five-bagger in 5 years? buy china merchants bank co., ltd...

RMB Prev. 2016A Prev. 2017E Prev. 2018E Prev. 2019E

Rev. (MM) --209,949.0 -- 229,787.0 -- 253,270.0 -- 283,650.0

Net Profit -- 62,081.0 -- 77,771.0 -- 91,206.0 -- 111,713.0

Cons. EPS -- NA -- 2.68 -- 2.95 -- 3.40

P/B 1.2x 1.0x 0.9x 0.8x

BV/Share -- 15.95 -- 18.30 -- 20.99 -- 24.33

P/B 1.2x 1.0x 0.9x 0.8x

EPS

FY Dec -- 2.46 -- 3.08 -- 3.62 -- 4.43

FY P/E 7.7x 6.2x 5.2x 4.3x

Price Performance

MAY-16 SEP-16 JAN-17 MAY-17

24

22

20

18

16

14

^Prior trading day's closing price unlessotherwise noted.

Target Change

China | Financials | Banks 22 May 2017

China Merchants Bank Co., Ltd. (3968 HK)Let's Think Big and Wild: Can CMB Become aFive-bagger in 5 Years?

EQU

ITY R

ESEARC

H C

HIN

A

BUYPrice target HK$38.50

(from HK$35.90)Price HK$21.45^

Bloomberg: 3968 HKReuters: 3968.HK

Financial SummaryBook Value (MM): Rmb402,350.0Book Value/Share: Rmb15.95Net Debt (MM): Rmb0Return on Avg. Equity: 16.3%

Market Data52 Week Range: HK$21.85 - HK$15.00Total Entprs. Value (MM): HK$540,969.0Market Cap. (MM): HK$540,969.0Shares Out. (MM): 25,220.0Float (MM): 4,113.0Avg. Daily Vol.: 18,403,310

Victor Wang *Equity Analyst

+852 3743 8033 [email protected] An *

Equity Associate+852 3743 8035 [email protected]

* Jefferies Hong Kong Limited

Key Takeaway

We believe a business deserves high valuation if it has 1) a high and sustainableROA, 2) a vast growth potential, and 3) a high entry barrier. CMB's retailbusiness, with >50x profit growth in 2005-16, meets all the criteria and shouldhelp re-rate CMB. A 20% profit CAGR (achievable via moderate B/S growthand gradual credit cost normalization) and a P/E re-rating to 12x (not high vs.global premium retail banks) could make the stock a 5-bagger in 5 years.

CMB has a clear leading position in retail banking. Based on a proprietary ChinaRetail Banking Strength (CRBS), CMB scores best in all major areas. CCB/ICBC rank the2nd/3rd while BOC/BCOM rank poorly.

CMB can sustain 3.2% high retail pre-tax ROAA, given 1) further economy of scalebenefit; and 2) cost saving from physical-to-mobile channel diversion.

Retail business has vast growth potential. For instance, we estimate CMB's leadingprivate banking division only covers 3.1% of the financial asset of China's high net worthfamilies in 2016.

The leading retail position won't be challenged in the medium-term. Retailbanking has a high real entry barrier. We expect only a few banks have the potential tobecome a strong retail franchise and even for them it will take a few years to create a realthreat to CMB's leading position.

Near 20% 5-year profit CAGR is achievable for CMB. A scenario analysis basedon modest assumptions suggests 19% 2016-21 profit CAGR. We see more upside fromefficiency gain and the fees. Hence, CMB is the only China bank who can potentially liftdividend payout ratio, in our view.

Global peers with strong retail business are trading at much higher valuation.We found CMB's medium-term ROE should be compared to global peers and retailcontribution may be even higher.

Valuation/RisksWe see CMB has a clear competitive advantage in retail business and our HK$38.5 PT isbased on 1.77x mid-2018 PB. Rising competition is the key risk. We estimate large peerswith strong client base and consistent strategies like ICBC/CCB or smaller peers with strongparent backing like PAB (000001.SZ, NC) have the potential to create competitive pressurein the medium-term.

Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 19 to 23 of this report.

Executive Summary China banking sector experienced a multi-year long de-rating. H-share banks’ average

2018 P/B is now at 0.66x, almost half the level compared to five years ago. Our recent

marketing trip confirms that most investors remain bearish (report link), and hence pay

little attention to company differential. In general, few investors analyse China banks’

company specifics; and they are not willing to value them with vastly different valuations.

We argue, however, that difficult times also forge great companies. We believe CMB is

such an underappreciated premium quality bank, which in the next 5 years has the

potential to become a five-bagger.

Our confidence is really built upon its solid retail business. Over the past 15 years or so,

CMB has built a clear leading retail banking franchise in China (we provided detail

comparative analysis in next page and in page 14 in Appendix). We believe CMB’s retail

business, accounting for 48% and 57% of 2016 revenue and profit, will deliver 1)

sustainable and high profitability; 2) vast growth potential and 3) strong competitive

advantage and leading position.

Financially, our scenario analysis suggests a 5-year 19% EPS CAGR (see page 8 for details),

lifting ROAA/ROAE from 1.1%/16% in 2016 to 1.6%/20% in 2021. We view more upside

as likely, from more operating efficiency and above sector average B/S growth rate.

Strategically, in the medium term, CMB’s profitability will rise to a level similar to global

premium retail bank peers (HDFC, BCA, Hang Seng Bank and Wells Fargo). These banks

trade at high multiples, e.g. their 10-year average forward PB and PE are 2.82x and 15.4x.

We expect CMB will substantially re-rating in the medium term, because investors will

gradually appreciate CMB’s robust retail banking story, its high ROE and strong profit

prospects. If the stock is to be valued at 15x PE in 2022, i.e. a valuation similar to global

peers in 5-years’ time, the stock can become a five-bagger.

Going forward, we believe CMB operational numbers for the retail division will catch

investor attention and become the key share price driver, in our view. A potential payout

ratio increase, if materialized in the medium term, can be a powerful re-rating catalyst.

We lifted our PT for CMB from HK$35.9 to HK$38.5 (79% upside from spot price of

HK$21.45), after rolling BVPS from end-2017 to mid-2018 while maintaining 1.77x target

PB multiple. CMB remains our top-pick among China banks.

Chart 1: Retail is now CMB's dominating business with

contribution to revenue, PPOP and profit all at around

50% or more

Source: Company Data

Chart 2: We estimate CMB ROA to trough out in 2016. Both

our forecasts and a scenario case suggests c20% profit

CAGR for medium term (details please see page 6)

Source: Company Data, Jefferies estimate

0

10

20

30

40

50

60

0%

10%

20%

30%

40%

50%

60%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Rmb bn

Pre-tax profit (RHS) Revenue PPOP Pre-tax profit

020406080100120140160180200

0.7%0.8%0.9%1.0%1.1%1.2%1.3%1.4%1.5%1.6%1.7%

Net profit (Rmb bn, RHS) Jeff. Est. profit (RHS)

Scenario case profit (RHS) Factual ROAA

Jeff. Est. ROAA Scenario case ROAA

Few investors like China banks. Even

fewer pay attention to company

differential

We believe CMB has the potential to

be a five-bagger in 5 years

Its retail business deserves high

valuation. It is highly profitable. It

has vast potential and it has high

entry barrier

We did a simple scenario analysis,

suggesting CMB can easily realize

19% 5-year earnings CAGR

CMB outperformed peers since

our initiation on March 22nd

Source: WIND

-1.8%3.5%

-12.2%-12.5%

-8.3%2.4%

-5.4%-4.3%

-2.0%1.7%

-0.6%-1.4%

-24% -16% -8% 0% 8%

HSCEIHSI

CEBMSB

CITIC BCMBPSBC

BCOMBOCABCCCB

ICBC

3968 HK

Target Change

22 May 2017

page 2 of 23 , Equity Analyst, +852 3743 8033, [email protected] Wang

Please see important disclosure information on pages 19 - 23 of this report.

https://javatar.bluematrix.com/pdf/hkbVl0W6

CMB’s leading retail business in China We introduced our proprietary China Retail Banking Strength (CRBS) framework to help

investors to better compare China banks’ retail strength, as there are no available tools to

do so in the market. Our CRBS system identifies 23 retail-related operating indicators

(totalling 80% weighting) and gives banks 1-9 scores, 9 being the best, based on their

relative ranking. We also give 20% weighting to retail strategy and execution, which is

based on our subjective assessment. CRBS score of all indicators are in Chart 3 below and

the raw data are in page 14 in the appendix.

Among the 9 national licensed banks we cover (we exclude PSBC given very short listing

history), CRBS suggests CMB, with 7.79 high score, is the best retail bank in all the major

areas including retail contribution and momentum, business quality, operation efficiency

and retail strategy. Such convincing scores clearly demonstrate CMB’s leading position in

retail banking business.

Next to CMB, though with a clear wide margin, CCB and ICBC are having the strong

scores of 6.28 and 5.76. We always know ICBC has a strong retail business among large

peers, but it is an unexpected surprise to realize that CCB actually scores better. This

probably is also one reason why CCB in the past many years was able to maintain a higher

ROE among large peers.

Other banks all have the total score below 5, suggesting their retail banking business is

notably weaker than CCB/ICBC and way from catching up to CMB’s level. BCOM and

BOC seem to rank particularly weak.

Chart 3: CMB is having a clear retail banking advantage in China

Note: For raw data, please go to page 14 in the appendix. Source: Company data

(R ank o f 9 banks, 1 being the best) IC B C C C B A B C B OC B C OM C M B C IT IC B M SB C EB

R etail co ntribut io n & mo mentum Indicato rs (R C M I)

Revenue contr. 6 8 7 2 5 9 1 4 3

Chg. vs. 5y ago, ppt 5 8 2 1 6 7 9 4 3

Chg. vs. 10y ago, ppt 2 5 3 1 4 9 6 8 7

PPOP contr. 6 8 7 4 2 9 1 5 3

Chg. vs. 5y ago, ppt 5 9 1 3 6 8 7 4 2

Chg. vs. 10y ago, ppt 3 8 4 2 1 9 7 6 5

PTP contr. 7 8 6 5 3 9 1 2 4

Chg. vs. 5y ago, ppt 6 8 4 3 5 9 7 1 2

Chg. vs. 10y ago, ppt 4 8 5 2 1 9 7 3 6

Loan contr. 2 7 5 4 1 9 3 6 8

Chg. vs. 5y ago, ppt 2 6 3 7 4 8 9 1 5

Chg. vs. 10y ago, ppt 3 4 6 2 1 9 8 7 5

Deposit contr. 8 7 9 6 4 5 2 3 1

Chg. vs. 5y ago, ppt 2 8 6 9 7 1 4 5 3

Chg. vs. 10y ago, ppt 3 6 8 1 4 2 5 7 9

R C M I sco re, 40% weighting 4.3 7 .2 5 .1 3 .5 3 .6 7 .5 5 .1 4 .4 4 .4

R etail quality indicato rs (R QI)

Fee contri. to retail revenue 4 3 1 2 5 6 9 7 8

Non-mortgage contri. 3 1 4 2 5 6 7 9 8

10-year average credit cost 6 9 2 8 7 5 4 1 3

Demand deposit contribution 5 3 7 4 6 9 2 1 8

Private banking strength 8 5 6 7 4 9 3 2 1

R QI sco re, 25% weighting 5.2 4 .2 4 .0 4 .6 5 .4 7 .0 5 .0 4 .0 5 .6

R etail ef f iciency indicato rs (R EI)

Retail CIR 7 6 4 5 1 8 2 9 3

Retail PPOP margin 7 6 5 4 1 9 3 8 2

Retail PTP ROAA 9 7 6 5 4 8 1 3 2

R EI sco re, 15% weighting 7.7 6 .3 5 .0 4 .7 2 .0 8 .3 2 .0 6 .7 2 .3

R etail strategy and executio n (R SE, 20% weighting) 8.0 7 .0 3 .5 3 .5 3 .5 9 .0 3 .5 3 .5 3 .5

Overall retail banking strength sco re 5.76 6.28 4.48 3.94 3.79 7 .79 4.30 4 .46 4.21

CMB has a clear leading

advantage in retail business

among peers

Source: Jefferies estimate

4.21

4.46

4.30

7.79

3.79

3.94

4.48

6.28

5.76

CEB

MSB

CITIC B

CMB

BCOM

BOC

ABC

CCB

ICBC

CRBS score

We introduced a framework to

compare China banks’ retail banking

business

CMB scores best in all major areas,

with a wide margin

CCB/ICBC are the next strong retail

banks. CCB’s strong retail business is

a positive surprise to us

3968 HK

Target Change

22 May 2017



CMB’s strong retail business is

sustainable and has vast potential Ultimately, the reason investors should pay China retail banks a higher valuation relative

to corporate banking player, in our view, are three-fold. 1) Strong retail banking business

has much lower business cyclicality relatively to industrial profitability cycle. 2) It enjoys

vast growth potential because household leverage is relatively low while retail financial

demands are not fully satisfied. 3) From a regulatory perspective, retail business is clearly

an encouraged business; hence investors will have little regulatory uncertainty.

For CMB, we believe investors should eventually re-rate the stock because of retail

banking story. First, this is already CMB’s dominating business with >50% profit

contribution. More importantly, we believe CMB, as a market leader in retail banking with

strong competitive advantage, will 1) maintain its high retail ROA, 2) continue to enjoy

relatively high growth retail banking market potential in China remains vast, and 3) face

limited market leading position challenge in the medium term given high entry barrier.

CMB’s high retail ROA is sustainable CMB’s retail business accounted for 48%, 43% and 57% of the bank’s revenue, PPOP and

pre-tax profit (PTP) as of 2016. 2016 pre-tax ROAA was at 3.2% high level, >2x vs. the 1.4%

group total pre-tax ROA. We believe high retail ROA is sustainable.

First, we should have more efficiency gain going forward given the fast growing retail

banking business scale and the ongoing process of “IT and apps to replace branches and

staff”. For instance, its cost of a mobile app-based retail transaction is only 1.8% that of a

counter-based transaction in 2016. Also, CMB cut branch space by 39,000 square meters

in 2016 after reducing average branch size.

Second, we see 2016 credit cost as the peak level. Given stabilizing macro economy,

declining NPL ratio and rising mortgage contribution, CMB is likely to cut credit cost.

Table 1: CMB retail business has substantial growth since 2005 Rmb bn 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 05-16

growth, x

05-16

CAGR

05-11

CAGR

11-16

CAGR

Net interest income 4.0 4.9 8.3 12.4 12.2 19.2 27.4 35.0 40.3 50.8 65.2 67.5 15.8x 29% 38% 23%

Net fee income 0.8 1.5 4.7 4.8 4.8 6.4 8.9 11.6 15.7 16.8 26.6 31.8 39.9x 40% 50% 31%

Other income 0.1 0.2 0.3 0.2 0.5 0.9 0.6 0.9 0.8 1.0 0.7 0.9 7.4x 21% 35% 1%

Revenue 4.9 6.6 13.3 17.4 17.5 26.4 37.0 47.5 56.8 68.6 92.5 100.2 19.5x 32% 40% 25%

Expenses -3.6 -4.5 -8.2 -12.1 -13.8 -18.3 -22.2 -26.2 -28.3 -31.9 -39.5 -38.1 9.5x 24% 35% 13%

PPOP 1.3 2.1 5.1 5.3 3.7 8.1 14.8 21.3 28.4 36.7 53.0 62.1 48.3x 43% 51% 40%

Provision charge -0.4 -0.5 -0.4 -1.1 -1.5 -1.7 -0.7 -2.6 -4.9 -7.6 -16.3 -17.0 41.7x 41% 9% 46%

Pre-tax profit 0.9 1.5 4.7 4.3 2.2 6.4 14.1 18.7 23.5 29.1 36.7 45.1 51.3x 43% 59% 38%

Retail loan 74 102 175 233 382 496 571 687 800 971 1,227 1,541 19.8x 32% 41% 21%

Retail deposits 256 312 327 525 639 704 803 926 968 1,093 1,210 1,285 4.0x 16% 21% 11%

Retail assets 75 105 177 237 395 617 726 909 836 1,022 1,266 1,572 19.9x 32% 46% 17%

Retail cost-income

ratio (CIR)

74% 68% 62% 69% 79% 69% 60% 55% 50% 46% 43% 38%

Credit cost 61 25 52 49 39 13 41 67 86 149 123

PTP ROAA 1.7% 3.4% 2.1% 0.7% 1.3% 2.1% 2.3% 2.7% 3.1% 3.2% 3.2%

Revenue contr. 25% 26% 32% 31% 34% 37% 38% 42% 43% 41% 46% 48%

PPOP contr. 12% 15% 21% 17% 15% 21% 27% 33% 36% 35% 39% 43%

PTP contr. 13% 15% 23% 16% 10% 19% 30% 31% 34% 40% 49% 57%


CMB’s retail pre-tax ROA is >2x that

of company overall ROA. We see this

high profitability sustainable

Retail banking deserves high

valuation given low cyclicality, vast

potential and lower regulatory risks

That’s why we are so confident on

CMB

3968 HK

Target Change

22 May 2017



Chart 4: Lower retail CIR lifts pre-tax ROA. Growing retail

business scale should bring more efficiency gain


Chart 5: Retail credit cost should also trend down from

2016 high level (123bp vs. 2006-16 average level of 64bp)


CMB’s retail banking has vast potential Based on a BCG survey (2017 April), China’s retail wealth management market has

reached Rmb120tn by 2016, and the number of high net worth family is 2.1 million

(HNWF). It expects the market size to have a 12% 5-year CAGR and rose to Rmb220tn by

2021. The HNWF market alone, their aggregate investible financial asset size will grew

from Rmb54tn in 2016 to Rmb111tn in 2021.

This means there is really no medium-term limit for CMB to further grow its retail

business. For instance, CMB has the largest private banking AUM among peers and its

2016 AUM size was Rmb1.66tn, covering only c.3.1% of HNWF financial assets.

Chart 6: Chinese household total investible financial assets

are expected to grow at 12% CARG

Source: BCG

Chart 7: Chinese HNWF investible financial assets are

expected to grow even faster

Source: BCG

Also, based on an E&Y 2012 survey, Chinese consumers tend to have banking relationship

with multiple banks and diversify their assets into these banks accounts. Provided CMB

has strong brand recognition, arguably the most complete product mix and high service

quality, we believe it can further gain market share when their clients consolidate assets

into CMB accounts. Historical data proves CMB is consistently gaining retail market share,

particularly from high-end customers.

30%

40%

50%

60%

70%

80%

90%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

200520062007200820092010201120122013201420152016

Retail pre-tax ROAA Retail CIR

0.00%

0.50%

1.00%

1.50%

2.00%

0%

10%

20%

30%

40%

50%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Retail loan contri. (LHS) Retail credit cost

Retail NPL ratio

2377 91

110126

142159

178199

221

0

50

100

150

200

250

2007 … 2013 2014 2015 2016 2017E2018E2019E2020E2021E

Chinese household total investible financial assets (Rmb tn)

+20%

+12%

11 28 3646 54 63

7385

97111

0

30

60

90

120

150

2007 … 2013 2014 2015 2016 2017E2018E2019E2020E2021E

Chinese HNWF investible financial assets (Rmb tn)

+20%

+15%

Retail banking business in China has

vast potential

3968 HK

Target Change

22 May 2017



Chart 8: Chinese customers are banking with more banks

than global peers…

Source: E&Y 2012

Chart 9: CMB is growing retail AUM at a fast speed,

particularly the high-end customers

Note: Sunflower customers need >Rmb0.5m AUM with CMB; private bank needs Rmb10 m. Source: Company data

Entry barrier for retail is high; hence CMB faces limited challenge in the short term Most China banks are saying that they will treat retail banking as their key strategy. We

believe most are showing lip service only. Even if the senior management realize the

strategic importance, we believe they lack the ability to transfer a retail strategy into a

strong retail business, for the following reasons.

Firstly, it takes a very long time even with impeccably execution. Retail business ultimately

targets to build an intimate and sticky relationship with retail customers. But such loyalty

does not come easily. It will take any bank at least 5-8 years of consistent and substantial

investments in people, product, and procedure before it builds the brand recognition and

scale of retail business. CMB is no exception. The bank set retail strategy as early as 2002

(we only got segmental data from 2005) but its retail cost-income ratio was painfully high

in 60%-80% until 2011. Up till 2013, i.e. 11 years since CMB set the retail strategy, its

retail pre-tax ROAA consistently surpass that of corporate pre-tax ROAA.

Chart 10: CMB’s retail CIR was high for many years

Note: The CIR calculation includes business tax, which was lifted from mid-2016. Source: Company data

Chart 11: 11 years after CMB set retail strategy did its retail

ROAA consistently surpass that of corporate segment

Source: Company data

Second, it has high requirements for management capability, authority and stability.

Retail business is tedious, requiring strong management system and skills to ensure

smooth operation, prudent risk control and sufficient training.

31%

6%

42% 43%

37%

26%

35% 38%

20%

33%

15% 14%12%

35%

8% 5%

Global avaerge China US EU

1 2 3 4 or more

0.1 0.2 0.3 0.4 0.4 0.6 0.81.3

1.70.5 0.8 0.9

1.1 1.21.5

1.8

2.5

2.9

0.40.5

0.60.6

0.70.8

0.9

1.0

1.0

1.11.4

1.72.1

2.42.8

3.5

4.8

5.5

2008 2009 2010 2011 2012 2013 2014 2015 2016 08-16

Cagr

Private bank clients Sunflower clients Mass market clients

+38%

+24%

+12%

+23%

20%

30%

40%

50%

60%

70%

80%

90%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Retail CIR Corp. CIR

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Retail pre-tax ROAA Corp. pre-tax ROAA

The real entry barrier for retail

banking is much higher than many

investors would expect

Retail banking takes long time to

show delivery

It also requires very strong and stable

management team

3968 HK

Target Change

22 May 2017



Further, the fact that retail segment tends to provide low ROAA in the first 5 or even 10

years suggests the bank needs to force corporate segment to cross-subsidize retail division

for multiple years. Only strong senior management team can balance such conflicts of

interests among segment for so long. Lastly, if a bank is not with senior management

stability, most likely it will not have real retail banking commitment. The reality in China,

however, is that most banks have overly frequent senior management change in the past

10 years.

Lastly, even if other banks want to do retail business serious from now, the cost and

difficulty today is substantial. Strong banks like CMB already built its brand recognition,

strong client advisor term, sound internal system and tested product portfolio, the new

comer has to provide something very appealing to attract customers, which is likely to be

very costly. Further, the overall banking sector profitability is lower than before, and

management focus is diluted due to rising asset quality issue and tightened regulatory

requirements, making the retail commitment more challenging than 5 or 10 years ago.

To summarize, we think the retail business looks appealing for its low cyclicality and high

potential return. However realistically very few banks can have strong retail business. This

is the case in most countries and China should not be an exception. We believe only 1-2

large SOE banks with strong system and high quality management team, e.g. ICBC or

CCB, and 1-2 joint stock banks with strong parent backing, e.g. Ping An Bank, have the

potential to be CMB’s retail business competitor. Even them, it should take quite long

time and vigorous execution to create real threat to CMB’s leading position.

To do retail today is much more

difficult than 5 or 10 years ago

3968 HK

Target Change

22 May 2017



We see c.20% 5-year profit CAGR likely Our 2017-19 forecasts for CMB expect 25%/17%/22% profit growth, respectively. We are

confident that CMB can achieve close to 20% 5-year profit CAGR relatively easily.

As shown in table 2, we have done a simple scenario analysis to broadly test CMB’s

medium-term growth outlook. We assume 1) CMB’s 2016 high credit cost of 2.12% will

gradually drop to 2005-16 average of 0.84% in the next 5 years; 2) CMB’s B/S growth to

slow to 10% per annum for the next 5 years; 3) its PPOP/asset margin to remain at 2016

level going forward, i.e. assuming CMB will have no strong fee growth or any further

operating efficiency gain; and 4) CMB continues to pay out 30% profit as cash dividend

each year. Based on such conservative assumptions, the exercise suggests CMB will have

19% 2016-21 profit CAGR. Its 2021 profit size will be around 2.4x the size of 2016 profit.

Also, its ROA and ROE will be meaningfully lifted from 2016 levels.

We emphasize that CMB may have more upside from this scenario analysis, given 1) its

medium term credit cost should most likely be below 0.84%, as its loan structure has

improved over the years with much higher retail contribution; 2) its B/S growth rate is

likely to be higher than 10% given it continues to gain market share; and 3) economy of

scale and benefit of technology implementation should further offer some efficiency gain.

Table 2: CMB can achieve close to 20% 5-year profit CAGR relatively easily, in our view Jefferies estimate Scenario analysis CAGR

(Rmb m) 2014 2015 2016 2017E 2018E 2019E 2017S 2018S 2019S 2020S 2021S 06-11 11-16 16-19E 16-21S

Total income 166 202 210 230 253 284 31% 17% 11%

PPOP 105 134 145 167 186 211 158 174 191 211 232 32% 21% 13% 10%

provision charge -32 -59 -66 -68 -70 -70 -64 -61 -56 -50 -42 18% 51% 2% -9%

pre-tax profit 73 75 79 99 116 142 94 113 135 161 190 36% 11% 22% 19%

NPAT 56 58 62 78 91 112 74 89 106 126 149 40% 11% 22% 19%

Assets 4,732 5,475 5,942 6,585 7,313 8,143 6,537 7,190 7,909 8,700 9,570 25% 16% 11% 10%

Gross loans 2,514 2,824 3,262 3,606 3,996 4,435 3,588 3,947 4,341 4,775 5,253 24% 15% 11% 10%

Deposits 3,304 3,572 3,802 4,204 4,658 5,170 4,182 4,600 5,061 5,567 6,123 23% 11% 11% 10%

Equity 315 362 403 463 531 615

EPS (Rmb) 2.22 2.29 2.46 3.08 3.62 4.43 2.94 3.54 4.22 5.01 5.91 29% 8% 22% 19%

DPS (Rmb) 0.67 0.69 0.74 0.93 1.08 1.33 0.88 1.06 1.27 1.50 1.77 28% 12% 22% 19%

BVPS (Rmb) 12.47 14.31 15.95 18.30 20.99 24.33 18.15 20.80 23.95 27.69 32.08 15% 16% 15%

Jefferies estimate Scenario analysis Average

2014 2015 2016 2017E 2018E 2019E 2017S 2018S 2019S 2020S 2021S 06-11 12-16 17-19E 17-21S

ROAA 1.28% 1.13% 1.09% 1.24% 1.31% 1.45% 1.19% 1.30% 1.41% 1.52% 1.63% 1.20% 1.27% 1.33% 1.32%

ROAE 19.2% 17.0% 16.2% 18.0% 18.4% 19.5% 17.2% 18.1% 18.8% 19.4% 19.7% 23.0% 19.9% 18.6% 18.4%

Cost-income ratio (CIR) 31% 28% 28% 27% 26% 25% 39% 32% 27%

Credit cost 1.33% 2.15% 2.12% 1.93% 1.79% 1.60% 1.87% 1.61% 1.35% 1.10% 0.84% 0.48% 1.16% 1.86% 1.48%

Provision charge vs. PPOP 30% 44% 46% 41% 38% 33% 40% 35% 29% 24% 18% 16% 26% 39% 32%

Asset growth 17.8% 15.7% 8.5% 10.8% 11.1% 11.3% 10.0% 10.0% 10.0% 10.0% 10.0% 25.2% 16.4% 10.4% 10.0%


Chart 12: CMB de-risked loan structure in the past 10 years

Note: Risky sector loans include manufacturing, mining, whole and retail corporate loans. Source: Company Data

Chart 13: History tells retail loan has much lower NPL ratio


0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Risky sector loans Other corporate loans Retail loans

0%

1%

2%

3%

4%

5%

6%

7%

8%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Risky sector NPL ratio Other corporate loan NPL ratioRetail loan NPL ratio

Our 2017-19 EPS forecasts are ahead

of consensus

We did a simple scenario analysis,

which suggests 19% 5-year profit

cagr

There should be more upside to this

CAGR

3968 HK

Target Change

22 May 2017



Global peers trade at higher valuation We choose four banks as global premium retail bank peers of CMB— 1) HDFC Bank in

India; 2) BCA in Indonesia; 3) Hang Seng Bank in Hong Kong; 4) Wells Fargo in the US. All

four banks are recognised as national champion for their long-standing retail franchise.

CMB is a relatively lower ROA or NIM bank now. Given strong medium-term profit

outlook, it will soon be similarly or more profitable in ROE terms. Over the past 10 years,

CMB’s retail revenue and profit contribution consistently rose to a level similar to, or even,

higher than global peers. We view CMB to be re-rated significantly once its retail strength

and sustainable high ROE is fully appreciated. In the past 10 years, these four banks’

average forward P/B and PE are higher at 2.82x and 15.4x, respectively.

Table 3: CMB’s retail profit contribution is now higher than these global premium retail bank peers

CMB HDFC Bank* BCA HSB WFC

US$ bn 2015 2016 2021S^ 2015 2016 2015 2016 2015 2016 2015 2016

ROAA (%) 1.13 1.09 1.63 1.91 1.88 3.14 3.24 2.12 1.20 1.32 1.18

ROAE (%) 17.1 16.3 19.7 18.6 18.4 21.9 20.4 20.4 11.8 12.8 11.8

Revenue (US$ bn) 32.2 31.6 n.a. 9.7 9.7 3.6 4.0 4.0 3.9 87.2 89.5

Pre-tax profit (US$ bn) 11.9 11.9 27.1 3.0 3.5 1.7 1.9 3.9 2.5 33.6 32.1

Retail contribution to revenue (%) 45.7 47.7 >2016 level 51.2 49.9 n.a. n.a. 65.7 65.5 54.2 52.3

Retail contribution to pre-tax profit (%) 48.8 57.1 c. 2016 level ^^ 35.9 34.0 n.a. n.a. 30.3 46.4 56.2# 53.8#

Note: *HSDC Bank uses March as fiscal year-end. The 2015/16 data in the table stand for fiscal year ending at March-2016 and March-2017. ^Based on scenario analysis. ^^ Profit contribution may not rise much given the recovery of corporate division profitability. # Well Fargo only discloses net profit contribution. Source: Bloomberg

Chart 14: CMB’s retail revenue contribution is now close to

HDFC or Well Fargo levels, but lower than Hang Seng


Chart 15: Its pre-tax profit, however, is now higher than

global peers


Chart 16: Global peers trade at much higher P/B

multiples…


Chart 17: … and it is the same case on PE multiple


20%

30%

40%

50%

60%

70%

80%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

CMB HDFC HSB WFC

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

CMB HDFC HSB WFC*

0.0

2.0

4.0

6.0

8.0

Jan

-20

07

Jul-

20

07

Jan

-20

08

Jul-

20

08

Jan

-20

09

Jul-

20

09

Jan

-20

10

Jul-

20

10

Jan

-20

11

Jul-

20

11

Jan

-20

12

Jul-

20

12

Jan

-20

13

Jul-

20

13

Jan

-20

14

Jul-

20

14

Jan

-20

15

Jul-

20

15

Jan

-20

16

Jul-

20

16

Jan

-20

17

CMB HDFC Bank BCA HSB WFC

Global premium retail banks peers 10-year average forward P/B: 2.82x

0

5

10

15

20

25

30

35

Jan

-20

07

Jul-

20

07

Jan

-20

08

Jul-

20

08

Jan

-20

09

Jul-

20

09

Jan

-20

10

Jul-

20

10

Jan

-20

11

Jul-

20

11

Jan

-20

12

Jul-

20

12

Jan

-20

13

Jul-

20

13

Jan

-20

14

Jul-

20

14

Jan

-20

15

Jul-

20

15

Jan

-20

16

Jul-

20

16

Jan

-20

17

CMB HDFC Bank BCA HSB WFC

Global premium retail bank peers' 10-year average forward PE: 15.4x

We choose four strong banks as

CMB’s global peers

CMB eventually should be valued at

a similar valuation vs. these peers, in

our view

3968 HK

Target Change

22 May 2017



Catalyst and risk: a potential payout

ratio increase and off-B/S items

Payout ratio increase can be a catalyst of re-rating Other than the strong P&L delivery, CMB may have another potential share price catalyst

in the medium term. We believe it is arguably the only China bank who can further

increase its dividend payout ratio from current 30% to high levels. If that happens, a

substantial re-rating will happen.

We currently forecast CMB’s 2017-19 CT1 CAR to be 11.9%/12.1%/12.4%, respectively.

This may prove overly conservative, as its 1Q17 CT1 CAR already reached 12.4%.

Chart 18: China banks 1Q17 CT1 CAR


Chart 19: CMB 2008-2019 CT1 CAR

Source: Jefferies estimates, company data

Off-B/S item creates confusion and needs to be addressed One area we recommend CMB management to better address or provide more detailed

analysis is its off-B/S items. Relative to its peers, CMB does have bigger size of WMPs or

other off-B/S assets. We understand this is a natural result when its retail customers,

particularly those high-end customers, diversifies their wealth into financial products and

reduces their wealth allocation into low-yielding banking deposits. However, better

disclosure will surely improve transparency and lift investor confidence for the bank.

3968 HK

Target Change

22 May 2017



Key financials and valuation We think CMB will deliver strong earnings in 2017/18 thanks to credit cost normalization

and robust retail profit growth. 1Q profit of Rmb20bn reached 26% of Jefferies’ FY17

profit forecasts or 30% of Bloomberg FY17 profit consensus, suggesting imminent

consensus upgrades.

Table 4: Financial highlights

(Rmb bn) 2012 2013 2014 2015 2016 2017E 2018E 2019E

Net interest income 88 99 117 138 135 148 162 179

Net fee income 20 29 39 53 61 67 75 86

Total income 114 133 166 202 210 230 253 284

Total expenses -49 -54 -61 -68 -65 -63 -67 -72

PPOP 65 79 105 134 145 167 186 211

provision charge -6 -10 -32 -59 -66 -68 -70 -70

pre-tax profit 60 68 73 75 79 99 116 142

NPAT 45 52 56 58 62 78 91 112

Assets 3,408 4,016 4,732 5,475 5,942 6,585 7,313 8,143

Gross loans 1,904 2,197 2,514 2,824 3,262 3,606 3,996 4,435

Deposits 2,532 2,775 3,304 3,572 3,802 4,204 4,658 5,170

Equity 200 265 314 361 402 461 529 614

Growth rate, y/y %

Total income 15.8% 11.9% 18.5% 17.4% -2.2% 9.7% 9.6% 10.8%

PPOP 17.4% 20.7% 33.6% 27.9% 7.9% 15.1% 11.5% 13.8%

NPAT 25.3% 14.3% 8.1% 3.2% 7.6% 25.3% 17.3% 22.5%

Assets 21.9% 17.8% 17.8% 15.7% 8.5% 10.8% 11.1% 11.3%

Gross loans 16.0% 15.4% 14.4% 12.3% 15.5% 10.6% 10.8% 11.0%

Deposits 14.1% 9.6% 19.1% 8.1% 6.4% 10.6% 10.8% 11.0%

Equity 21.4% 32.5% 18.4% 14.8% 11.5% 14.7% 14.7% 15.9%

EPS (Rmb) 2.10 2.05 2.22 2.29 2.46 3.08 3.62 4.43

DPS (Rmb) 0.63 0.62 0.67 0.69 0.74 0.93 1.08 1.33

BVPS (Rmb) 9.28 10.53 12.47 14.31 15.95 18.30 20.99 24.33

ROA 1.46% 1.39% 1.28% 1.13% 1.09% 1.24% 1.31% 1.45%

ROE 24.8% 22.2% 19.3% 17.1% 16.3% 18.0% 18.4% 19.5%

Net fee contribution 17% 22% 24% 26% 29% 29% 30% 30%

NIM 3.03% 2.82% 2.64% 2.77% 2.50% 2.49% 2.47% 2.47%

Cost-income ratio 42.8% 40.9% 36.9% 33.6% 31.0% 27.5% 26.6% 25.5%

Credit cost 0.31% 0.50% 1.33% 2.15% 2.12% 1.93% 1.79% 1.60%

NPL ratio 0.61% 0.83% 1.11% 1.68% 1.87% 1.74% 1.79% 1.73%

LLR/loans 2.15% 2.21% 2.59% 3.00% 3.37% 3.31% 3.39% 3.37%

T1 CAR 8.5% 9.3% 10.4% 10.8% 11.5% 11.9% 12.1% 12.6%


We lifted target price for CMB from HK$35.9 to HK$38.5, after rolling the BVPS base from

end-2017 to mid-2018. It is still based on 1.77x target P/B based on three-stage Gordon

Growth model. Our key assumptions include 12.5% cost-of-equity, 4.0% terminal growth

rate and 14.5% long-term ROE. CMB remains our top pick among China banks.

We view current valuation of 1.0x 2017E PB as very attractive. It is trading at a rich

valuation than peers, but we believe the market meaningfully undervalued CMB’s leading

retail franchise and expect the stock to be re-rated over time. We encourage investors to

add this name

We expect sector consensus to rise

soon

We lift our TP for CMB to HK$38.5

3968 HK

Target Change

22 May 2017



Table 5: Du-Pont Analysis

(as % of average assets) 2012 2013 2014 2015 2016E 2017E 2018E 2019E

Net interest income 2.85 2.66 2.68 2.70 2.36 2.36 2.33 2.32

Net fee income 0.64 0.79 0.90 1.04 1.07 1.07 1.08 1.12

Total income 3.67 3.58 3.80 3.96 3.68 3.67 3.64 3.67

Total expenses -1.57 -1.47 -1.40 -1.33 -1.14 -1.01 -0.97 -0.93

PPOP 2.10 2.12 2.40 2.63 2.54 2.66 2.67 2.74

provision charge -0.18 -0.28 -0.72 -1.16 -1.16 -1.09 -1.01 -0.91

pre-tax profit 1.92 1.84 1.68 1.47 1.38 1.58 1.67 1.84

NPAT (ROAA) 1.46 1.39 1.28 1.13 1.09 1.24 1.31 1.45

Asset/equity multiple (x) 17.01 15.13 15.05 15.17 14.77 14.27 13.82 13.27

ROAE 24.78 22.22 19.28 17.09 16.27 18.01 18.41 19.55


Table 6: Valuation table

Stock Rating Target Spot Upside Mkt cap P/BV P/E Div. yield ROA ROE NP growth

Code Price Price 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E

HK$ HK$ % (US$ b) (x) (x) (x) (x) (%) (%) (%) (%) (%) (%) (%) (%)

ICBC 1398 Buy 7.70 5.07 52 251 0.77 0.69 5.5 5.1 5.5 5.9 1.16 1.16 14.8 14.4 5.6 7.9

CCB 939 Buy 9.30 6.32 47 204 0.81 0.72 5.5 5.0 5.5 6.0 1.16 1.16 15.5 15.1 10.4 9.3

ABC 1288 Buy 5.00 3.64 37 161 0.75 0.67 5.2 4.8 5.8 6.3 1.00 0.99 15.5 14.9 10.8 7.5

BOC 3988 Buy 5.70 3.85 48 152 0.70 0.64 5.7 5.5 5.2 5.4 0.93 0.89 12.7 12.1 6.5 4.2

BCOM 3328 Buy 7.30 5.83 25 60 0.63 0.58 5.9 5.9 5.1 5.1 0.76 0.72 11.0 10.2 -2.8 -0.5

PSBC 1658 Hold 5.20 4.54 15 47 0.84 0.75 7.0 6.2 1.4 1.6 0.53 0.54 12.8 12.9 17.7 13.4

CMB 3968 Buy 38.50 21.45 79 74 1.04 0.91 6.2 5.3 4.9 5.7 1.24 1.31 18.0 18.4 25.3 17.3

CITIC 998 Buy 7.10 4.83 47 39 0.56 0.51 5.0 4.7 5.0 5.4 0.68 0.65 11.8 11.5 1.9 6.4

MSB 1988 Hold 8.80 7.60 16 40 0.66 0.60 5.4 5.4 3.7 3.7 0.75 0.68 13.0 11.8 -3.9 0.0

CEB 6818 Buy 4.80 3.46 39 25 0.59 0.53 5.0 5.0 3.0 3.0 0.71 0.70 12.3 11.2 -6.0 0.6

Simple avg. 39 105 0.73 0.66 5.6 5.3 4.5 4.8 0.89 0.88 13.7 13.3 6.6 6.6

Note: spot price as of 19 May market close. Source: Jefferies estimates, company data

3968 HK

Target Change

22 May 2017



Appendix We provide lot information for both CMB and its peers in the appendix.

CRBS raw data for key indicators;

Listed banks’ 1Q operational matrix comparison;

CMB corporate segment details (2005-16);

CMB loan mix and NPL mix (2010-16);

China private bank AUM and customer number (2007-2016);

2015-16 private bank customer number and AUM of 17 banks;

Private bank AUM and customer number (CMB, ICBC, MSB, BOC)

3968 HK

Target Change

22 May 2017



Chart 20: CMB is having a clear retail banking advantage in China

Note: *This is subjective score. Our ability to give specific scores to 9 banks are limited, hence we only assign 9, 8, 7 score to CMB/ICBC/CCB and give the remaining banks the same score of 3.5 to make total score of 45. Source: Company data, Jefferies estimate

Chart 21: China banks’ retail revenue contribution


Chart 22: China banks’ retail revenue contribution


IC B C C C B A B C B OC B C OM C M B C IT IC B M SB C EB

R etail co ntribut io n & mo mentum Indicato rs (R C M I)

Revenue contr. 37% 39% 38% 31% 33% 48% 26% 32% 31%

Chg. vs. 5y ago, ppt 6.5 10.4 1.9 1.7 7.4 9.7 12.6 6.2 5.1

Chg. vs. 10y ago, ppt 2.8 10.3 5.0 (3.1) 7.0 21.5 12.8 15.5 13.2

PPOP contr. 32% 34% 33% 27% 21% 43% 17% 32% 24%

Chg. vs. 5y ago, ppt 7.9 17.4 4.2 4.9 8.4 16.0 14.0 7.5 4.4

Chg. vs. 10y ago, ppt 4.3 18.2 9.0 (0.3) (2.0) 28.0 16.2 13.4 9.6

PTP contr. 36% 44% 36% 27% 22% 57% 20% 21% 26%

Chg. vs. 5y ago, ppt 14.3 26.6 5.3 5.2 9.8 27.0 18.1 1.6 4.4

Chg. vs. 10y ago, ppt (1.3) 27.6 7.5 (5.4) (5.8) 42.0 18.6 (2.0) 15.6

Loan contr. 32% 37% 34% 34% 29% 47% 33% 37% 37%

Chg. vs. 5y ago, ppt 6.6 11.1 9.0 12.2 9.0 12.4 14.7 6.4 10.7

Chg. vs. 10y ago, ppt 16.3 16.5 20.4 15.9 15.3 29.2 22.8 22.1 19.8

Deposit contr. 46% 45% 59% 43% 32% 34% 15% 18% 14%

Chg. vs. 5y ago, ppt (2.0) 0.8 0.1 2.2 0.7 (2.4) (0.3) (0.0) (1.6)

Chg. vs. 10y ago, ppt (6.4) (1.8) 2.6 (16.1) (4.3) (6.5) (1.8) 1.3 3.1

R etail quality indicato rs (R QI)

Fee contri. to retail revenue 28% 28% 20% 25% 29% 32% 59% 46% 58%

Non-mortgage contri. 23% 17% 23% 23% 35% 53% 55% 67% 56%

10-year average credit cost 0.59% 0.33% 0.86% 0.35% 0.59% 0.64% 0.65% 1.20% 0.74%

Demand deposit contribution 46% 43% 52% 45% 48% 74% 42% 31% 61%

Private banking strength (by AUM size) 8.0 5.0 6.0 7.0 4.0 9.0 3.0 2.0 1.0

R etail ef f iciency indicato rs (R EI)

Retail CIR 39% 40% 46% 45% 61% 38% 55% 34% 48%

Retail PPOP margin 3.7% 3.2% 3.0% 2.6% 2.1% 4.4% 2.2% 4.0% 2.2%

Retail PTP ROAA 3.4% 3.2% 2.3% 1.9% 1.7% 3.2% 1.3% 1.5% 1.5%

R etail strategy and executio n*

Score 8.0 7.0 3.5 3.5 3.5 9.0 3.5 3.5 3.5

10%

15%

20%

25%

30%

35%

40%

45%

50%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

ICBC CCB ABC BOC BCOM

CMB CITIC MSB CEB

0%

10%

20%

30%

40%

50%

60%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

ICBC CCB ABC BOC BCOM

CMB CITIC MSB CEB

3968 HK

Target Change

22 May 2017



Chart 23: Summary table of H-share bank 1Q results

Source: Company Data, Jefferies

1Q17, Rmb bn ICBC CCB ABC BOC BCOM PSBC CMB CITIC MSB CEB Sector total

P/L items

Net interest income 122 107 103 79 31 42 35 25 21 15 580

Net fee income 41 39 25 26 11 4 19 11 13 8 197

Revenue 168 159 149 130 47 52 57 38 36 24 860

Expenses 39 35 57 43 16 32 14 10 10 7 263

PPOP 130 124 93 87 31 20 43 28 27 17 598

Net profit 76 70 56 47 19 14 20 11 14 9 335

B/S items

Gross loans 13,572 12,172 10,113 10,365 4,344 3,190 3,435 2,949 2,612 1,896 64,647

Assets 24,905 21,695 20,324 18,918 8,734 8,487 6,001 5,752 5,957 4,127 124,898

Deposits 18,565 16,232 15,962 13,760 4,938 7,781 3,930 3,430 3,051 2,243 89,891

Wholesale funding 3,617 3,318 2,504 3,030 76 27 1,469 1,841 2,433 1,535 19,851

BVPS (Rmb) 5.50 6.47 3.95 4.59 7.93 4.44 16.68 7.21 9.51 4.88 5.53

EPS (Rmb) 0.21 0.28 0.17 0.16 0.25 0.17 0.79 0.23 0.39 0.18 0.22

ROAA 1.24% 1.31% 1.12% 1.01% 0.88% 0.66% 1.34% 0.78% 0.98% 0.84% 1.09%

ROAE 15.83% 17.64% 17.68% 14.01% 12.95% 15.63% 19.42% 13.07% 16.71% 15.30% 15.74%

CET1 CAR 12.98% 12.98% 10.50% 11.16% 10.92% 8.88% 12.40% 8.86% 8.91% 8.25% 11.28%

NIM 2.12% 2.13% 2.22% 1.80% 1.57% 2.24% 2.43% 1.79% 1.43% 1.53% 2.00%

Credit cost, bps 94 118 95 87 70 59 207 164 142 119 109

NPL Ratio 1.59% 1.52% 2.33% 1.45% 1.52% 0.85% 1.76% 1.74% 1.68% 1.54% 1.64%

NPL coverage ratio 142% 160% 174% 160% 150% 280% 209% 152% 156% 158% 164%

LLR/loans 2.24% 2.42% 4.05% 2.31% 2.28% 2.36% 3.68% 2.64% 2.61% 2.43% 2.69%

%, y/y ICBC CCB ABC BOC BCOM PSBC CMB CITIC MSB CEB Sector total

Net interest income 2.7% -0.9% 1.5% -1.2% -8.3% 0.6% 1.8% -8.9% -14.2% -7.4% -1.1%

Net fee income -5.8% 1.0% -11.9% 0.1% 4.7% 37.8% -6.0% -2.1% -13.0% 18.9% -2.9%

Revenue -0.5% 2.1% 7.5% 5.2% -3.7% 10.4% -2.1% -6.8% -9.7% 0.6% 1.7%

Expenses -19.5% -14.3% 9.9% -3.3% -6.5% 3.0% -9.6% -19.6% -21.4% -11.5% -6.8%

PPOP 7.1% 7.9% 6.1% 10.0% -2.1% 24.4% 0.7% -1.0% -4.6% 6.4% 6.0%

-Loan provision charge 36.0% 30.7% 30.1% 47.9% 8.8% 114.8% -6.5% 11.0% -9.9% 14.6% 23.5%

Net profit 1.4% 3.0% 1.9% 0.1% -1.6% 10.4% 8.9% 1.7% 3.6% 1.6% 2.3%

%, q/q ICBC CCB ABC BOC BCOM PSBC CMB CITIC MSB CEB Sector total

Gross loans 3.9% 3.5% 4.0% 3.9% 5.9% 6.0% 5.3% 2.5% 6.1% 5.6% 3.9%

Assets 3.2% 3.5% 3.9% 4.2% 3.9% 2.7% 1.0% -3.0% 1.0% 2.7% 2.8%

Deposits 4.1% 5.4% 6.1% 6.3% 4.4% 6.8% 3.4% -5.7% -1.0% 5.8% 4.1%

Wholesale funding -0.6% -5.3% -6.0% -1.3% -10.1% -81.6% 3.5% 4.8% 3.2% -2.0% -1.2%

q/q changes in bps ICBC CCB ABC BOC BCOM PSBC CMB CITIC MSB CEB Sector total

CET1 CAR 0 bps 0 bps 12 bps -21 bps -8 bps 25 bps 86 bps +22 bps -4 bps 4 bps +4 bps

NIM 2 bps 10 bps 3 bps 2 bps -23 bps n.a. 7 bps -9 bps -27 bps -19 bps -1 bps

Credit cost, bps 24 bps 24 bps -12 bps -9 bps -3 bps -15 bps -23 bps -51 bps -29 bps -57 bps 0 bps

NPL Ratio -3 bps 0 bps -4 bps -1 bps 0 bps -2 bps -11 bps +5 bps 0 bps -6 bps -2 bps

NPL coverage ratio 482 bps 915 bps 20 bps -330 bps -24 bps 806 bps 2865 bps -396 bps 29 bps 562 bps 378 bps

LLR/loans 3 bps 13 bps -7 bps -7 bps -1 bps -1 bps 30 bps +1 bps -1 bps 0 bps +3 bps

Others ICBC CCB ABC BOC BCOM PSBC CMB CITIC MSB CEB Sector total

Share capital - 1Q17 356 250 325 294 74 81 25 49 36 47 1,538

Shareholders fund - 1Q17 1,959 1,618 1,283 1,352 589 360 421 353 347 228 8,509

Share capital- FY16 (assume 1Q17 vs 4Q16 no change)356 250 325 294 74 81 25 49 36 47 1,538

Shareholders fund - FY16 1,884 1,557 1,238 1,312 569 347 402 344 333 221 8,206

CT1 Capital - 1Q17 1,938 1,610 1,276 1,313 587 358 408 351 353 232 8,424

RWA - 1Q17 14,929 12,404 12,150 11,762 5,376 4,030 3,288 3,965 3,957 2,807 74,667

IEAs 23,013 20,079 18,596 17,468 7,953 7,491 5,747 5,611 5,785 3,969 115,712

3968 HK

Target Change

22 May 2017



Chart 24: CMB Corporate business details


Table 7: CMB loan mix

RMB bn 2010 2011 2012 2013 2014 2015 2016 10-16 Carg % of 2016

Manufacturing 253 308 366 388 360 332 297 3% 9%

Transportation, Storage and Postal Services 132 141 143 127 148 159 194 7% 6%

Wholesale, Retail and Lodging 116 169 226 295 301 251 229 12% 7%

Production and Supply of Electricity, Gas and Water 63 66 81 60 101 112 109 10% 3%

Leasing and Commercial Services 50 38 35 38 52 84 102 13% 3%

Real Estate 113 113 102 131 180 213 228 12% 7%

Water, Environment and Public Utility Management 32 34 30 34 30 34 35 2% 1%

Mining 29 37 55 65 65 58 49 10% 2%

Construction 34 44 61 93 102 101 85 17% 3%

Information Transmission, Software and IT Services 9 11 13 16 22 30 77 43% 2%

Others 40 34 42 77 104 132 161 26% 5%

Corporate loans 871 994 1,153 1,326 1,468 1,508 1,567 10% 48%

Personal Housing Loans 299 324 336 269 329 499 728 16% 22%

Credit Card Loans 55 73 107 155 220 313 409 40% 13%

Personal business loans 65 90 182 320 339 311 284 28% 9%

Others 77 84 63 57 83 103 120 8% 4%

Retail loans 496 571 687 800 971 1,227 1,541 21% 47%

Discounted bills 65 76 65 71 75 90 155 16% 5%

Total gross loans 1,431 1,641 1,904 2,197 2,514 2,824 3,262 15% 100%

NPL ratio 0.68% 0.56% 0.61% 0.83% 1.11% 1.68% 1.87%


Table 8: NPL ratio by sector

2010 2011 2012 2013 2014 2015 2016

Manufacturing 1.06% 0.87% 1.00% 1.78% 2.67% 4.59% 6.38%

Transportation, Storage and Postal Services 0.65% 0.68% 0.34% 0.27% 0.50% 0.87% 0.82%

Wholesale, Retail and Lodging 1.47% 1.01% 1.09% 1.44% 2.17% 4.09% 4.63%

Production and Supply of Electricity, Gas and Water 0.66% 0.51% 0.51% 0.25% 0.00% 0.07% 1.00%

Leasing and Commercial Services 0.87% 0.36% 0.52% 0.19% 0.21% 0.22% 0.13%

Real Estate 0.79% 0.73% 0.63% 0.40% 0.26% 0.55% 1.01%

Rmb bn 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 05-16 growth, x 05-16 Cagr 05-11 Cagr 11-16 Cagr

Net interest income 12.2 13.5 18.3 25.0 21.4 35.8 50.9 56.6 55.2 60.9 71.7 66.5 4.4x 17% 27% 6%

Net fee income 0.7 0.9 1.6 2.7 2.8 4.3 6.0 7.1 8.7 12.9 22.9 25.9 37.0x 39% 44% 34%

Other income 0.4 0.5 0.7 0.7 1.0 2.5 4.7 4.4 3.4 3.6 9.8 9.6 24.4x 34% 52% 15%

Revenue 13.3 14.9 20.6 28.5 25.2 42.6 61.7 68.2 67.4 77.4 104.4 102.1 6.7x 20% 29% 11%

Expenses -4.9 -5.9 -7.7 -10.3 -11.0 -13.4 -17.7 -21.0 -22.1 -23.5 -26.4 -24.6 4.0x 16% 24% 7%

PPOP 8.4 9.0 12.9 18.2 14.3 29.2 44.0 47.2 45.2 54.0 78.1 77.5 8.3x 22% 32% 12%

Provision charge -3.2 -3.2 -2.7 -2.8 -1.6 -3.8 -7.5 -3.0 -4.4 -23.2 -40.0 -37.5 10.8x 25% 15% 38%

Pre-tax profit 5.2 5.8 10.3 15.3 12.7 25.4 36.5 44.2 40.8 30.8 38.1 40.0 6.7x 20% 38% 2%

Revenue 12% 39% 38% -11% 69% 45% 11% -1% 15% 35% -2%

Expenses 19% 31% 33% 7% 22% 32% 19% 5% 6% 12% -7%

PPOP 8% 43% 41% -22% 105% 51% 7% -4% 19% 45% -1%

Provision charge 2% -18% 7% -45% 143% 98% -60% 49% 422% 73% -6%

Pre-tax profit 11% 78% 50% -17% 100% 44% 21% -8% -25% 24% 5%

Corp loan 299 360 446 546 701 871 994 1,153 1,326 1,468 1,508 1,567 4.2x 16% 22% 10%

Corp deposits 378 462 617 726 969 1,194 1,417 1,607 1,807 2,211 2,362 2,517 5.7x 19% 25% 12%

Corp assets 390 452 486 637 784 1,308 1,400 1,717 1,203 1,381 2,645 2,813 6.2x 20% 24% 15%

Corp CIR 37% 40% 37% 36% 43% 31% 29% 31% 33% 30% 25% 24%

Incremantal CIR 59% 32% 33% -21% 14% 22% 51% -139% 13% 11% 76%

Credit cost 98 66 57 25 48 80 28 36 166 269 244

Corp. pre-tax ROAA 1.4% 2.2% 2.7% 1.8% 2.4% 2.7% 2.8% 2.8% 2.4% 1.9% 1.5%

PPOP margin 2.1% 2.8% 3.2% 2.0% 2.8% 3.2% 3.0% 3.1% 4.2% 3.9% 2.8%

Corp. NPL ratio 3.92% 3.18% 2.15% 1.57% 1.14% 0.92% 0.74% 0.73% 1.00% 1.39% 2.28% 2.92%

Credit cost 0.98% 0.66% 0.57% 0.25% 0.48% 0.80% 0.28% 0.36% 1.66% 2.69% 2.44%

3968 HK

Target Change

22 May 2017



Table 8: NPL ratio by sector

2010 2011 2012 2013 2014 2015 2016

Water, Environment and Public Utility Management 0.19% 0.00% 0.00% 0.33% 0.49% 0.37% 0.61%

Mining 0.00% 0.00% 0.00% 0.00% 2.51% 6.73% 16.50%

Construction 0.64% 0.30% 0.28% 0.34% 0.39% 0.76% 1.97%

Information Transmission, Software and IT Services 0.72% 0.65% 0.74% 0.51% 0.25% 0.45% 0.29%

Others 1.70% 1.61% 0.76% 0.67% 0.72% 0.79% 0.49%

Corporate loans 0.92% 0.74% 0.73% 1.00% 1.39% 2.28% 2.92%

Personal Housing Loans 0.14% 0.12% 0.22% 0.34% 1.10% 0.95% 0.64%

Credit Card Loans 1.89% 1.39% 1.07% 0.99% 0.94% 1.37% 1.40%

Personal business loans 0.10% 0.16% 0.45% 0.59% 0.26% 0.73% 1.07%

Others 0.18% 0.26% 0.96% 1.27% 1.08% 1.72% 1.70%

Retail loans 0.34% 0.31% 0.48% 0.63% 0.77% 1.07% 1.00%

Discounted bills 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total gross loans 0.68% 0.56% 0.61% 0.83% 1.11% 1.68% 1.87%


Chart 25: China private banks client numbers

Source: Pystandard

Chart 26: China private banks AUM

Source: Pystandard

Table 9: China banks’ PB clients numbers and AUM

Company 2016 PB

clients

number

2016

clients

growth

rate

2015

clients

growth

rate

2016 PB

AUM, RMB

bn

2016

AUM

growth

rate

2015 AUM

growth

rate

CMB 59,560 21% 49% 1,660 33% 66%

ICBC 70,100 12% 45% 1,210 14% 44%

BOC 95,400 10% 17% 1,000 23% 13%

ABC 70,000 1% 21% 818 1% 26%

CCB 58,721 17% 23% 786 26% 33%

BCOM 34,078 19% 26% 453 8% 39%

SPDB 19,000 27% 25% 350 17% 36%

CITIC 21,600 32% 25% 321 32% 29%

MSB 15,609 3% 6% 297 9% 18%

IB 20,339 11% n.a. 291 10% 20%

PAB 16,900 17% 44% 281 12% 62%

EB 28,213 16% 32% 258 13% 36%

BJB 29,691 48% n.a. 159 35% n.a.

HXB 5,451 1% n.a. 104 45% n.a.

JSB 17,900 53% n.a. 79 50% n.a.

GFB 6,032 15% 31% 70 14% n.a.

SHB 2,583 18% n.a. 51 22% n.a.

Total 571,177 15% 13% 8,188 19% 16%

Source: Pystandard

5 14 39

77

160 188

253

316

477

571

0

100

200

300

400

500

600

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Private banks client numbers ('000)

130 612 854

1,663 2,086

3,352

4,513

6,740

8,187

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2008 2009 2010 2011 2012 2013 2014 2015 2016

Chinese private banks AUM, RMB bn

3968 HK

Target Change

22 May 2017



Chart 27: ICBC private banking clients number

Source: Pystandard

Chart 28: CMB private banking clients number

Source: Pystandard

Chart 29: BOC private banking clients number

Source: Pystandard

Chart 30: MSB private banking clients number

Source: Pystandard

Chart 31: ICBC private banking AUM

Source: Pystandard

Chart 32: CMB private banking AUM

Source: Pystandard

Chart 33: BOC private banking AUM

Source: Pystandard

Chart 34: MSB private banking AUM

Source: Pystandard

13 18

22 26

33

43

62 70

0

20

40

60

80

2009 2010 2011 2012 2013 2014 2015 2016

ICBC private banking clients number ('000)

6 9 13 16 20

25 33

49

60

0

20

40

60

80

2008 2009 2010 2011 2012 2013 2014 2015 2016

CMB private banking clients number ('000)

5 6 10 16 25

40

60 74

87 95

0

20

40

60

80

100

120

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

BOC private banking clients number ('000)

1 3

5

9

13 14 15 16

0

5

10

15

20

2009 2010 2011 2012 2013 2014 2015 2016

MSB private banking clients number ('000)

255 354

435 473 541

736

1,060 1,210

0

500

1,000

1,500

2009 2010 2011 2012 2013 2014 2015 2016

ICBC private banking AUM, RMB bn

130 181 270 370 434

571 753

1,252

1,660

0

500

1,000

1,500

2,000

2008 2009 2010 2011 2012 2013 2014 2015 2016

CMB private banking AUM, RMB bn

150 189 300

450 570

720 810

1,000

0

200

400

600

800

1,000

1,200

2009 2010 2011 2012 2013 2014 2015 2016

BOC private banking AUM, RMB bn

25 40 68

128

192 230

273 297

0

100

200

300

400

2009 2010 2011 2012 2013 2014 2015 2016

MSB private banking AUM, RMB bn

3968 HK

Target Change

22 May 2017



Company DescriptionChina Merchants Bank is the sixth-largest commercial bank in China and plays a leading role in the country’s retail banking market. It has thehighest retail revenue, PPOP, pre-tax profit contribution among HK-listed state-owned and mid-cap China banks. It also has the highest PPOPmargin among peers. By 3Q16, the bank’s total assets had reached RMB5.6 tn.

Analyst Certification:I, Victor Wang, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Jeremy An, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Victor Wang is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.Registration of non-US analysts: Jeremy An is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.

Investment Recommendation Record(Article 3(1)e and Article 7 of MAR)

Recommendation Published , 05:54 ET. May 22, 2017Recommendation Distributed , 05:54 ET. May 22, 2017

Company Specific DisclosuresFor Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Explanation of Jefferies RatingsBuy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or morewithin a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an averagesecurity price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. ForUnderperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus20% or less within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinionson the investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the number

3968 HK

Target Change

22 May 2017



https://javatar.bluematrix.com/sellside/Disclosures.action


can vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility inthe bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intendedto represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment stylesuch as growth or value.

Risks which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• Agricultural Bank of China Limited (1288 HK: HK$3.65, BUY)• Bank of China Limited (3988 HK: HK$3.88, BUY)• Bank of Communications Co., Ltd. (3328 HK: HK$5.86, BUY)• China CITIC Bank Corporation Limited (998 HK: HK$4.84, BUY)• China Construction Bank Corporation (939 HK: HK$6.33, BUY)• China Everbright Bank Company Limited (6818 HK: HK$3.49, BUY)• China Merchants Bank Co., Ltd. (3968 HK: HK$21.45, BUY)• China Minsheng Banking Corp., Ltd. - A (1988 HK: HK$7.59, HOLD)• Housing Development Finance Corp. Ltd. (HDFC IN: INR1,520.60, HOLD)• Industrial and Commercial Bank of China Limited (1398 HK: HK$5.11, BUY)• Postal Savings Bank of China Co., Ltd. (1658 HK: HK$4.49, HOLD)• Wells Fargo & Company (WFC: $53.06, HOLD)

Notes: Each box in the Rating and Price Target History chart above represents actions over the past three years in which an analyst initiated on acompany, made a change to a rating or price target of a company or discontinued coverage of a company.Legend:

I: Initiating Coverage

D: Dropped Coverage

B: Buy

H: Hold

UP: Underperform

For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

3968 HK

Target Change

22 May 2017





Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 1088 50.28% 336 30.88%HOLD 909 42.01% 176 19.36%UNDERPERFORM 167 7.72% 13 7.78%

3968 HK

Target Change

22 May 2017



Other Important DisclosuresJefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have aconflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investmentdecision.Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) groupcompanies:United States: Jefferies LLC which is an SEC registered firm and a member of FINRA.United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England andWales No. 1978621; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)207029 8010.Hong Kong: Jefferies Hong Kong Limited, which is licensed by the Securities and Futures Commission of Hong Kong with CE number ATS546; locatedat Suite 2201, 22nd Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong.Singapore: Jefferies Singapore Limited, which is licensed by the Monetary Authority of Singapore; located at 80 Raffles Place #15-20, UOB Plaza 2,Singapore 048624, telephone: +65 6551 3950.Japan: Jefferies (Japan) Limited, Tokyo Branch, which is a securities company registered by the Financial Services Agency of Japan and is a memberof the Japan Securities Dealers Association; located at Hibiya Marine Bldg, 3F, 1-5-1 Yuraku-cho, Chiyoda-ku, Tokyo 100-0006; telephone +813 52516100; facsimile +813 5251 6101.India: Jefferies India Private Limited (CIN - U74140MH2007PTC200509), which is licensed by the Securities and Exchange Board of India as a MerchantBanker (INM000011443), Research Analyst (INH000000701) and a Stock Broker with Bombay Stock Exchange Limited (INB011491033) and NationalStock Exchange of India Limited (INB231491037) in the Capital Market Segment; located at 42/43, 2 North Avenue, Maker Maxity, Bandra-KurlaComplex, Bandra (East) Mumbai 400 051, India; Tel +91 22 4356 6000.This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. The information setforth herein was obtained from sources believed to be reliable, but has not been independently verified by Jefferies. Therefore, except for any obligationunder applicable rules we do not guarantee its accuracy. Additional and supporting information is available upon request. Unless prohibited by theprovisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States ("US"), by Jefferies LLC, a US-registeredbroker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of1934. Transactions by or on behalf of any US person may only be effected through Jefferies LLC. In the United Kingdom and European EconomicArea this report is issued and/or approved for distribution by Jefferies International Limited and is intended for use only by persons who have, or havebeen assessed as having, suitable professional experience and expertise, or by persons to whom it can be otherwise lawfully distributed. JefferiesInternational Limited Equity Research personnel are separated from other business groups and are not under their supervision or control. JefferiesInternational Limited has implemented policies to (i) address conflicts of interest related to the preparation, content and distribution of research reports,public appearances, and interactions between research analysts and those outside of the research department; (ii) ensure that research analysts areinsulated from the review, pressure, or oversight by persons engaged in investment banking services activities or other persons who might be biased intheir judgment or supervision; and (iii) promote objective and reliable research that reflects the truly held opinions of research analysts and prevents theuse of research reports or research analysts to manipulate or condition the market or improperly favor the interests of the Jefferies International Limitedor a current or prospective customer or class of customers. Jefferies International Limited may allow its analysts to undertake private consultancywork. Jefferies International Limited’s conflicts management policy sets out the arrangements Jefferies International Limited employs to manage anypotential conflicts of interest that may arise as a result of such consultancy work. Jefferies International Ltd, its affiliates or subsidiaries, may make amarket or provide liquidity in the financial instruments referred to in this investment recommendation. For Canadian investors, this material is intendedfor use only by professional or institutional investors. None of the investments or investment services mentioned or described herein is available toother persons or to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario). In Singapore, Jefferies SingaporeLimited is regulated by the Monetary Authority of Singapore. For investors in the Republic of Singapore, this material is provided by Jefferies SingaporeLimited pursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for accredited,expert or institutional investors, as defined under the Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising from, orin connection with this material, please contact Jefferies Singapore Limited, located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624,telephone: +65 6551 3950. In Japan this material is issued and distributed by Jefferies (Japan) Limited to institutional investors only. In Hong Kong,this report is issued and approved by Jefferies Hong Kong Limited and is intended for use only by professional investors as defined in the Hong KongSecurities and Futures Ordinance and its subsidiary legislation. In the Republic of China (Taiwan), this report should not be distributed. The researchin relation to this report is conducted outside the PRC. This report does not constitute an offer to sell or the solicitation of an offer to buy any securitiesin the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals,licenses, verifications and/or registrations from the relevant governmental authorities themselves. In India this report is made available by JefferiesIndia Private Limited. In Australia this information is issued solely by Jefferies International Limited and is directed solely at wholesale clients withinthe meaning of the Corporations Act 2001 of Australia (the "Act") in connection with their consideration of any investment or investment servicethat is the subject of this document. Any offer or issue that is the subject of this document does not require, and this document is not, a disclosuredocument or product disclosure statement within the meaning of the Act. Jefferies International Limited is authorised and regulated by the FinancialConduct Authority under the laws of the United Kingdom, which differ from Australian laws. Jefferies International Limited has obtained relief underAustralian Securities and Investments Commission Class Order 03/1099, which conditionally exempts it from holding an Australian financial serviceslicence under the Act in respect of the provision of certain financial services to wholesale clients. Recipients of this document in any other jurisdictionsshould inform themselves about and observe any applicable legal requirements in relation to the receipt of this document.

This report is not an offer or solicitation of an offer to buy or sell any security or derivative instrument, or to make any investment. Any opinion orestimate constitutes the preparer's best judgment as of the date of preparation, and is subject to change without notice. Jefferies assumes no obligationto maintain or update this report based on subsequent information and events. Jefferies, its associates or affiliates, and its respective officers, directors,and employees may have long or short positions in, or may buy or sell any of the securities, derivative instruments or other investments mentioned ordescribed herein, either as agent or as principal for their own account. Upon request Jefferies may provide specialized research products or servicesto certain customers focusing on the prospects for individual covered stocks as compared to other covered stocks over varying time horizons orunder differing market conditions. While the views expressed in these situations may not always be directionally consistent with the long-term viewsexpressed in the analyst's published research, the analyst has a reasonable basis and any inconsistencies can be reasonably explained. This materialdoes not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individualclients. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate,seek professional advice, including tax advice. The price and value of the investments referred to herein and the income from them may fluctuate. Pastperformance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange

3968 HK

Target Change

22 May 2017



rates could have adverse effects on the value or price of, or income derived from, certain investments. This report has been prepared independently ofany issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of securities. Noneof Jefferies, any of its affiliates or its research analysts has any authority whatsoever to make any representations or warranty on behalf of the issuer(s).Jefferies policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer priorto the publication of a research report containing such rating, recommendation or investment thesis. Any comments or statements made herein arethose of the author(s) and may differ from the views of Jefferies.

This report may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproductionand distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party contentproviders do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible forany errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party contentproviders give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose oruse. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequentialdamages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content,including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. Theydo not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice.

Jefferies research reports are disseminated and available primarily electronically, and, in some cases, in printed form. Electronic research issimultaneously available to all clients. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent ofJefferies. Neither Jefferies nor any officer nor employee of Jefferies accepts any liability whatsoever for any direct, indirect or consequential damagesor losses arising from any use of this report or its contents.

For Important Disclosure information, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 1.888.JEFFERIES

© 2017 Jefferies Group LLC

3968 HK

Target Change

22 May 2017



five-bagger in 5 years? buy china merchants bank co., ltd...

Documents