IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

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Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

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<a href="https://www.smartkarma.com/entities/27174" target="_blank" data-smartkarma-citation="entities:27174:1">Jiangxi Bank Co Ltd (1916 HK)</a> is a Chinese city commercial bank. At the mid-point of the IPO price range of HK$5.94-6.66 per share, Jiangxi Bank will raise HK$7,152 million ($930 million), resulting in a market cap of $4.8 billion. Cornerstone investors, including state-owned CITIC Group and Chinese online lender Dianrong’s investment affiliate, have agreed to buy 52% of the offer shares at the mid-point of IPO price range. At first glance, Jiangxi Bank appears to have superior growth and profitability metrics in comparison to its peer group of city commercial banks. However, a closer examination reveals underlying issues on growth, margins and asset quality:<ol><li>Jiangxi Bank’s net profit grew a healthy 74% in 2017. However, Jiangxi Bank's net profit growth was flattered by a 29% decline in the P&amp;L provision charge for impairment losses. Excluding the provision charge, Jiangxi Bank’s operating profit grew a modest 5% in 2017.</li><li>Jiangxi Bank’s net interest margin (NIM) is higher than the average city commercial banks' NIM. However, the difference between Jiangxi’s and the average city commercial banks’ NIM more than halved from 69 basis points in 2016 to 32 basis points in 2017. Strikingly, Jiangxi Bank’s cost-to-income ratio is materially higher than the average city commercial bank and increased from 29.8% in 2016 to 32.2% in 2017.</li><li>The prospectus details that the non-performing loan (NPL) ratio "was lower than the industry average". However, the industry average was based on the overall China banking industry and not on the direct peers - city commercial banks. Since 2015, Jiangxi’s NPL ratio is higher than the average city commercial banks' NPL ratio.</li><li>Markedly, a lead indicator for future NPLs paints a worrying picture. Jiangxi Bank’s special mention loan ratio is high and increased from 4.8% in 2016 to 5.4% in 2017. In contrast, the average city commercial banks ratio marginally decreased from 2.7% in 2016 to 2.6% in 2017.</li></ol>Regarding valuation, based on our estimates at the IPO mid-point price, Jiangxi Bank trades at a significant premium to its peers on a 2019 P/B basis. However, Jiangxi Bank’s P/B valuation needs to be put in the context of its ROE and ROA metrics. At the IPO mid-point price, Jiangxi Bank lies above the linear trend line for P/B vs ROE and Market cap/Assets vs ROA, i.e. trades at a premium for the ROE and ROA it delivers. Overall, our view is that Jiangxi Bank is at best fully priced at the proposed IPO price range and recommend investors to seek alternative names to gain exposure to China city commercial banks.

Jiangxi Bank Co Ltd (1916 HK) is a Chinese city commercial bank. At the mid-point of the IPO price range of HK$5.94-6.66 per share, Jiangxi Bank will raise HK$7,152 million ($930 million), resulting in a market cap of $4.8 billion. Cornerstone investors, including state-owned CITIC Group and Chinese online lender Dianrong’s investment affiliate, have agreed to buy 52% of the offer shares at the mid-point of IPO price range. At first glance, Jiangxi Bank appears to have superior growth and profitability metrics in comparison to its peer group of city commercial banks. However, a closer examination reveals underlying issues on growth, margins and asset quality:Jiangxi Bank’s net profit grew a healthy 74% in 2017. However, Jiangxi Bank's net profit growth was flattered by a 29% decline in the P&amp;L provision charge for impairment losses. Excluding the provision charge, Jiangxi Bank’s operating profit grew a modest 5% in 2017.Jiangxi Bank’s net interest margin (NIM) is higher than the average city commercial banks' NIM. However, the difference between Jiangxi’s and the average city commercial banks’ NIM more than halved from 69 basis points in 2016 to 32 basis points in 2017. Strikingly, Jiangxi Bank’s cost-to-income ratio is materially higher than the average city commercial bank and increased from 29.8% in 2016 to 32.2% in 2017.The prospectus details that the non-performing loan (NPL) ratio "was lower than the industry average". However, the industry average was based on the overall China banking industry and not on the direct peers - city commercial banks. Since 2015, Jiangxi’s NPL ratio is higher than the average city commercial banks' NPL ratio.Markedly, a lead indicator for future NPLs paints a worrying picture. Jiangxi Bank’s special mention loan ratio is high and increased from 4.8% in 2016 to 5.4% in 2017. In contrast, the average city commercial banks ratio marginally decreased from 2.7% in 2016 to 2.6% in 2017.Regarding valuation, based on our estimates at the IPO mid-point price, Jiangxi Bank trades at a significant premium to its peers on a 2019 P/B basis. However, Jiangxi Bank’s P/B valuation needs to be put in the context of its ROE and ROA metrics. At the IPO mid-point price, Jiangxi Bank lies above the linear trend line for P/B vs ROE and Market cap/Assets vs ROA, i.e. trades at a premium for the ROE and ROA it delivers. Overall, our view is that Jiangxi Bank is at best fully priced at the proposed IPO price range and recommend investors to seek alternative names to gain exposure to China city commercial banks.

China

Jiangxi Bank Co., Ltd. operates as a commercial bank. The Bank offers public deposits, loans, domestic settlement, foreign exchange, notes discounting, government bonds underwriting, credit guarantee, and Internet banking services. Jiangxi Bank provides services for enterprises and individuals.

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Jiangxi Bank (1916 HK)

Jiangxi Bank IPO: Paying More for Less

Jiangxi Bank Co Ltd (1916 HK) is a Chinese city commercial bank. At the mid-point of the IPO price range of HK$5.94-6.66 per share, Jiangxi Bank...

Arun George

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