Capital pressure declined
According to the latest announcement of China Construction Bank (CCB or the Group) last weekend, it will issue the preferred stock of 600 million shares privately, and the book value per share is RMB100, with the total amount of RMB60 billion, in order to increase its tier-1 capital.
The dividend of the preferred stock is paid annually, and according to the terms, if the core tier-1 CAR decreased to 5.125% (or below), CCB has the rights to convert the preferred stock into A Shares common stock without the agreement of the shareholders of the preferred stock.
In the previous report, we mentioned that the bank¡¦s capital pressure was smaller than other large-sized banks. By the end of this Sep, CCB¡¦s CAR and Core Tier-1 CAR recorded to 14.53% and 11.65% respectively, up 0.90ppts and 1.19ppts respectively compared with the end of 2013. After the issuance of the preferred stock, excluding the relative expenses, CCB¡¦s CAR and Core Tier-1 CAR would achieve to 15.12% and 11.65% respectively, representing the further decrease of the capital pressure.
Stable improvement of the performance
In all, the preferred stock will increase the bank¡¦s capital obviously, the performance met our expectation in the first three quarters, and the market environment will improve obviously in 4Q, and the investors hold more optimistic view on the expectation especially after the launch of the HK-SH Stock Connect, therefore we still hold cautiously optimistic view on the bank¡¦s future performance, but estimate the profit growth would go down continually and net profit should increase by 8% y-y in average in the next two years. We increase CCB¡¦s 12-month target price to HK$6.90, 15% higher than the latest closing price, equivalent to P/E5.0x and P/B1.0x in 2015 respectively, and the valuation is quite attractive. Maintain Accumulate rating
Investment Thesis
The issuance of the preferred stock will increase CCB¡¦s capital obviously this time, and based on the historical dividend payout record, the impact is quite small for the bank¡¦s common stockholders. Considering the Group¡¦s table performance, and the high CAR, we believe there is a further optimization of the bank¡¦s capital structure, and the profit growth will maintain at the stable level.
CAR will increase
The CAR of CCB increased obviously in 2014 due to the internal capital accumulation from profit outpacing that of risk-weighted assets and the issuance of qualifying capital instruments. By the end of Sep, CAR and Core Tier-1 CAR recorded to 14.53% and 11.65%, up 0.90ppts and 1.19ppts respectively compared with the end of 2013, and CCB¡¦s CAR was still on the top of the peers.According to the plan of the preferred stock, excluding the relative expenses, and based on the 3Q results, CCB¡¦s CAR and Core Tier-1 CAR would achieve to 15.12% and 11.65% respectively, representing the further decrease of the capital pressure.
Small impact of profits
Common stockholders may have a loss of RMB3.6 billion based on the total amount of the preferred stock as RMB60 billion with the dividend yield of 6% because the preferred stockholders can gain the dividend primarily. However, considering CCB¡¦s stable historical dividend payout record, we believe the impact of the preferred stock is quite small. Additionally, if all preferred stocks were converted into A Shares common stocks, based on the total amount of RMB60 billion and the convertible price of RMB5.20/share, the shares will be no more than 11.538 billion (=600/5.2), and as at the end of this Sep, CCB¡¦s total common stock was 250,011 million, therefore original shareholders¡¦ voting rights would be diluted no more than 4.41%.
Financials
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