China’squarterlybankreportingseasonhasstartedwithamarket-beatingperformancefromBankofChina(BOC)[3988.HK;BUY].Akeycomponentofthebank’s13.8%year-on-year(YoY)netprofitgrowthforQ12014appearstohavebeenaresultofitsincreasedoffshoreloanportfolio,whichhasbeengrowingfasterthanitsRMBbookoverthepastyear.AnindicationofthefasterpaceofgrowthinoffshorelendinginQ1isthefactthattotalloansrose7.2%fromend-2013,butwithinthattotalRMBloansroseonly3.75%,whileoffshoreloanssurgedby16.6%fromtheendofDecember.InourBOCinitiationreport,circulatedthisweek,wecitedthebalanceinBOC’sgeographicportfolioasakeyattraction,andthathasprovedtrueasearlyasthefirstquarter.However,theinferenceisthatloangrowthforthedomestic-orientedbankswillbeslowerforQ1.Resultsaredueinthecomingweek.Meanwhile,asthechartaboveshows,thespreadbetweenthe2-yearinterbankswaprateandthe2-yearT-bondhasnarrowedfromits120bpsspreadinFebruary,whichhadpreviouslynotbeenseensince2009.Thesuggestionisthatthebondmarketiswillingtotoleratemorerisk,andindicatesthatthereisexpectationofafurtherliquidityinjection,althoughweseethisasalowprobability.Expectthebankstooutperformintheshortterm.
TALKINGPOINTS
ANHUICONCH[0914.HK;BUY]-Althoughmostanalystsexpected>100%EPSgrowthinQ12014duetoalowbaselastyear,theactualgrowthof155%isstillapleasantsurprise.AsitsQ12014ASP(averagesellingprice)islargelyinlinewiththelevelinQ42013,itsuggestedthatthecompanymanageditsASPbetterthanmarketaverage.WeraiseourFY14E/FY15EEPSby22%/19%butlowerourtargetPERto10.4x(2014E)byapplyinga15%discounttotheaverageforwardPERsince2009toreflectthepotentialriskofhighpricepremiumoverAnhuiConch-A.WemaintainourtargetpriceatHK$36.00duetotheEPSupwardrevision.ReiterateBUY.
CHINAANIMALHEALTHCARE(CAH)[0940.HK;HK$5.51;Notrated]-WerecentlyhostedateleconferencewithCAH,oneoftheleadingmanufacturersofdrugsandvaccinesforanimalsinChina.Atfirstglancethestocklooksexpensive,at2013PERof42.2xand2014EPERof28.7x,basedonconsensus,butearningsgrowthisprojectedat>40%for2014and2015,andthelinkwithEliLillyisapositive.