• Maintain BUY and MYR26.60 TP, 25% upside and c.4% FY25F (Jun) yield. We were recently invited to visit Chengdu in China, and observed that economic conditions in the city appear healthy. While this is certainly positive for Hong Leong Bank’s associate Bank of Chengdu (BOCD), we are also encouraged by HLBK’s efforts at powering up its domestic operations to narrow the growth gap with its Chinese counterpart. With and without its associate, we think HLBK, a sector Top Pick, is fundamentally robust, and is a key laggard play.

• A hustling and bustling city. During our two-day visit to the city, we observed that traffic – be it on foot or road – was very healthy. Restaurants were packed, tourist streets were flooded, and shopping areas were not short of patrons. In fact, retail consumption in Chengdu was up 10% YoY in 2023, vs the entire China’s +7% during the same period. This is likely due to the higher income nature of Chengdu consumers (Chengdu’s GDP per capita is 16% higher than China’s overall). We also note that property sales, especially of the higher-end range, have been decent – the Xi Pai Lan An development (with property prices over seven digits) located near the city’s new financial district was reportedly fully sold, and some units were already occupied.

• Powering up for the future. We were also introduced to the city’s long-term plans, ie to become an economy powered by a strong renewable energy (RE) and high-tech sector. Currently, the city is home to around 20 EV manufacturers as well as the largest producer of solar cells in the world. Given its position as the city’s City Commercial Bank (CCB), we think BOCD is poised for further strong growth alongside its clients.

• Growth is good. BOCD is reaping the benefits from the city’s resilient economy – in 1H24 (FYE Dec), it recorded a 23% YoY increase in gross loans. The group has a 75:25 split between non-retail and retail loan customers, with most of its non-retail loans coming from government-owned enterprises (GOEs). The bank sees its growth to be driven by the high-tech sector, manufacturing, and RE, whereas it is cognisant of potential oversupply in the EV scene. It also notes that retail loans growth is moderating, but deposits growth within that segment is still good.

• Well-shielded from nationwide downturn. BOCD maintains a prudent screening policy to protect its asset quality. For its customers in the property development business, this involves scrutinising items such as project location, project feasibility and progress, tracking the utilisation of funds, and tracking project sales. This early and thorough screening has helped BOCD retain its strong asset quality credentials, as it commands an NPL ratio of 0.66% (property development NPL ratio: 1.8%) and a significant LLC of 496% (or almost 1.7x FY23 PBT).

Source: RHB Research - 11 Sep 2024