China Construction Bank Corporation (601939.SS)

Equity
China
Financial Services

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Key risk factors

Low price volatility

Good trading liquidity

Resilient to price shocks

Key return factors

Excellent dividends

Undervalued vs peers

Somewhat favourable analyst view

Company profileChina Construction Bank Corporation provides various banking and related financial services to individuals and corporate customers in the People's Republic of China and internationally. It operates through Corporate Banking, Personal Banking, Treasury Business, and Others segments. The company accepts various deposits, such as foreign currency, all in one accounts, RMB, corporate term and notification, and corporate demand deposits, as well corporate deposits by agreement. Its loan products include personal business, car, and housing loans; and SME, traditional credit, commercial draft, buyer credit, and RMB credit line loans. The company also offers credit cards; physical gold for personal investment and personal gold accounts; foreign exchange services; certificate treasury and savings bonds, securities deposit accounts, and securities services, as well as bank-securities transfer and book-entry treasury bond over the counter services; and wealth management products. In addition, it provides collection, salaries payment, third-party collection and payment, insurance agency, and remittance services; international settlement and financing, and FI services; securities and fund settlement services; guarantee-based, consulting and advising, and factoring services; fund custody services; and e-banking services. Further, the company offers institutional services comprising services for government agencies, social security, banks cooperation, bank-securities cooperation, bank-insurance cooperation, and services for non-banking financial institutions. It operates 14,741 banking outlets. China Construction Bank Corporation was founded in 1954 and is headquartered in Beijing, the People's Republic of China.

Valuation: Undervalued

Multiple

TTM

NTM

P/E

4.00

3.60

PEG

1.70

P/B

0.40

P/CR

0.20

P/RIBPT

0.40

P/IBPT

0.50

Considering past and projected metrics, the stock is 'cheap' compared to its peers. Specifically, the stock is cheap' on P/E, Editor's note: P/CR is Price to Core Revenue (CR), similar to P/S for corporates. CR = Net interest income + Net fee & commission income. P/IBPT is Price to Income Before Provisioning and Taxes (IBPT), similar to EV/EBITDA for corporates. IBPT = Core revenue -- Operating expenses + Non-recurring income. P/RIBPT is Price to Recurring Income Before Provisioning and Taxes (RIBPT), similar to P/FCF for corporates. RIBPT = Core revenue -- Operating expenses.

Performance: Mixed

The stock's performance has been mixed in the past six months, with growth following a decline. There is no clear price trend compared to its global peers from the same sector and industry (as shown above). The stock has outperformed this peer group by 1ppts over past six months and grown 4ppts slower in the past month. This is largely true for peers from the same country and sector. With respect to the stock's valuation against its peers, its overall price performance is neutral.

Analyst view: Somewhat favourable

The average target price is 7.8 and suggests 10% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 9.3. This translates into 31% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 5.8. This is equivalent to 19% downside potential in the worst case.

Profitability: Average

RoE

China Construction Bank Corporation reported a return on equity (RoE) of 10.3% in the last 12 months, down from 11.0% in FY23. The market consensus projects a RoE of 10.0% in FY24, again behind the peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 0.8% in the last 12 months, a decrease from 0.9% in FY23. The market analysts predict that RoA will be 0.8% in FY24, again weaker than the peers.

C/I

In the last 12 months, the cost-to-income ratio (C/I) grew to 100.6%, above the peers. The consensus estimate for FY24 for CI is 78.2%, again above of the peers.

Growth: Poor

EPS

Core revenue

IBPT

RIBPT

0939.HK reported revenue of CNY 725 889mn in the last 12 months, down 1% from FY23. The institution earned CNY 387 987 mn of interest before provisioning and taxes (IBPT) in the trailing 12 months (TTM), a decline of 1% from FY23 At the same time, the dynamics of a more stable income, as measured by recurring income before provisioning and taxes (RIBPT), were drastically different. EPS fell 0% from FY23 to CNY 1.31. Market expects EPS to reach CNY 1.43 in FY24.The core revenue has been declining slowly over the last several years (negative), while IBPT growth has been weak. The positive effect of cost control was almost eliminated by a rapidly declining revenue, such that EPS's growth was mediocre (negative-to-neutral). The RIBPT trend is rapidly falling, way worse than of IBPT. We emphasize the highly volatile dynamics of RIBPT. On the positive side, core revenue and EPS dynamics is very stable.

Dividends: Excellent

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is a clear trend. In the past 12 months, the dividend yield has been outstanding and can be rated excellent compared to its peers. At the same time, the average five-year yield has been significantly higher and exceeded most of its peers. On average, the company pays dividends annually.

Default risk: Moderate

The solvency (credit quality) of 601939.SS is good. The credit profile rests on (a) a substandard capital position, (b) weak asset quality, (с) a robust corporate governance framework, (d) below average earnings power and cost efficiency, and (e) its weak liquidity profile. We draw special attention to the rather low capital adequacy, fairly low asset quality driven by low loss absorption capacity, fairly weak liquidity position, which could instantly become a critical factor in the case of an unexpected bank run.

Volatility: Low

In normal market circumstances, 601939.SS is not overly volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible. Finally, it may be affected by inherently volatile sector.

Stress-test: Resilient

In highly turbulent market conditions, 601939.SS is not overly volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low. At the same time, due to inherently volatile sector, its maximum losses could be low.

Selling difficulty: Low

601939.SS boasts high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and becomes extremely unfavourable on the days with the lowest activity. However, under highly turbulent market conditions, the trading volume tends to improve significantly.

Country risk: Low

The institutional, legal, and compliance risks associated with the company's country are close to minimal. In combination with rigorous business standards, shareholder rights are well protected.

Other risks: Negligible

No other major risks have been identified.