. Taobao, Tmall, Taobao Deals, Taocaicai, 1688.com), International Digital Commerce (12%; incl. Lazada, AliExpress, Trendyol and Daraz), Cloud Intelligence Group (11%; incl. AliCloud, AI), logistic provider Cainiao (10%), Local Consumer Services (7%; incl. Ele.me, Amap), and Digital Media and Entertainment (3%, incl. Youku & Alibaba Pictures) and Others (20%; 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 1.6 tn as of 10 December 2024.
Risk & Catalysts
AS OF 10 Dec 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).
Intensifying competition amongst eCommerce platforms may result in slower topline growth and weaker EBITDA margins.
Alibaba does not control Alipay but relies on Alipay to conduct substantially all the payment processing and escrow services on its marketplaces.
US-China tension may escalate under the new Trump Administration, including additional chip sanctions, which may result in higher volatility. Failing to secure a stable supply of advanced AI chips and/(or) find domestic alternatives could weigh on the long-term AI development of Tencent against international peers.
Key Metric
AS OF 10 Dec 2024| CNY BN | FY21 | FY22 | FY23 | FY24 | LTM F2Q25 |
|---|---|---|---|---|---|
| Debt to Book Cap | 12.1% | 11.6% | 12.6% | 13.3% | 16.1% |
| Debt/Total Equity | 13.8% | 13.1% | 14.4% | 15.3% | 19.1% |
| Debt/Total Assets | 8.8% | 8.3% | 9.2% | 9.7% | 11.5% |
| Gross Leverage | 0.8x | 0.9x | 0.9x | 0.9x | 1.1x |
| Interest Coverage | 39.9x | 32.2x | 29.6x | 24.0x | 20.8x |
| EBITDA Margin | 24.9% | 18.5% | 20.2% | 20.3% | 19.3% |
CreditSight View Comment
AS OF 02 Jan 2025We maintain our Outperform recommendation on Alibaba (A1/A+/A+) post its F2Q25 results; the improving topline growth and take rate of its domestic eCommerce segment was a highlight though the widening losses at its international eCommerce and logistics arm, Cainiao, which are still at a ramp-up stage weighed on overall EBITDA margin and cash flow; shareholder rewards continued burning cash, but was expected and manageable. We expect Alibaba’s debt metrics to be stable over the next 6-12 month, on an acceleration of topline growth, stabilizing EBITDA margin, and healthy FOCF, which can cover its shareholder rewards. We continue viewing Alibaba as a core holding in China and Asia IG credits; and for investors looking to add duration in Asia credits, we recommend Alibaba’s 31 and its new 30.
Recommendation Reviewed: January 02, 2025
Recommendation Changed: August 05, 2022
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Search topics about wealth insights and investments.Baidu
- Sector: Media and TelecommunicationsTechnology
- Sub Sector: Technology
- Country: China
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Fundamental View
AS OF 06 Jan 2025We maintain M/P on Baidu post its 3Q24 results; revenues contracted as expected, with adverting and iQiyi revenues continuing to decline; EBITDA margin trended up on disciplined R&D expenses, and FOCF weakened on higher working capital investments; Baidu’s net cash contracted due to higher investments, but gross debt metrics improved. We expect Baidu’s credit metrics to marginally improve over the next 12 months; we expect topline growth to pick up as advertising revenues gradually recover and AI cloud revenues remains strong, and EBITDA margin to trend up; we expect FOCF to narrow due to higher working capital investments, but debt metrics to improve. The better credit outlook is likely priced in as Baidu trades inside Asia A and A- corporates. We prefer Alibaba and Tencent.
Business Description
AS OF 10 Dec 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 3Q24 revenues) which provides search-based, feed-based and other online marketing services (total: 56% of 3Q24 revenues), as well as products and services from new AI initiatives (23% 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 236.3 bn as of 10 December 2024.
Risk & Catalysts
AS OF 10 Dec 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 Dec 2024| RMB bn | FY20 | FY21 | FY22 | FY23 | LTM 3Q24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 30.4% | 29.7% | 28.5% | 25.0% | 22.3% |
| Debt/Total Equity | 43.8% | 42.2% | 39.8% | 33.4% | 28.7% |
| Debt/Total Assets | 24.8% | 24.1% | 23.4% | 20.8% | 18.5% |
| Gross Leverage | 2.7x | 3.3x | 2.8x | 2.2x | 1.9x |
| Interest Coverage | 9.8x | 8.2x | 11.4x | 12.1x | 13.4x |
| EBITDA Margin | 28.5% | 22.6% | 26.8% | 29.2% | 29.7% |
CreditSight View Comment
AS OF 22 Nov 2024We maintain M/P on Baidu (A3/NR/A) post its 3Q24 results; revenues contracted as expected, with adverting and iQiyi revenues continuing to decline; EBITDA margin trended up on disciplined R&D expenses, and FOCF weakened on higher working capital investments; Baidu’s net cash contracted due to higher investments, but gross debt metrics improved. We expect Baidu’s credit metrics to marginally improve over the next 12 months; we expect topline growth to pick up as advertising revenues gradually recover and AI cloud revenues remains strong, and EBITDA margin to trend up; we expect FOCF to narrow due to higher working capital investments, but debt metrics to improve. The better credit outlook is likely priced in as Baidu trades in Asia A and A- corporates. We prefer Alibaba and Tencent.
Recommendation Reviewed: November 22, 2024
Recommendation Changed: August 31, 2022
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Search topics about wealth insights and investments.Bank of China
- Sector: Financial Services
- Sub Sector: Banks
- Country: China
- Region: China
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Fundamental View
AS OF 06 Jan 2025Bank of China 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 non-Merchants joint stock banks.
Business Description
AS OF 02 Dec 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 also the holding company for all of BCHINA's Southeast Asian operations excluding Singapore.
Risk & Catalysts
AS OF 07 Jan 2025China’s sovereign ratings 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 has also been under pressure in FY24 due to higher non-CNY funding costs.
As a G-SIB, BCHINA has a substantial TLAC shortfall to meet by 1 January 2028, whereas meeting the 1 January 2025 requirement appears manageable, on the back of its domestic TLAC issue plan and the upcoming government equity injection.
Key Metric
AS OF 02 Dec 2024| RMB bn | FY20 | FY21 | FY22 | FY23 | 9M24 |
|---|---|---|---|---|---|
| PPP ROA | 1.55% | 1.48% | 1.39% | 1.31% | 1.23% |
| Credit Costs | 0.87% | 0.70% | 0.63% | 0.57% | 0.55% |
| Reported ROA | 0.87% | 0.89% | 0.85% | 0.80% | 0.75% |
| Reported ROE | 10.6% | 11.3% | 10.8% | 10.1% | 9.6% |
| Total Equity/Total Assets | 8.4% | 8.3% | 8.4% | 8.1% | 8.0% |
| CET1 Ratio | 11.3% | 11.3% | 11.8% | 11.6% | 12.2% |
| NPL Ratio | 1.46% | 1.33% | 1.32% | 1.27% | 1.26% |
| Loan-Deposit Ratio | 84% | 87% | 87% | 87% | 90% |
CreditSight View Comment
AS OF 01 Nov 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. It had a larger QoQ NIM contraction than peers in 3Q24 as its overseas businesses are also faced with rate cuts. We have moved BCHINA from Underperform to Market perform on the back of fair $ FRN notes trading levels and the upcoming state capital injection.
Recommendation Reviewed: November 01, 2024
Recommendation Changed: September 26, 2024
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Fundamental View
AS OF 07 Jan 2025- Our credit view on AGRBK 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; however it has peer-leading reserve coverage ratio. The Big 4 have been managed more prudently in recent years than the non-Merchants 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 02 Dec 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 strong presence in rural areas.
Risk & Catalysts
AS OF 07 Jan 2025- China’s sovereign ratings 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 2028, whereas meeting the 1 January 2025 requirement appears manageable, on the back of its domestic TLAC issue plan and the upcoming government equity injection.
- 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 AGRBK’s credit standing.
Key Metric
AS OF 02 Dec 2024| RMB bn | FY20 | FY21 | FY22 | FY23 | 9M24 |
|---|---|---|---|---|---|
| PPP ROA | 1.65% | 1.64% | 1.43% | 1.20% | 1.19% |
| Reported ROA | 0.83% | 0.86% | 0.82% | 0.73% | 0.69% |
| Reported ROE | 11.4% | 11.6% | 11.3% | 10.9% | 10.8% |
| Total Equity/Total Assets | 8.1% | 8.3% | 7.9% | 7.2% | 6.9% |
| 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% | 0.74% |
| Loan-Deposit Ratio | 74% | 78% | 79% | 78% | 83% |
CreditSight View Comment
AS OF 01 Nov 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 managed to report pre-provision profit growth in 9M24, due to stronger loan growth. But its capital ratios were behind the other Big 4 banks. We have moved AGRBK from Underperform to Market perform on the back of fair $ FRN notes trading levels and the upcoming state capital injection.
Recommendation Reviewed: November 01, 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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