Faster expansion of RMB investment channels is key to outperformance

BOCHK (2388.HK)

Rating: LT-Buy

Initial coverage

BOCHK is the second largest licensed bank incorporated in Hong Kong, and has the biggest branch network in Hong Kong. Its asset growth was slower than the peer average in 1999-2007, but has accelerated since 2009, driven by offshore RMB deposit business. Regarding profitability, its ROE and ROA have been second to only Hang Seng Bank’s since 2009, mainly due to a lower cost-toincome ratio. BOCHK has a balanced business mix and prudent operation style. Broadening RMB investment channels is critical for enhancing asset yields and achieving faster-than-sector growth. Initiate with “LT-Buy” and a TP of HK$23.83. Stock data (HK$) 28.35 14.24 194.5 10,573 7.18 7.73 -30.43 17.90 21.16 54.51

52-week high (HK$) 52-week low(HK$) Market cap (HK$ m) Issued shares (m) Daily trading volume (m) 1 month change(%) Ytd change (%) 50-day average 200-day average 14-day RSI Source: Bloomberg

2nd largest local bank in HK; offshore RMB deposits the main growth driver. In terms of asset size, BOCHK ranks second among the 23 licensed banks incorporated in HK, only after HSBC. It also has the biggest branch network among banks in HK. Its network expansion will focus on mainland China while optimizing the HK network. In 1999-2007, its asset growth was prudent and slower than the peer average. Since 2008, its market share has recovered, driven by a faster asset growth which was in turn spurred by the acceleration of offshore RMB deposit business. In recent years, its market share in non-RMB deposits is declining. Its earnings growth was in-line with industry average in 2006-10, but the CAGR in 2007-10 outpaced the industry average.




Strong profitability helped by low cost-to-income ratio, balanced business structure, and prudent operating style. BOCHK’s ROE and ROA were only second to HSB’s since 2009, thanks to the economies of scale and low cost-to-income ratio brought by its vast network and resources. While its prudent style has led to a low yield on interest-earning assets and industry average NIM, it also reduces cyclical fluctuations. BOCHK has an equal focus on corporate and personal businesses and a balanced loan structure. Its exposure to property investment loans is lower than the industry average and still on the decrease. Its revenue structure is also more balanced than peers’, with a high ratio of non-interest income. It has a low risk appetite for securities investments while its CAR and liquidity levels are high. BOCHK’s asset quality has improved in recent years, with NPL ratio and credit cost lower than listed peers’, and a provision coverage ratio above listed peers’.




Development of RMB investment channels will be the key for an outperformance of BOCHK’s business. Owing to lack of RMB investment channels, the growth of RMB deposits is mainly driven by the expectations on RMB appreciation. The recent slowdown in the growth of RMB deposits is a result of weaker expectations on RMB appreciation which is driven by slower growth in China’s economy. The slower appreciation will directly drag down the growth of RMB deposits. In the mid-to-long term, we believe the development of investment channels will be the key factor determining the growth of RMB deposits and ROA of BOCHK. Assuming that (1) market share of BOCHK’s RMB deposits will gradually decrease to 20% from 30%, (2) the net profit margin of its offshore RMB business is 70%, and (3) NIM of RMB deposits ranges between 1.2%-1.6%, we estimate that the value of RMB business will be HK$5.75-HK$7.67 per share.




Initial coverage with “LT-Buy” rating. While BOCHK achieved a CAGR of 12.4%in EPS during 2000-2010, the earnings growth is expected to slow down given a slower growth in China’s economy and RMB deposits in the next 5 to 10 years. Adopting the Discounted Dividend Model (DDM) and assuming the EPS CAGR for the 10 years during 2010-2020 to be 8.1% and perpetual growth rate of 2.5%, we estimate that the intrinsic value per share of BOCHK is HK$23.83, corresponding to 2011E P/E and P/B of 12.17x and 1.92x, respectively. We assign “LT-Buy” rating on initial coverage.




Major risk alerts: Weaker expectations on RMB appreciation, leading to a slower growth in the company’s offshore RMB deposits; Failure to increase ROA of RMBdenominated assets if growth in the development of RMB-denominated products is slower than our expectation; Faster-than-expected deterioration in asset quality amid volatile global economy; Outflow of capital due to a deterioration in European debt crisis, aggravating the liquidity risks in HK market.

1-year share price: HSI index

20% 10% 0% -10%D-10 -20% -30%

M-11

J-11

Upside: 29.5%




Special Views:

BOCHK

TP: HK$23.83

Summary:

30 December 2011

30%

Price: HK$18.40

A-11

N-11

-40%

Source: Bloomberg

Yang Qingli [email protected] Tel: (00852) 22979212 Li Shanshan [email protected] Tel: (8610) 88009795x8058 Wan Li [email protected] Tel: (8610) 88009795x8051 Download our reports from Bloomberg: BOCM〈enter〉

Valuation Table (HK$) (HK$ bn) Total operating income Net operating income Net profit YoY growth EPS (HK$) YoY growth PE PB DPS (HK$) Dividend yield

Source: BOCOM Int’l

2009

2010

2011E

2012E

2013E

33.34 15.10 13.93 316.7% 1.32 316.7% 13.97 1.82 0.86 4.65%

35.50 18.24 16.20 16.3% 1.53 16.3% 12.01 1.64 0.97 5.28%

39.22 23.00 20.09 24.0% 1.90 24.0% 9.68 1.48 1.21 6.60%

45.73 23.82 20.35 1.3% 1.93 1.3% 9.56 1.39 1.23 6.69%

52.90 27.90 23.39 14.9% 2.21 14.9% 8.32 1.29 1.41 7.69%

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Table of Content 1. The 2nd largest local bank in HK; RMB offshore business is the main growth driver.............................................5 1. 2. 3. 4. 5.

Company overview........................................................................................................................................................................................................5 The Second largest local bank in Hong Kong............................................................................................................................................................6 Network optimization is the focus in HK; operating profit contribution of mainland business has remained stable since 2009....................6 Market share recovered on offshore RMB deposits, though market share in non-RMB deposits declined............................................................8 Earnings CAGR in 06-10 close to peer average......................................................................................................................................................11

2. Profitability only second to HSB’s; profit enhancement needs more RMB investment channels .........................13 1. 2. 3.

High ROA & ROE driven by lower cost-to-income ratio.......................................................................................................................................13 Industry average NIM, but more stable than peer avg. ..........................................................................................................................................14 Economies of scale and lower cost-to-income ratio due to its large and stable branch network......................................................................17

3. Balanced business structure and prudent operating style .........................................................................................18 1. 2. 3. 4. 5. 6.

Equal focus on corporate and personal businesses.................................................................................................................................................19 Relatively balanced loan mix .....................................................................................................................................................................................20 High ratio of non-interest income..............................................................................................................................................................................22 Decreasing risk appetite of securities investments ..................................................................................................................................................23 Above-peer CAR, further enhanced by adoption of FIRB ......................................................................................................................................24 Solid liquidity levels.....................................................................................................................................................................................................25

4. Asset quality largely improved in recent years.........................................................................................................26 5. Development of RMB investment channels will be the key for an outperformance of BOCHK’s business.........29 1. 2. 3. 4.

Offshore RMB business began to develop ................................................................................................................................................................29 Growth of RMB deposits in HK will slow down amid a slower economic growth and weaker expectations on RMB appreciation............30 ROA growth depends on the development of RMB investment channels .............................................................................................................32 Value of RMB business estimated to be roughly HK$5.75-HK$7.67 per share ..................................................................................................33

6. Forecasts and valuations............................................................................................................................................34 1. 2. 3.

Earnings forecast.........................................................................................................................................................................................................34 Intrinsic value estimated to be HK$23.83 by adopting absolute valuation model - DDM.................................................................................34 Initial coverage with “LT-Buy” rating .....................................................................................................................................................................36

7. Major Risk Alerts: .....................................................................................................................................................37

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Page 2

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 1: Peer comparison of total assets, 2010-2011H .................................................................................................................. 6 Chart 2: Number of Network for HK-listed banks, since 2007..................................................................................................... 6 Chart 3: Network growth of BOCHK, HSB and BEA .................................................................................................................. 7 Chart 4: Mainland network growth of BOCHK, HSB and BEA.................................................................................................. 7 Chart 5: Operating profit contribution of mainland business of BOCHK .................................................................................. 7 Chart 6: Asset CAGR of BOCHK outpaced the authorized institutions in 2007-10................................................................... 9 Chart 7: BOCHK’s market share in terms of asset size among authorized institutions, since 2003 ......................................... 9 Chart 8: Asset growth breakdown of BOCHK in 2003-10 (sum of all items = asset/liability growth) ...................................... 9 Chart 9: Peer comparison of loan growth..................................................................................................................................... 10 Chart 10: Market share in terms of loan among HK authorized institutions since 2003 ......................................................... 10 Chart 11: Peer comparison of deposit growth.............................................................................................................................. 10 Chart 12: Market share in terms of deposits among HK authorized institutions since 2003................................................... 10 Chart 13: Rapidly rising share of RMB deposits in the total deposits of BOCHK ................................................................... 10 Chart 14: BOCHK’s share in the RMB deposit market.............................................................................................................. 10 Chart 15: Volume and growth of RMB remittance in HK related to cross-border trade & settlement ................................. 11 Chart 16: BOCHK’s market share in non-RMB deposits among the authorized institutions................................................. 11 Chart 17: Comparison of earnings growth of HK-listed banks since 2003................................................................................ 11 Chart 18: Earnings growth breakdown of BOCHK, 2003-10 (sum of all items = earnings growth rate) ............................... 12 Chart 19: Earnings growth of HK-listed banks ........................................................................................................................... 12 Chart 20: ROE of HK-listed banks ............................................................................................................................................... 13 Chart 21: ROA of HK-listed banks ............................................................................................................................................... 13 Chart 22: Profitability breakdown of HK-listed banks (2010) ................................................................................................... 13 Chart 23: Trend of HK composite interest rate ........................................................................................................................... 14 Chart 24: Yield on interest-earning assets and cost of interest-bearing liabilities of BOCHK ................................................ 15 Chart 25: Half-yearly NIM and NIS since 2008 ........................................................................................................................... 15 Chart 26: NIM and NIS since 1999 ............................................................................................................................................... 16 Chart 27: NIM of HK-listed banks................................................................................................................................................ 16 Chart 28: Comparison of yield on interest-earning assets of HK-listed banks ......................................................................... 16 Chart 29: Time deposit ratio of HK banks ................................................................................................................................... 16 Chart 30: BOCHK’s time deposit ratio is lower than the industry level ................................................................................... 16 Chart 31: Deposit structure of BOCHK ....................................................................................................................................... 17 Chart 32: Peer comparison of cost-to-income ratio, 2009-present ............................................................................................. 18 Chart 33: Staff growth comparison of BOCHK, HSB and BEA ................................................................................................ 18 Chart 34: Per capita expenditure of BOCHK, HSB and BEA.................................................................................................... 18 Chart 35: Segmental breakdown of BOCHK’s pre-tax profit .................................................................................................... 19 Chart 36: Income breakdown of BOCHK (2010) ........................................................................................................................ 19 Chart 37: Income breakdown of HSB (2010) ............................................................................................................................... 19 Chart 38: Income breakdown of the HK business of BEA (2010) .............................................................................................. 20 Chart 39: Income breakdown of the HK business of WHB (2010)............................................................................................. 20 Chart 40: Breakdown of operating income .................................................................................................................................. 20 Chart 41: Loan structure of BOCHK ........................................................................................................................................... 21 Chart 42: Ratios of individual loan of authorized institutions in HK ........................................................................................ 21 Chart 43: Ratios of construction and property loan of authorized institutions in HK............................................................. 21 Chart 44: Peer comparison of loan structure (2011H) ................................................................................................................ 22 Chart 45: Breakdown of fee and commission income.................................................................................................................. 22 Chart 46: Non-interest income ratios of HK-listed banks........................................................................................................... 23 Chart 47: Net fee and commission income ratios of HK-listed banks ........................................................................................ 23 Chart 48: Breakdown of BOCHK’s securities investment, by issuer......................................................................................... 24 Chart 49: Core-CAR of HK-listed banks...................................................................................................................................... 24 Chart 50: CAR of HK-listed banks ............................................................................................................................................... 24 Chart 51: Peer comparison of risk-weighted asset coefficient .................................................................................................... 25 Download our reports from Bloomberg: BOCM〈enter〉

Page 3

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 52: Loan-to-deposit ratio of BOCHK................................................................................................................................. 25 Chart 53: Average liquidity ratio of BOCHK .............................................................................................................................. 25 Chart 54: HKD and all currency loan-to-deposit ratios of HK financial institutions............................................................... 26 Chart 55: Peer comparison of loan-to-deposit ratio .................................................................................................................... 26 Chart 56: Balance and proportion of BOCHK’s impaired loans ............................................................................................... 27 Chart 57: Proportion of BOCHK’s classified or impaired loans in 1999-2006 ......................................................................... 27 Chart 58: Proportion of BOCHK’s classified or impaired loans in 2006-1H2011 .................................................................... 27 Chart 59: Asset quality of residential mortgage loans improving .............................................................................................. 28 Chart 60: Charge-off rate of credit card loans has been decreasing since 2009....................................................................... 28 Chart 61: Classified loan ratio of HK-listed banks...................................................................................................................... 28 Chart 62: Loan-to-provision ratios ............................................................................................................................................... 28 Chart 63: Provision coverage ratios .............................................................................................................................................. 28 Chart 64: Asset quality of BOCHK............................................................................................................................................... 29 Chart 65: Development of offshore RMB business ...................................................................................................................... 30 Chart 66: RMB deposits in HK grew faster since 2H2010 .......................................................................................................... 31 Chart 67: RMB deposits accounted for more than 10% of the total deposits ........................................................................... 31 Chart 68: RMB time deposits grew rapidly since 2009 ............................................................................................................... 31 Chart 69: Rapid growth in RMB-denominated bonds issuance but the total amount remains small..................................... 32 Chart 70: BOCHK’s RMB business estimates ............................................................................................................................. 33 Chart 71: Major assumptions for BOCHK’s profit forecast ...................................................................................................... 34 Chart 72: Valuation of BOCHK adopting DDM.......................................................................................................................... 35 Chart 73: Dividend payout ratio of HK-listed banks................................................................................................................... 35 Chart 74: P/E of HK-listed banks.................................................................................................................................................. 36 Chart 75: P/B of HK-listed banks.................................................................................................................................................. 36 Chart 76: Valuation and key financial indicators of HK-listed banks ....................................................................................... 37 Chart 77: Shareholding structure of BOCHK ............................................................................................................................. 38

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Page 4

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

1. The 2nd largest local bank in HK; RMB offshore business is the main growth driver BOCHK was established in Oct 2001. Its holding company BOC Hong Kong (Holdings) Limited was listed in July 2002. The group’s businesses are focused in HK with branches in mainland China. In terms of asset size, it ranks second among the 23 licensed banks incorporated in HK, only after HSBC. It has the largest asset size among the listed local banks. BOCHK has a leading market share in its main personal banking operations, and has distinct advantages in RMB offshore businesses.

1.

Company overview

The Bank of China began conducting HK businesses through HK branches in Sept 1917. Its business development in HK was not very fast in the first few decades, and the first sub-branch was only opened in 1971. After establishing an IT platform in 1980, 14 banks were combined to establish the Bank of China Group, concentrating their treasury bond and forex trading businesses, but the subsidiary banks still operated independently. The bank run in the wake of the June 4th Incident in Beijing in 1989 caused a setback in the HK businesses of Bank of China Group. BOCHK was established on 1 Jan 2001 by combining the businesses of 10 of the 12 banks in HK originally belonging to the Bank of China Group. In addition, it holds shares in subsidiaries Nanyang Commercial Bank and Chiyu Banking Corporation, both of which are incorporated in HK, as well as BOC Credit Card (International) Limited. BOCHK became one of the three issuing banks in HK in 1994. It also serves as a Chairman Bank of the Hong Kong Association of Banks on a rotational basis. BOC Hong Kong (Holdings) Limited began trading on the main board of the Stock Exchange of Hong Kong on 25 Jul 2002, and was included as an HSI constituent in Dec of the same year. Bank of China Limited holds a 66.06% stake in BOC Hong Kong (Holdings) Limited. As at 30 Sept 2011, the BOCHK Group (including BOCHK, Nanyang Commercial Bank and Chiyu Banking Corporation) and its subsidiaries had over 260 branches, more than 550 ATMs and other distribution channels in HK, as well as 26 branches and sub-branches in mainland China. Through these branches and sub-branches, the BOCHK Group provides local and cross-border banking services to customers in HK and the mainland. In late 2003, BOCHK was appointed by the PBOC as the clearing bank for RMB business in HK. On 13 Jul 2010, BOCHK was authorized as the clearing bank of RMB banknotes for the Taiwan region.

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Page 5

BOCHK(2388.HK)

30 December 2011

2.

Faster expansion of RMB investment channels is key to outperformance

The Second largest local bank in Hong Kong

As at the end of Jun 2011, the total assets of BOCHK amounted to HK$1.83trn, second only to HSBC among the 23 licensed banks incorporated in HK, and the largest among the listed local banks. As at the end of Jun 0211, BOCHK had 266 branches in Hong Kong, the largest branch network among banks in HK.

Chart 1: Peer comparison of total assets, 20102011H Total asset (HK$bn) 1,830 2,000 1,500 973

2010

1,000 500 -

BOC(HK) DSB 400 #of branches 300

2011H

599 177

141

Chart 2: Number of Network for HK-listed banks, since 2007

153

74

HSB DSF

BEA CHB

WHB

292 250 220

200

B CH

D SF

D SB

B H W

A BE

SB H

BO C( H

K)

100 FY 2007 FY 2008

Source: Bloomberg

FY 2009 FY 2010

2011H

Source: Bloomberg

3. Network optimization is the focus in HK; operating profit contribution of mainland business has remained stable since 2009 Since 2009, the branch network of BOCHK has been contracting, due to the limited room for growth in the intensely competitive HK market. Going forward, the size of BOCHK’s HK network is expected to stabilize. Instead, it is expected to focus on network optimization and replacement, opening flagship branches and improving branch distribution. In contrast, Hang Seng Bank (“HSB”) and Bank of East Asia (“BEA”), which followed BOCHK in terms of network size, have continued to expand their networks since 2006. The new branches of BOCHK are mainly on the mainland. Its mainland business is mainly conducted through Nanyang Commercial Bank (“NCB China”). The pace of network expansion (measured in the number of branches) of NCB China was moderate in the past few years, faster than HSB’s but slower than BEA’s. It is expected to focus on opening branches in existing cities in the wealthy regions, such as Guangdong, Jiangsu and Beijing. BOCHK’s mainland network is not very large and mainly provides cross-border services for corporate clients and wealth management for high-end private clients, differing from the client positioning of mainland banks and the Bank of China.

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Page 6

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

With increasing economic and trade ties between mainland China and HK, there is a growing need for capital by firms that conduct cross-border businesses. BOCHK’s cross-border and cross-currency advantages in HK and mainland facilitate the development of its cross-border business. The parent bank’s extensive customer resources on the mainland provide inspiring room for growth. However, the majority of the new mainland clients are still from BOCHK itself. The contribution of mainland business to operating income has remained at about 3% since 2008. The contribution of mainland business of operating profit rose sharply during the financial crisis in 2008, but then retreated to around 2% as the expansion of HK business accelerated.

Chart 3: Network growth of BOCHK, HSB and BEA BOCHK

25%

HSB

BEA

BOCHK

35%

HSB

BEA

30% 25%

20% 15%

20%

10%

15%

5%

10% 5%

0% -5%

Chart 4: Mainland network growth of BOCHK, HSB and BEA

2008

2009

2010

2011H

0% 2008

-10%

Source: Company data

2009

2010

2011H

Source: Company data

Chart 5: Operating profit contribution of mainland business of BOCHK Proportion of operating income from mainland business 15%

Proportion of revenue from mainland business 13.3%

10% 3.2% 5% 0%

3.0% 2.3% 2007

2.9% 2.6%

2008

2009

3.0% 2.1% 2010

3.4% 2.2% 2011H

Source: Company data

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Page 7

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

4. Market share recovered on offshore RMB deposits, though market share in non-RMB deposits declined BOCHK’s asset growth has outpaced the industry average since 2008. In 1999-2007, its asset CAGR was 4.12%, lower than the 5.42% of the authorized institutions. This accelerated to 15.87% in 2007-10, much faster than the 7.12% of the authorized institutions. The rapid asset growth was mainly driven by the robust increase in RMB deposits in HK since 2H10. As Hong Kong’s sole RMB clearing bank, BOCHK saw a rapid increase in the ratio of RMB deposits to total deposits, from 4.6% in 2009 to 19.8% as at the end of Jun 2011. RMB deposits also accounted for 63.7%/81.7% of its deposit growth in 2010/1H11. However, with escalating competition in the HK deposit market, BOCHK’s share in the HK RMB deposit market fell from 55.4% in mid-2010 to 32.8% as at end-Jun 2011. Its market share may decline further amid intensifying competition. Nevertheless, BOCHK’s position as the RMB clearing bank should remain intact in at least the next few years, meaning it will continue to have an advantage in attracting RMB deposits. Amid an intensely competitive environment, BOCHK’s share in the deposit market fell in 2001-08, from 17.9% to 13.2%. But the growth of RMB deposits provided new impetus. Its market share recovered to 15.0% in 2010 and further to 15.2% in 1H11. Still, its market share in non-RMB deposits is falling. Amid severe competition, BOCHK’s market share in non-RMB deposits fell from 15.4% in 2005 to 13.5% in mid-2011. Bond investment was a bigger asset growth driver than loan prior to 2007. Since 2007, loan has overtaken bond investment as the major driver. With the vast increase in offshore RMB deposits in 2010, cash and balances at banks and other financial institutions became the major asset growth driver in 2010. BOCHK’s share in the HK lending market was above 15% in most of the years since 2003, but dropped below 15% in 2007-08. Since 2009, its market share has returned to the 15-16% range.

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Page 8

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 6: Asset CAGR of BOCHK outpaced the authorized institutions in 2007-10

Chart 7: BOCHK’s market share in terms of asset size among authorized institutions, since 2003 BOCHK’s market share in terms of asset size among authorized institutions 13.6% 13.5%

BOCHK 15%

Authorized institutions 15.87%

14% 13% 11.7%

12%

5.42%

11%

7.12%

4.12%

11.2%

Source: Company data

20 10 1H 20 11

20 03

FY 07-10

20 09

10%

0% FY 99-07

11.4% 11.2% 10.7% 10.3% 20 08

5%

11.5%

20 07

10%

20 06

15%

20 04

CAGR of asset 20%

20 05

BOCHK(2388.HK)

Source: Company data

Chart 8: Asset growth breakdown of BOCHK in 2003-10 (sum of all items = asset/liability growth) 2003

2004

2005

2006

2007

2008

2009

2010

Cash and balances with banks and other financial institutions

2.6%

-4.1%

-9.0%

9.0%

5.8%

-0.5%

0.7%

21.0%

Placements with banks and other financial institutions maturing between one and twelve months

-0.3%

3.8%

2.3%

-8.4%

-0.3%

3.4%

-2.6%

-1.7%

1.0%

0.7%

0.9%

0.1%

2.1%

Financial assets at fair value through profit or loss

-1.3%

Investment in securities

1.9%

2.2%

6.8%

7.0%

-0.1%

-0.9%

1.9%

3.8%

Advances and other accounts

-1.1%

1.2%

3.7%

1.7%

7.3%

4.6%

5.0%

9.8%

Others

0.6%

2.6%

0.5%

1.5%

1.7%

0.0%

0.6%

2.0%

Total assets

3.7%

4.5%

4.3%

11.8%

14.9%

7.5%

5.7%

37.0%

Deposits and balances from banks and other financial institutions

1.7%

-1.0%

0.9%

1.1%

1.4%

2.9%

1.0%

19.4%

4.4%

0.2%

8.3%

11.7%

0.9%

3.7%

16.7% 0.8%

Deposits from customers Hong Kong SAR currency notes in circulation

0.3%

0.5%

-0.3%

0.3%

-0.2%

0.1%

0.4%

Others

1.4%

-0.2%

2.3%

2.7%

2.6%

5.3%

-1.1%

2.7%

Total liabilities

3.5%

3.7%

3.1%

12.4%

15.5%

9.3%

4.1%

39.5%

Source: Company, BOCOM Int'l

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Page 9

30 December 2011

WHB

BOCHK’s market share in terms of total loans among authorized institutions

10% 0% 20 FY 0 0 20 FY 0 1 20 FY 0 2 20 FY 0 3 20 FY 0 4 20 FY 0 5 20 FY 0 6 20 FY 0 7 20 FY 0 8 20 FY 0 9 20 10

20 03

-10%

14.3%

FY

-20%

15.3% 14.9%

20 09

20%

16.0%

15.7% 15.2% 15.1% 14.6% 14.2%

20 1 1H 0 20 11

16.5% 16.0% 15.5% 15.0% 14.5% 14.0%

20 08

BEA CHB

20 07

HSB DSF

20 06

BOC(HK) DSB 40% Loan growth 30%

Chart 10: Market share in terms of loan among HK authorized institutions since 2003

20 05

Chart 9: Peer comparison of loan growth

Faster expansion of RMB investment channels is key to outperformance

20 04

BOCHK(2388.HK)

Source: Bloomberg

Source: Bloomberg

Chart 11: Peer comparison of deposit growth

Chart 12: Market share in terms of deposits among HK authorized institutions since 2003 WHB

1H

20 11

10 20

09

08

20

07

20

20

06 20

05 20

04

20

01 20

FY

20 FY 00 20 FY 01 20 FY 02 20 FY 03 20 FY 04 20 FY 05 20 FY 06 20 FY 07 20 FY 08 20 FY 09 20 10

14% 12% 10%

17.9% 16.9% 18.1% 15.6% 16.4% 15.0% 13.5% 13.2% 15.3% 14.7% 13.2%

03

20% 18% 16%

Market share in terms of deposits among HK authorized institutions

02

BEA CHB

20

HSB DSF

20

BOC(HK) DSB 60% Deposit 50% growth 40% 30% 20% 10% 0% -10%

Source: Company, Wind

Source: Company, Wind

Chart 13: Rapidly rising share of RMB deposits in the total deposits of BOCHK

Chart 14: BOCHK’s share in the RMB deposit market

RMB

120%

USD

HKD

EURO

JPY

GBP

100% 80% 60%

67.0%

63.9%

59.6%

55.2%

18.0% 15.2%

19.8%

2010

2011H

40% 20% 0%

18.8% 4.6% 2009

20.4% 6.4% 2010H

BOCHK’s share in the RMB deposit market

Other

18.9%

Source: Company Download our reports from Bloomberg: BOCM〈enter〉

60% 50% 40% 30% 20% 10% 0%

54.3%

55.4% 42.2% 32.8%

2009

2010H

2010

2011H

Source: Company, HKMA Page 10

30 December 2011

500

Source: HKMA

14.5%

14%

13.3%

13%

13.4%

13.5%

12.9% 12.7%

12%

20 1 20 0-0 10 7 20 -0 1 20 0-08 10 9 20 -1 1 20 0-10 1 20 0-11 1 2 20 1-0 1 1 20 1-0 1 20 1-02 1 20 1-03 1 20 1-04 11 5 20 -0 1 20 1-06 11 7 20 -0 1 8 20 1-0 11 9 -1 0

0

15.4%

1H 20 11

1000

15%

20 10

1500

16%

BOCHK’s market share in non-RMB deposits among the authorized institutions

20 09

2000

Volume of RMB remittance in HK related to cross-border trade & 1600% 1400% settlement YoY growth 1200% 1000% 800% 600% 400% 200% 0%

20 08

RMB 100mn

20 05

2500

Chart 16: BOCHK’s market share in non-RMB deposits among the authorized institutions

20 07

Chart 15: Volume and growth of RMB remittance in HK related to cross-border trade & settlement

Faster expansion of RMB investment channels is key to outperformance

20 06

BOCHK(2388.HK)

Source: Company, HKMA

5.

Earnings CAGR in 06-10 close to peer average

BOCHK’s earnings CAGR in 2006-10 was close to the average of listed peers, but outpaced the industry average in 2007-10. However, dragged by interest margin contraction, its overall profitability is still below the level in 2006-08, while its profit growth lagged behind asset growth.

Chart 17: Comparison of earnings growth of HK-listed banks since 2003 BOC(HK) WHB CHB Earnings growth

600% 400%

HSB DSB

BEA DSF

200% 0% -200%

FY FY FY FY FY FY FY FY FY FY FY 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Bloomberg

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Page 11

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 18: Earnings growth breakdown of BOCHK, 2003-10 (sum of all items = earnings growth rate) Net interest income

2,003

2,004

2,005

2,006

2,007

2,008

2,009

2,010

-5.9%

-9.7%

12.2%

12.6%

12.7%

2.1%

-6.7%

2.4%

-1.7%

3.6%

9.1%

-3.0%

4.0%

1.6%

11.9%

8.0%

-6.9%

5.6%

-3.8%

2.5%

-0.2%

-1.0%

-2.3%

6.3% 0.0%

Net fee and commission income Net insurance premium income Net gain on investment in securities

1.4%

Other operating income

1.1%

-23.5%

1.1%

-0.7%

1.6%

-0.6%

-0.2%

Total operating income

-4.8%

-8.1%

35.8%

29.8%

31.2%

-9.4%

0.3%

6.5%

Contribution of insurance benefits and claims

0.00%

0.00%

-21.20%

-12.60%

-3.32%

3.09%

1.75%

-0.89%

Contribution of provisions

6.87%

20.30%

4.46%

-6.28%

-16.20%

-43.47%

108.26%

-3.46%

Contribution of operating expenditure

5.36%

8.50%

6.54%

-1.05%

-2.68%

-27.00%

150.83%

18.63%

Contribution of non-operating income

0.25%

43.27%

-9.82%

-6.06%

2.57%

-1.87%

48.94%

-2.71%

Contribution of tax

9.46%

-14.38%

-1.47%

-0.77%

-0.86%

-2.31%

63.82%

-0.93%

Earnings growth

17.2%

49.6%

14.3%

3.1%

10.7%

-81.0%

373.9%

17.1%

Source: Company, BOCOM Int’l

Chart 19: Earnings growth of HK-listed banks 05-10 earnings CAGR

06-10 earnings CAGR

07-10 earnings CAGR

08-10 earnings CAGR

BOC(HK)

3.6%

3.7%

1.6%

120.1%

09-10 earnings growth 16.3%

HSB

5.6%

5.5%

-6.5%

2.9%

13.5%

BEA

9.0%

5.3%

0.6%

940.7%

62.2%

WHB

3.8%

-0.5%

-7.1%

18.3%

34.9%

DSB

1.9%

-2.7%

10.3%

138.6%

78.8%

DSF

-0.3%

-7.9%

-1.4%

207.8%

60.7%

CHB

3.7%

-1.4%

-1.9%

180.3%

105.5%

Total

4.7%

3.7%

-2.2%

44.2%

22.2%

Source: Bloomberg

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Page 12

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

2. Profitability only second to HSB’s; profit enhancement needs more RMB investment channels 1.

High ROA & ROE driven by lower cost-to-income ratio

In terms of ROE and ROA, BOCHK ranks in the top 3 among the local banks, only second to HSB. This is mainly due to the economies of scale and lower cost-toincome ratio brought by its extensive network and resources. BOCHK ranks 3rd-4th in income/asset ratio and after-provision income/asset ratio, but it ranks 2nd in ROA. It also ranks 2nd in ROE, as it has the highest asset/equity ratio.

BEA DSF

FY

19 FY 99 20 0 FY 0 20 FY 01 20 FY 02 20 FY 03 20 0 FY 4 20 FY 05 20 FY 06 20 FY 07 20 0 FY 8 20 FY 09 20 10

40 35 30 25 20 15 10 5 -

HSB DSB

Source: Bloomberg

ROA(%)

3.5 3.0 2.5 2.0 1.5 1.0 0.5 -

BOC(HK) WHB CHB

HSB DSB

BEA DSF

19 F Y 99 20 F Y 00 20 F Y 01 20 F Y 02 20 F Y 03 20 F Y 04 20 F Y 05 20 F Y 06 20 F Y 07 20 F Y 08 20 F Y 09 20 10

BOC(HK) WHB CHB

ROE(%)

Chart 21: ROA of HK-listed banks

FY

Chart 20: ROE of HK-listed banks

Source: Bloomberg

Chart 22: Profitability breakdown of HK-listed banks (2010) Net interest income /total assets

Fee & commission income /total assets

Operating income /total assets

1.13%

0.42%

HSB

1.56%

BEA

1.41%

WHB

1.66%

DSB

1.48%

DSF CHB

BOC(HK)

Provisions /total assets

Afterprovision income /total assets

ROA

Assets/SH’s equity

ROE

2.14%

0.02%

2.12%

1.13%

14.04

14.77%

0.53%

3.75%

-0.04%

3.80%

1.71%

13.10

22.57%

0.55%

2.08%

-0.05%

2.14%

0.87%

10.98

10.61%

2.07%

0.03%

2.04%

1.06%

11.14

12.13%

0.29%

1.84%

-0.07%

1.91%

0.88%

9.73

8.84%

1.53%

0.25%

3.28%

-0.07%

3.35%

0.76%

8.09

7.88%

1.10%

0.32%

1.68%

-0.02%

1.70%

0.66%

11.29

7.47%

Source: Bloomberg, BOCOM Int’l

Download our reports from Bloomberg: BOCM〈enter〉

Page 13

BOCHK(2388.HK)

30 December 2011

2.

Faster expansion of RMB investment channels is key to outperformance

Industry average NIM, but more stable than peer avg.

Prior to 2006, BOCHK’s interest margin was rather low relative to peers. Since 2006, its interest margin has improved, though still belonging to the mid/lower quartile. Nevertheless, its interest margin has remained stable throughout various economic cycles. The lower interest margin is a result of its prudent operating style, such as a cautious approach to lending and a lower risk appetite in bond investments, which led to a lower yield on interest-earning assets. Its yield on interest-earnings assets is only higher than Chong Hing Bank’s. The rapid growth of RMB deposits and narrowing of investment channels since 2009 have also affected interest margins. The competition for deposits in HK has become much more intense since early 2010. Composite interest rate, a gauge of the average liability cost of banks in HK, stood at 0.43% as at Oct 11, similar to the level in end-08, and recovering from the trough of 0.11% at end-09. BOCHK’s average deposit cost has moved in tandem with the industry level, though with much less volatility, thanks to its higher-thanindustry-average ratio of demand deposit. However, with the rising ratio of time deposit in RMB deposits (mainly corporate deposits), BOCHK’s time deposit ratio increased in mid-2010, though it remains lower than the industry average. Net interest margin (“NIM”) has trended down since 2007, due not only to rising deposit cost, but also to the lower interest margin of RMB clearing business. If excluding this effect, BOCHK’s interest margin trend remains relatively stable in the long term. With more RMB investment channels becoming available and more RMB capital being invested in loan and bond assets, we see some room for NIM recovery, though this will also depend on the pace of policy liberation. We expect NIM to edge up in 2012 from the level in 2011, driven by rising interest rates since year beginning and the faster repricing pace in loans than that of deposits.

Chart 23: Trend of HK composite interest rate Composit interest rate

0.5% 0.4% 0.3% 0.2% 0.1% 0.0%

J-09 A-09 J-09 O-09 J-10 A-10 J-10 O-10 J-11 A-11 J-11 O-11 Source: HKMA, BOCOM Int’l; The composite interest rate is a weighted average interest rate of all Hong Kong dollar interest bearing liabilities on the books of banks.

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Page 14

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 24: Yield on interest-earning assets and cost of interest-bearing liabilities of BOCHK 2007

2008H1

2008H2

2008

2009H1

2009H2

2009

2010H1

2010H2

2010

2011H1

Balances and placements with banks and other financial institutions

4.01%

2.53%

1.82%

2.11%

1.55%

0.91%

1.21%

0.95%

1.15%

1.07%

1.21%

Debt securities investments

4.92%

4.49%

4.05%

4.27%

2.62%

2.30%

2.46%

2.28%

2.20%

2.24%

2.36%

Loans and advances to customers

5.45%

3.68%

4.00%

3.83%

2.37%

2.07%

2.22%

2.00%

2.02%

2.01%

2.02%

3.73%

2.82%

3.05%

2.92%

1.09%

1.17%

1.14%

1.26%

1.48%

1.37%

1.74%

Total interest-earning assets

4.91%

3.67%

3.35%

3.51%

2.25%

1.86%

2.05%

1.88%

1.85%

1.87%

1.80%

Deposits and balances from banks and other financial institutions

3.38%

2.04%

1.80%

1.91%

0.78%

0.63%

0.70%

0.58%

0.87%

0.76%

0.89%

Current, savings and fixed deposits

3.27%

1.85%

1.46%

1.65%

0.39%

0.19%

0.28%

0.27%

0.41%

0.34%

0.53%

Certificates of deposit issued

3.58%

2.81%

5.39%

3.73%

4.07%

4.04%

4.06%

3.91%

2.90%

3.40%

2.10%

1.68%

1.88%

2.11%

Other interest-bearing liabilities

2.92%

2.23%

4.11%

3.08%

0.24%

0.13%

0.19%

0.31%

0.35%

0.33%

0.40%

Total interest-bearing liabilities

3.26%

1.88%

1.58%

1.73%

0.52%

0.30%

0.41%

0.35%

0.50%

0.44%

0.66%

Loan-deposit spread

2.18%

1.83%

2.54%

2.18%

1.98%

1.88%

1.94%

1.73%

1.61%

1.67%

1.49%

NIS

1.65%

1.79%

1.77%

1.78%

1.73%

1.56%

1.64%

1.53%

1.35%

1.43%

1.14%

NIM

2.07%

2.03%

1.97%

2.00%

1.79%

1.61%

1.69%

1.58%

1.42%

1.49%

1.21%

Adjusted NIM * (adjusted for clearing bank function)

2.10%

2.10%

1.74%

1.64%

1.55%

1.59%

1.48%

Other interest-earning asset

Subordinated liabilities

2.07%

Source: Company

Chart 25: Half-yearly NIM and NIS since 2008

2011H1

2010H2

2010H1

2009H2

2009H1

2008H1

2.2% 2.0% 1.8% 1.6% 1.4% 1.2% 1.0%

2008H2

NIS NIM Adjusted NIM*(Excluding RMB clearing business)

Source: Company

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Page 15

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 26: NIM and NIS since 1999 NIS NIM 2.07% 1.98% 1.93%2.06% 1.95% 2.00% 1.90% 1.82% 1.72% 1.69% 1.55% 1.49%

1

20 11 H

20 10

20 09

20 08

20 07

20 06

20 05

20 04

20 03

20 02

20 01

1.21%

20 00

19 99

2.2% 2.0% 1.8% 1.6% 1.4% 1.2% 1.0%

Source: Company

Chart 27: NIM of HK-listed banks HSB DSF

BEA CHB

WHB

6%

BOC(HK) WHB CHB

HSB DSB

BEA DSF

5% 4% 3% 2% 1% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

FY

19 FY 99 20 FY 00 20 FY 01 20 FY 02 20 FY 03 20 FY 04 20 FY 05 20 FY 06 20 FY 07 20 FY 08 20 FY 09 20 10

4.0 3.5 3.0 2.5 2.0 1.5 1.0

BOC(HK) DSB NIM

Chart 28: Comparison of yield on interestearning assets of HK-listed banks

Source: Bloomberg

Source: Bloomberg

Chart 29: Time deposit ratio of HK banks

Chart 30: BOCHK’s time deposit ratio is lower than the industry level

Proportion of time deposit for HK banking industry

D -8 D 0 -8 D 2 -8 D 4 -8 D 6 -8 D 8 -9 D 0 -9 D 2 -9 D 4 -9 D 6 -9 D 8 -0 D 0 -0 D 2 -0 D 4 -0 D 6 -0 D 8 -1 0

90% 80% 70% 60% 50% 40% 30%

Source: Bloomberg

Download our reports from Bloomberg: BOCM〈enter〉

70% 65% 60% 55% 50% 45% 40% 35% 30%

Proportion of time deposit for HK banking industry Proportion of time deposit for BOCHK 64.2% 59.1%

59.8% 46.4% 47.8% 33.6%

2007

2008

2009

45.8% 41.7% 2010

47.8% 46.2%

1H2011

Source: Bloomberg

Page 16

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 31: Deposit structure of BOCHK 2007

2008

2009

2010

1H2011

4.1%

4.4%

6.0%

5.3%

5.0%

Demand deposits and current accounts －Corporate －Personal

1.0%

1.3%

1.7%

1.5%

1.3%

5.1%

5.7%

7.7%

6.9%

6.4%

－Corporate

9.6%

14.3%

16.8%

15.4%

15.2%

－Personal

26.3%

32.2%

41.9%

36.0%

32.1%

35.9%

46.5%

58.7%

51.4%

47.4%

－Corporate

21.6%

18.5%

13.1%

22.9%

27.5%

－Personal

37.5%

29.3%

20.4%

18.8%

18.7%

59.1%

47.8%

33.6%

41.7%

46.2%

100.0%

100.0%

100.0%

100.0%

100.0%

Sub-total Savings deposits

Sub-total Time, call & notice deposits

Sub-total Total Demand deposits and current accounts

5.1%

5.7%

7.7%

6.9%

6.4%

Savings deposits

35.9%

46.5%

58.7%

51.4%

47.4%

Sub-total of demand deposits

40.9%

52.2%

66.4%

58.3%

53.8%

Time, call & notice deposits

59.1%

47.8%

33.6%

41.7%

46.2%

100.0%

100.0%

100.0%

100.0%

100.0%

Corporate deposits

35.2%

37.3%

35.9%

43.6%

47.8%

Personal deposits

64.8%

62.7%

64.1%

56.4%

52.2%

100.0%

100.0%

100.0%

100.0%

100.0%

Total

Total

Source: BOCOM Int’l

3. Economies of scale and lower cost-to-income ratio due to its large and stable branch network BOCHK has a rather low cost-to-income ratio relative to other banks in HK, similar to HSB’s but below those of other HK-listed banks. This is mainly because: 1) Having the largest network gives BOCHK economies of scale; 2) Its network size has remained stable with small decreases in recent years. It is not under pressure to open new branches, while its staff size and cost have stayed stable. With its unique edge in attracting RMB deposits, BOCHK can achieve rapid balance sheet growth without expanding its network, thus further enhancing its cost-to-income ratio. This is evidenced by the fact that its cost-to-income ratio was lower than HSB’s in 1H11, reversed from the situation in the preceding years. We have compared BOCHK with the similar-sized BEA and HSB. BEA’s network size is only second to BOCHK’s and HSB’s, but has a much higher cost-to-income ratio, due to BEA’s faster network and staff expansion.

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Page 17

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 32: Peer comparison of cost-to-income ratio, 2009-present 2009

100%

2010H1

2010

2011H1

80% 60% 40% 20% CHB

DSF

DSB

WHB

BEA

HSB

BOC(HK)

0%

Source: Companies

Chart 33: Staff growth comparison of BOCHK, HSB and BEA BOCHK

25%

BEA

HSB

50

20%

40

15%

BOCHK

10 thousand

BEA

HSB

30

10%

20

5%

10

0% -5%

Chart 34: Per capita expenditure of BOCHK, HSB and BEA

2007

2008

2009

2010

0

-10%

2009

Source: Company

2010

Source: Company

3. Balanced business structure and prudent operating style BOCHK has a relatively balanced loan structure with equal focus on corporate and personal businesses, while its exposure to property loan is lower than the industry average and still on the decrease. Also, its income structure is more balanced than peers’. The balanced business structure is a core contributor to BOCHK’s earnings stability throughout various cycles.

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Page 18

BOCHK(2388.HK)

30 December 2011

1.

Faster expansion of RMB investment channels is key to outperformance

Equal focus on corporate and personal businesses

BOCHK has a balanced revenue mix. Personal banking accounts for 20-30% while corporate banking accounts for 30-40%. The weighting of treasury business is more volatile, averaging at around 20-30%. While its large network provides advantage in developing personal banking, the intense competition in HK means limited room for BOCHK, the 2nd largest local bank, to grow personal business. On the other hand, a proactive approach in developing corporate banking should help enhance its profitability in an economic up-cycle. Other HK-listed banks have higher exposure to personal banking (over 70% for the HK businesses of HSB and WHB, and over 50% for the HK businesses of BEA).

Chart 35: Segmental breakdown of BOCHK’s pre-tax profit 300%

Personal banking Insurance

200%

-100%

Treasury

135%

100% 0%

Corporate banking Other

40% 30%

34% 43%

120%

35% 27%

35% 24%

31% 19%

2006

2007

2008

2009

2010

2011H

-200% Source: Company, BOCOM Int’l

Chart 36: Income breakdown of BOCHK (2010) BOCHK（2010） Eliminati Insuranceons, -6% , 3% Other, 7%

Personal banking, 40%

Treasury, 22% Corporate banking, 34% Source: Bloomberg, BOCOM Int’l Download our reports from Bloomberg: BOCM〈enter〉

Chart 37: Income breakdown of HSB (2010)      HSB（2010 ）      Treasury, 7%      Commerc ial Banking, 13%

Corporat e Banking, 5%

    Other: Sharehol der Funds Manage ment &

    Intersegment Eliminati on, -1%      Personal Financial Services, 73%

Source: Bloomberg, BOCOM Int’l Page 19

BOCHK(2388.HK)

30 December 2011

Chart 38: Income breakdown of the HK business of BEA (2010)     

Faster expansion of RMB investment channels is key to outperformance

Chart 39: Income breakdown of the HK business of WHB (2010)     

Treasury Markets, 6%

BEA-HK（2010）     Wealth Manage ment, 10%      Corporat e Banking, 30%

Treasury Markets, 8%

WHB-HK（2010 ）      Corporate Banking, 13%

     Personal Banking, 54%

Source: Bloomberg, BOCOM Int’l

     Personal Banking, 79% Source: Bloomberg, BOCOM Int’l

Chart 40: Breakdown of operating income Item Net interest income Net fee and commission income Net insurance premium income Net trading gain/(loss) Net gain on financial instruments designated at fair value through profit or loss Net gain on investment in securities Other operating income Total operating income Ratio of non-interest income

2007

2008H

2008

2009H1

2009

2010H1

2010

2011H1

53% 17% 23% 3% 2%

57% 16% 26% 7% -8%

61% 16% 18% 6% -1%

65% 21% 16% 6% -10%

54% 20% 23% 4% -2%

55% 21% 17% 0% 4%

53% 20% 18% 4% 2%

53% 21% 18% 4% 2%

0% 2% 100%

1% 2% 100%

0% 2% 100%

0% 2% 100%

0% 1% 100%

2% 2% 100%

2% 1% 100%

2% 1% 100%

47.1%

43.1%

39.4%

35.4%

46.2%

45.4%

47.2%

47.3%

Source: Company

2.

Relatively balanced loan mix

BOCHK has a balanced loan mix relative to its listed peers. The ratio of industrial, commercial and financial (“ICF”) loans is trending down, mainly due to the decrease in the ratio of property investment loan from 16% in 2007 to 10.5% at endJun 11. Still, property investment loan continues to occupy the biggest portion of ICF loans. As at the end of Jun 11, property development loan and property investment loan accounted for an aggregate 15.1% of BOCHK’s ICF loans, lower than the ratios of the listed peers, and below the 26.9% ratio of construction and property loan of the authorized institutions. The ratio of individual loans edged down to 30.1% in mid-2011, a tad below the 33.5% ratio of the authorized institutions in the same period. Among individual loans, the ratio of mortgage loan accounts for a steadily high ratio of around 25% (excluding loans under the Home Ownership Scheme and other home purchase schemes). BOCHK has a stable market share of around 20% in mortgage loan (excluding loans under the Home Ownership Scheme and other home purchase schemes) among the licensed banks in HK. Download our reports from Bloomberg: BOCM〈enter〉

Page 20

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

The ratio of trade finance is 8.9%, lower than that of HSBC, HSB and WHB, and around the middle of the peers’ range. The ratios of trade finance loan and loans for use outside HK are on the rise. In particular, the ratio of loans for use outside HK rose from 20.1% at end-07 to 28.2% at end-10, then dipped to 26.5% as at the end of Jun 2011. BOCHK’s ratio of loans for use outside HK is around the middle of the peers’ range.

Chart 41: Loan structure of BOCHK Advances to customers Loans for use in Hong Kong Industrial, commercial and financial －Property development －Property investment －Financial concerns －Stockbrokers －Wholesale and personal trade －Manufacturing －Transport & transport equipment －Recreational activities －Information technology －Others Individuals －Loans for the purchase of flats in Home Ownership Scheme and other schemes －Loans for purchase of other residential properties －Credit card advances －Others Total loans for use in Hong Kong Trade finance Loans for use outside Hong Kong Gross advances to customers

2007-12-31

2008-6-30

2008-12-31

2009-6-30

2009-12-31

2010-6-30

2010-12-31

2011-6-30

40.8% 4.4% 16.0% 3.0% 0.1% 3.3% 3.5% 5.1% 0.0% 0.5% 5.1% 33.2%

40.9% 4.0% 15.2% 2.8% 0.0% 3.4% 3.4% 4.7% 0.0% 1.7% 5.5% 31.1%

44.9% 4.8% 15.3% 2.6% 0.7% 4.3% 4.0% 5.3% 0.1% 0.9% 6.9% 31.1%

41.0% 4.3% 15.5% 2.5% 0.0% 3.9% 3.6% 4.7% 0.0% 1.3% 5.1% 32.1%

43.5% 4.5% 14.1% 2.3% 0.1% 3.7% 4.2% 5.2% 0.1% 3.0% 6.5% 30.5%

44.9% 5.5% 12.2% 3.5% 0.2% 4.8% 4.9% 4.6% 0.1% 2.6% 6.5% 28.1%

33.7% 4.8% 11.0% 1.5% 0.1% 4.0% 2.5% 3.8% 0.1% 2.3% 3.8% 29.4%

34.5% 4.6% 10.5% 1.4% 0.2% 4.8% 2.5% 3.9% 0.1% 2.2% 4.2% 30.1%

3.4%

3.0%

2.7%

2.9%

2.3%

2.0%

2.0%

1.7%

25.8%

24.4%

24.8%

25.3%

24.7%

23.0%

24.0%

25.0%

1.4% 2.6% 74.0% 5.9% 20.1% 100.0%

1.2% 2.5% 72.0% 6.7% 21.4% 100.0%

1.4% 2.2% 76.0% 5.3% 18.8% 100.0%

1.4% 2.5% 73.1% 5.3% 21.6% 100.0%

1.4% 2.1% 74.1% 5.7% 20.2% 100.0%

1.2% 1.9% 73.0% 6.9% 20.1% 100.0%

1.3% 2.0% 63.1% 8.7% 28.2% 100.0%

1.3% 2.2% 64.6% 8.9% 26.5% 100.0%

Source: Company, BOCOM Int’l

Chart 42: Ratios of individual loan of authorized institutions in HK 50%

Chart 43: Ratios of construction and property loan of authorized institutions in HK 30%

Professional and private individuals

Building and construction, property

25%

40%

20%

30%

15% 20%

10%

10%

5% 0%

0% J-65

D-72

J-80

D-87

J-95

D-02

J-10

Source: HKMA

Download our reports from Bloomberg: BOCM〈enter〉

J-65

D-72

J-80

D-87

J-95

D-02

J-10

Source: Bloomberg, BOCOM Int’l

Page 21

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 44: Peer comparison of loan structure (2011H) Advances to customers Loans for use in Hong Kong Industrial, commercial and financial －Property development －Property investment －Financial concerns －Stockbrokers －Wholesale and personal trade －Manufacturing －Transport & transport equipment －Recreational activities －Information technology －Others Individuals －Loans for the purchase of flats in Home Ownership Scheme and other schemes －Loans for purchase of other residential properties －Credit card advances －Others Total loans for use in Hong Kong Trade finance Loans for use outside Hong Kong Gross advances to customers

HSBC

BOCHK

HSB

BEA

WHB

DSB

CHB

44.4% 6.3% 17.1% 1.1% 0.2% 7.1% 3.3% 2.3% 0.1% 0.5% 6.3% 32.6%

34.5% 4.6% 10.5% 1.4% 0.2% 4.8% 2.5% 3.9% 0.1% 2.2% 4.2% 30.1%

39.4% 6.1% 20.6% 0.7% 0.0% 2.6% 3.2% 1.4% 0.2% 0.4% 4.4% 29.9%

27.4% 3.2% 13.6% 3.1% 0.3% 2.2% 1.5% 1.5% 0.1% 0.2% 1.9% 14.8%

33.1% 1.9% 14.3% 2.0% 1.4% 2.1% 1.6% 6.3% 0.1% 0.0% 3.4% 24.0%

34.0% 0.8% 18.6% 1.4% 0.1% 2.2% 2.2% 5.1% 0.4% 0.0% 3.3% 30.6%

63.9% 4.9% 20.0% 6.3% 2.9% 3.9% 4.1% 2.3% 0.0% 0.0% 19.4% 21.1%

2.2%

1.7%

2.9%

0.5%

2.5%

1.5%

1.4%

24.1%

25.0%

20.9%

9.1%

15.8%

19.2%

15.4%

3.0% 3.3% 77.0% 15.0% 8.0% 100.0%

1.3% 2.2% 64.6% 8.9% 26.5% 100.0%

3.2% 2.9% 69.3% 15.9% 14.8% 100.0%

1.0% 4.3% 42.2% 2.5% 55.2% 100.0%

0.2% 5.4% 57.2% 10.3% 32.5% 100.0%

4.8% 5.2% 64.6% 7.0% 28.4% 100.0%

0.2% 4.1% 85.0% 2.7% 12.3% 100.0%

Source: Company, BOCOM Int’l

3.

High ratio of non-interest income

BOCHK’s non-interest income ratio of nearly 50% is only lower than HSB and Dah Sing Financial Holdings among listed peers. The ratio of net fee and commission income to operating income is rising, from 13.3% in 2006 to 19.8% in 2010. The contribution of securities income to net fee and commission income was high at over 40%, though it has fallen somewhat since 2010 due to the rapid growth of credit card, loan commission and insurance income, but is still around 1/3.

Chart 45: Breakdown of fee and commission income Securities brokerage －Stock －Bond Credit cards Loan commissions Bills commission Payment services Insurance Currency exchange Trust services Safe deposit box Funds distribution Others Total

2007H

2007

2008H

2008

2009H

2009

2010H

2010

2011H

40.4% 38.5% 1.9% 13.7% 3.8% 7.9% 6.4% 2.5% 2.1% 1.9% 2.9% 0.0% 18.4% 100.0%

46.1% 43.5% 2.6% 12.6% 4.2% 7.2% 5.7% 1.9% 2.3% 1.9% 2.2% 0.0% 16.0% 100.0%

39.2% 33.5% 5.7% 17.2% 6.8% 8.6% 6.2% 3.4% 2.8% 2.3% 2.5% 4.1% 6.8% 100.0%

36.6% 33.0% 3.6% 19.6% 7.1% 9.5% 6.7% 2.9% 2.8% 2.4% 2.6% 3.0% 6.7% 100.0%

41.9% 41.8% 0.1% 18.2% 10.2% 8.0% 5.8% 3.1% 2.2% 2.1% 2.5% 1.0% 4.8% 100.0%

43.1% 42.6% 0.5% 17.7% 10.8% 7.3% 5.8% 2.5% 2.5% 2.1% 2.2% 1.1% 4.8% 100.0%

33.7% 33.6% 0.1% 20.2% 13.9% 8.3% 6.1% 4.9% 2.8% 2.2% 2.3% 1.5% 4.2% 100.0%

35.2% 34.6% 0.6% 21.1% 10.1% 7.9% 6.0% 5.9% 3.5% 2.2% 2.1% 1.7% 4.2% 100.0%

27.3%

21.9% 10.8% 7.7% 5.6% 11.2% 4.1% 2.3% 2.0% 3.2% 3.8% 100.0%

Source: Company, BOCOM Int’l Download our reports from Bloomberg: BOCM〈enter〉

Page 22

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 46: Non-interest income ratios of HK-listed banks BOC(HK) 80% 60%

HSB

BEA

DSB DSF Non-interest income/Net revenue

WHB

CHB

40% 20% 0% -20%

FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010

Source: Bloomberg

Chart 47: Net fee and commission income ratios of HK-listed banks BOC(HK) HSB BEA DSB 35% Net commission and fee income/Net revenue 30% 25% 20% 15% 10% 5% 0% FY 2006

FY 2007

FY 2008

DSF

CHB

FY 2009

FY 2010

Source: Bloomberg

4.

Decreasing risk appetite of securities investments

As at the end of Jun 2011, securities investments (including financial assets at fair value through profit or loss) accounted for 24.1% of total assets, down from 24.1% at the end of 2007, mainly due to a sharp cut in the allocation to corporate bonds. Among BOCHK’s securities investments, the ratio of securities issued by corporations fell from 26.5% at end-2006 to 8% as at the end of Jun 2011, while the ratio of sovereign securities climbed from 5.8% to 26.2% over the same period. 50% of BOCHK’s securities investments are in HK and the rest of the Asia-Pacific region, while the remaining 50% are invested half in Europe and half in the US. 90% of the European investments are in the UK, Germany, the Netherlands and Download our reports from Bloomberg: BOCM〈enter〉

Page 23

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

France. As at the end of Jun 2011, BOCHK’s exposure to debt securities issued by financial institutions of Ireland and Italy amounted to around HK$1bn. The Irish debt securities had matured and were repaid in July, while there are no signs of impairment for the Italian debt securities.

Chart 48: Breakdown of BOCHK’s securities investment, by issuer Government Public institution Bank and other financial institution Corporate

80% 60% 40% 20%

20 11 H

20 10

20 10 H

20 09

20 09 H

20 08

20 08 H

20 07

20 06

20 07 H

0%

Source: Bloomberg, BOCOM Int’l

5.

Above-peer CAR, further enhanced by adoption of FIRB

BOCHK’s capital adequacy ratio (“CAR”) is among the highest of the listed local banks. Since 2011, the company has adopted Foundation Internal Ratings-Based (“FIRB”) approach in its calculation of credit risk, mainly because of the decreased risk weighting of mortgage loans, which caused its total risk-weighted assets to fall 6.8% from the level as at the end of 2010 and further lifted its CAR. From 2007 to 1H10, BOCHK’s risk-weighted asset coefficient was kept stable at around 51%. Due to the adoption of FIRB, the risk-weighted asset coefficient fell to 35.1% as at the end of Jun 2011, indicating a significantly higher CAR from the end-2010 level. As at the end of Jun 2011, its core-CAR and CAR stood at 12.9% and 17.6%, up 1.58 ppts and 1.48 ppts, respectively from the levels at the end of 2010, and above its listed peers’.

Source: Company, BOCOM Int’l

Download our reports from Bloomberg: BOCM〈enter〉

2011H

B CH

D

D

15.6 16.94

SF

15.6

SB

16.1

12.6

B

B CH

SF D

SB D

B H W

A BE

SB H

BO C( H

K)

0

13.8

H

5

20 15 10 5 0

A

10.8

BE

10.9

SB

10

10.9

17.62

H

10.3

9.4

2010

CAR

K)

11.0

2011H

C( H

12.9

15

2010

BO

Tier 1 CAR

Chart 50: CAR of HK-listed banks

W

Chart 49: Core-CAR of HK-listed banks

Source: Company, BOCOM Int’l

Page 24

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 51: Peer comparison of risk-weighted asset coefficient BOC(HK) DSB RWA coefficient

70%

HSB DSF

BEA CHB

WHB

60% 50% 40% 30% 2004

2005

2006

2007

2008

2009

2010

2011H

Source: Company, BOCOM Int’l; HSB adopted FIRB in 2008

6.

Solid liquidity levels

BOCHK’s loan growth was slower than peers before 2007, but has gathered pace since 2008. Its deposit growth was also slower than peers’ before 2007, but has caught up since 2008, and reached a high level relative to peers in 2010. As at the end of Jun 2011, BOCHK’s loan-to-deposit ratio was 60.95%, which was low relative to peers. According to regulatory requirements, the average monthly liquidity ratio of authorized institutions must be above 25%. In 1H11, BOCHK’s average monthly liquidity ratio was 36.38% which, though lower than previous levels, was still above the regulatory requirement.

Chart 52: Loan-to-deposit ratio of BOCHK Loan to deposit ratio 57.81 56.74 57.66

60.98

64.02

59.69 60.95

60

Average liquidity ratio 50.92

50

51.66

42.47 41.74 39.7 40.18 37.81 38.77 36.38

40 30

Source: Company, BOCOM Int’l

Download our reports from Bloomberg: BOCM〈enter〉

20 11 H

20 10

20 10 H

20 09

20 09 H

20 08

20 08 H

20 07

20 11 H

20 10

20 10 H

20 09

20 08

20 07

20 09 H

20

20 08 H

70 65 60 55 50 45 40

Chart 53: Average liquidity ratio of BOCHK

Source: Company, BOCOM Int’l

Page 25

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 54: HKD and all currency loan-to-deposit ratios of HK financial institutions Hong Kong dollar

90

All currencies

80 70 60 50

J- 1 1

J- 1 0

J09

J08

J- 0 7

J- 0 6

J04

J05

40

Source: HKMA

Chart 55: Peer comparison of loan-to-deposit ratio

90 80

BOC(HK) DSB

HSB DSF

BEA CHB

WHB

Loan/deposit

70 60 50 40 FY

FY

FY

FY

FY

FY

FY

FY

FY

FY

FY

FY

FS1

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Company

4.

Asset quality largely improved in recent years

BOCHK is a merger of several state-owned banks with poor asset qualities. Its NPL ratio prior to listing was higher than the industry average. Despite the fact that the bank sold HK$26.915bn of loans to Zhong Gang, a wholly-owned subsidiary of BOC, in 1999, its NPL in late 1999 still stood at HK$50.49bn, representing a NPL ratio of 15.9% (industry average in late 1999 was 10.14%). BOCHK sold another HK$11.4bn of loans to BOC in 2001, bringing its NPL down to 9.48% from 11.48%. It also wrote-off HK$10.435bn of impaired loans during the year. In June 2002, the bank sold another HK$11.4bn of loans to BOC. It collected HK$9.545bn of classified loans during the year. Download our reports from Bloomberg: BOCM〈enter〉

Page 26

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

The asset quality of BOCHK’s residential mortgage loans and credit card loans has been improving in recent years, helping the bank to achieve a NPL ratio lower than industry average. While the proportion of classified loans as of the end of 2008 increased 0.12ppts from that of 2007, the asset quality showed an improving trend since then. As of the end of June 2011, impaired loans only accounted for 0.05% of the total while classified loans represented only 0.1% of the total loans, much lower than the listed peers. The delinquency and restructure rate for residential mortgage loan was only 0.01% while credit card charge-off rate was 1.07%, both of which were the lowest since 2006. The bank’s provision coverage reached 350%, topping other listed peers. Meanwhile, the proportion of its portfolio provisions has been increasing from 70.4% in late 2009 to 85.9% in 2010. The figure stood at 89.9% in 1H11.

Chart 56: Balance and proportion of BOCHK’s impaired loans

Impaired loan Impaired loans/total customer loans

HK$ mn 1500

0.29% 1000

0.17%

0.3%

0.21% 0.20%

0.14%

0.12%

500

0.4%

0.2% 0.07%

0.05% 0.1%

0

0.0% 2007 2008H 2008 2009H 2009 2010H 2010 2011H

Source: Company

Chart 57: Proportion of BOCHK’s classified or impaired loans in 1999-2006

Chart 58: Proportion of BOCHK’s classified or impaired loans in 2006-1H2011

Classified loans/total customer loans

0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0%

15.90% 15% 11.50%

10% 10.60%

7.98% 5.82%

5%

2.95% 0% 1999

2000

2001

2002

2003

2004

1.28% 0.57%

2005

2006

Source: Company

Download our reports from Bloomberg: BOCM〈enter〉

0.57%

Classified loans/total customer loans

0.41%

0.46% 0.44% 0.37% 0.34% 0.34% 0.23% 0.14% 0.10%

20 0 20 6 07 H 20 07 20 08 H 20 0 20 8 09 H 20 09 20 10 H 20 1 20 0 11 H

20%

Source: Company

Page 27

30 December 2011

Source: Company

2.69%

2.40% 2.22% 2.14% 1.56%1.36%

2011H

2010

2009

2010H

1.07%

2009H

2011H

2010

2008H

2007

2007H

2006

0.0%

2009

0.1%

2010H

0.08% 0.07% 0.04% 0.05% 0.03%0.02% 0.01%

3.14% 2.44% 2.59%

2008

0.1%

Credit card loans: Charge-off rate

2008H

0.2%

0.15%

3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

2007

0.19%

2009H

0.2%

Residential mortgage loans: Delinquency and restructure rate

0.21%

2008

0.3%

Chart 60: Charge-off rate of credit card loans has been decreasing since 2009

2007H

Chart 59: Asset quality of residential mortgage loans improving

Faster expansion of RMB investment channels is key to outperformance

2006

BOCHK(2388.HK)

Source: Company

Chart 61: Classified loan ratio of HK-listed banks 2.5

BOC(HK) NPL ratio

HSB

BEA

WHB

DSB

DSF

CHB

2.0 1.5 1.0 0.5 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 2011H Source: Bloomberg

Download our reports from Bloomberg: BOCM〈enter〉

20 11 H

20 10

WHB

FY

20 09

FY

20 08

FY

FY 1 FY 999 2 FY 000 2 FY 001 2 FY 002 2 FY 003 2 FY 004 2 FY 005 2 FY 006 2 FY 007 2 FY 008 2 FY 009 20 1 20 0 11 H

Source: Companies

BEA CHB

20 07

2 -

20 06

4

FY

LLR/total loans

BOC(HK) HSB DSB DSF 500% Provision 400% coverage 300% ratio 200% 100% 0%

FY

WHB

20 05

6

BEA CHB

20 04

8

HSB DSF

FY

BOC(HK) DSB

Chart 63: Provision coverage ratios

FY

Chart 62: Loan-to-provision ratios

Source: Bloomberg, provision coverage ratio=LLR/NPL Page 28

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 64: Asset quality of BOCHK HK$m / %

2007

2008H

2008

2009H

2009

2010H

2010

2011H

Classified or impaired loans

1,803

1,607

2,138

1,774

1,769

1,317

867

706

Change in classified loans HoH

-196

531

-364

-5

-452

-450

-161

-10.9%

33.0%

-17.0%

-0.3%

-25.6%

-34.2%

-18.6%

Change in classified loans HoH% Proportion of classified or impaired loans Provision coverage ratio

0.44%

0.34%

0.46%

0.37%

0.34%

0.23%

0.14%

0.10%

76.8%

94.8%

107.6%

113.9%

128.3%

173.8%

266.6%

349.9%

Loan-to-provision ratio

0.34%

0.32%

0.50%

0.42%

0.44%

0.40%

0.38%

0.37%

0.03%

0.15%

-0.03%

0.02%

-0.03%

-0.01%

0.01%

72.7%

65.2%

68.7%

70.4%

77.6%

85.9%

89.9%

Credit cost Proportion of portfolio provision

72.5%

Source: Company, BOCOM Int’l

5. Development of RMB investment channels will be the key for an outperformance of BOCHK’s business BOCHK was appointed by the PBoC as the sole RMB Clearing Bank in HK. While RMB deposits grew rapidly in the HK market, the development of RMB investment channels lagged behind. Offshore RMB businesses of BOCHK, which are still at the early stage of development, include offering RMB clearing services and acting as participant bank. The growth of offshore RMB business will largely depend on China’s open-up policies. Assuming the NIM of BOCHK’s RMB deposits to be 0.4%-2.4%, the value of BOCHK’s RMB business will be HK$1.92-HK$11.50 per share. Taking reference to the current NIM, the NIM will more likely fall in the range of 1.2%-1.6%, corresponding to a value of HK$5.75-HK$7.67.

1. Offshore RMB business began to develop BOCHK was appointed as the sole RMB Clearing Bank in late 2003 and obtained authorization from PBoC in July 2010 to provide RMB cash settlement services to Taiwan. Offshore RMB business started to develop as China gradually opens up its market.

Download our reports from Bloomberg: BOCM〈enter〉

Page 29

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 65: Development of offshore RMB business 2003-12

PBoC appointed BOCHK as the sole RMB Clearing Bank outside the mainland China.

2004-02

Banks in HK offer RMB services including deposit taking, currency exchange, remittance, debit and credit cards. Mainland financial institutions may issue RMB bonds in Hong Kong

2007-07 2009-07

2010-02

2010-06

2010-07

2010-08 2010-12

2010-12

2011-01

The PBoC and other five supervisory units in the mainland China jointly issued the “Implementing Rules of the Administrative Measures for Piloting Cross-Border Trade Settlement in RMB” to formally launch crossborder RMB trade settlement pilot scheme in a 5 designated cities in the mainland including Shanghai and Shenzhen and certain offshore regions such as HK, Macau and the ASEAN. HKMA released “Elucidation of Supervisory Principles and Operational Arrangements Regarding RMB Business in HK” which enhanced operation efficiency and flexibility for HK and offshore RMB businesses and facilitated RMB trade and investments among enterprises. PBOC and the five supervisory units in the Mainland issued a notice on the extension of regions for the implementation of Pilot Scheme. Within the Mainland, the Pilot Scheme covered 20 provinces, autonomous regions and municipalities including Shanghai, Guangdong, Beijing, Fujian, Hubei, Jiangsu, Shandong, Sichuan, Tianjin, Zhejiang, Chongqing, Guangxi, Hainan, Heilongjiang, Inner Mongolia, Jilin, Liaoning, Tibet, Xinjiang and Yunnan in the Mainland. Outside the Mainland China, the coverage of the scheme has been expanded from Hong Kong, Macau and the ASEAN countries to all overseas countries and regions. PBOC and BOCHK signed a revised "Settlement Agreement on the Clearing of Renminbi Business", which expanded the scope of RMB business (RMB account opening, exchange, remittance and transfer) in Hong Kong and overseas, thus further facilitating the RMB investment and trade. The PBOC released "Circular on Matters Relevant to the Pilot Project for Investment in the Interbank Bond Market with Renminbi by Three Types of Organisations Such as Overseas Renminbi Clearing Banks”. PBOC and the five supervisory units in the Mainland issued a notice on the expansion of Pilot Import Enterprises for the Cross-border Trade Settlement in RMB scheme, in which the number of enterprises has increased from 365 to 67,359, providing a new opportunity for the Cross-border Trade Settlement in RMB scheme to develop further. HKMA released a notice on "Renminbi Cross-border Trade Settlement and Net Open Position" which provides further guidelines for the participating banks in Hong Kong to operate cross-border trade settlement related RMB business based on the local RMB market conditions. PBoC released the circular on "Administrative Measures for the Pilot RMB Settlement of Outward Direct Investment(ODI)", not only providing a guideline for the Financial Institutions both offshore and onshore to conduct Outward Direct Investment practice, but also supplying a platform for the RMB capital account projects to develop healthily and steadily.

Source: Company, BOCOM Int’l

2. Growth of RMB deposits in HK will slow down amid a slower economic growth and weaker expectations on RMB appreciation RMB deposits in HK observed rapid growth since 2H2010. As of the end of Oct 2011, RMB deposits reached RMB618.6bn, accounting for 10.3% of the total deposits. Most of the RMB capital could only generate return in the form of time deposits due to the lack of RMB investment channels. Most of the RMB capital were saved as time deposits in 2004 but the proportion of time deposits declined during 20052007 but the trend reversed in 2010. As of the end of Oct, time deposits accounted for 69.4% of the total deposits. Download our reports from Bloomberg: BOCM〈enter〉

Page 30

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Nonetheless, the growth of RMB deposits observed a slowing trend recently with the balance showing a MoM decrease in Oct, which could mainly be attributed to lower RMB deposit demand amid weaker expectations on RMB appreciation. The lower demand in RMB also led to a narrowing in the CNH-CNY spread. Customers tend to exchange RMB in HK when the CNH rate is higher. Meanwhile, the value of RMB is basically a reflection of China’s fundamental economy and the slower appreciation in RMB is a result of a slower economic growth. While RMB deposits will continue to climb as more appreciation could be expected in the midto-long term, the slower appreciation rate will lead to a slower growth in RMB deposits. We believe the development of investment channels will become the key factor determining the growth of RMB deposits in the mid-to-long term.

Chart 66: RMB deposits in HK grew faster since 2H2010 RMB deposits (bn yuan)

YoY growth

700 600 500 400 300 200 100 0

600% 500% 400% 300% 200% 100% 0% -100% F-04

M-05

A-06

N-07

F-09

M-10

A-11

Source: HKMA

Chart 67: RMB deposits accounted for more than 10% of the total deposits RMB deposits/ Total deposits

12% 10%

Chart 68: RMB time deposits grew rapidly since 2009 90%

Time deposits

70%

8% 6%

50%

4%

30%

2% M-05

A-06

N-07

F-09

M-10 A-11

Source: HKMA

Download our reports from Bloomberg: BOCM〈enter〉

F04 O -0 4 J-0 5 F06 O -0 6 J-0 7 F08 O -0 8 J-0 9 F10 O -1 0 J-1 1

10%

0% F-04

Demand deposits and savings

Source: HKMA

Page 31

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 69: Rapid growth in RMB-denominated bonds issuance but the total amount remains small RMB bn 50

RMB-denominated bond offerings in Hong Kong 40.1

40

CAGR:58.9%

30 20

10

12

2007

2008

16

10 0 2009

2010

Source: HKMA

3. ROA growth depends on the development of RMB investment channels BOCHK currently invests its RMB capital in the following three ways:
RMB clearing services – earning rate spread by depositing the RMB capital of participant banks to the PBoC.


Investing in the interbank bond market in China – but with limits.




Investing in offshore RMB bond market – again with quarterly limits.

As the sole RMB clearing bank, BOCHK will deposit the RMB deposits from participant banks to the Shenzhen Branch of PBoC, earning a rate spread of 9.1bps. Considering the counterparty risk arisen from participating banks’ deposits, BOCHK established custodian accounts in 2010, turning the interest income to fees from custody business. The fee rate is currently set at 9.1bps. In addition to RMB asset business, the enrichment of RMB products could also help expand BOCHK’s intermediary business but the potential would probably be rather limited. BOCHK is the largest Chinese dim sum bond issuer in HK, ranking 6th largest issuer in HK with a market share of 5.1%. However, given the fact that the bond market is not well-developed in HK, brokerage remains the main contributor of BOCHK’s fee income, though representing only less than 6% of the bank’s total revenue.

Download our reports from Bloomberg: BOCM〈enter〉

Page 32

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

4. Value of RMB business estimated to be roughly HK$5.75HK$7.67 per share Assuming that (1) market share of BOCHK’s RMB deposits will gradually decrease to 20% from 30%, (2) the net profit margin of its offshore RMB business is 70%, and (3) NIM of RMB deposits ranges between 0.4-2.4%, the value of BOCHK’s RMB business will be HK$1.92-HK$11.50 per share. Taking reference to the current NIM, the NIM will more likely fall in the range of 1.2%-1.6%, corresponding to a value of HK$5.75-HK$7.67.

Chart 70: BOCHK’s RMB business estimates RMB deposits in HK market (RMB100m)

2011E

2012E

2013E

2014E

2015E

2016E

2017E

2018E

2019E

2020E

6,423

9,177

12,111

14,421

17,066

20,106

23,524

27,361

31,660

34,784

42.9%

32.0%

19.1%

18.3%

17.8%

17.0%

16.3%

15.7%

9.9%

Growth rate Exchange rate

1.23

1.26

1.28

1.29

1.30

1.30

1.30

1.30

1.30

1.30

RMB deposits in HK market (HK$100m) BOCHK’s market share

7,901 30.0%

11,563 28.0%

15,502 27.0%

18,603 26.0%

22,100 25.0%

26,038 24.0%

30,464 23.0%

35,432 22.0%

41,000 21.0%

45,045 20.0%

RMB deposits of BOCHK (HK$100m)

2,370

3,238

4,186

4,837

5,525

6,249

7,007

7,795

8,610

9,009

Net profit margin

70%

Increase in net profit (HK$100m) NIM assumption 0.4%

7

9

12

14

15

17

20

22

24

25

0.8%

13

18

23

27

31

35

39

44

48

50

1.2%

20

27

35

41

46

52

59

65

72

76

1.6% 2.0%

27 33

36 45

47 59

54 68

62 77

70 87

78 98

87 109

96 121

101 126

2.4%

40

54

70

81

93

105

118

131

145

151

0.4%

3%

4%

6%

7%

7%

8%

9%

11%

12%

12%

0.8%

6%

9%

11%

13%

15%

17%

19%

21%

23%

24%

1.2%

10%

13%

17%

20%

22%

25%

28%

32%

35%

37%

1.6% 2.0%

13% 16%

18% 22%

23% 28%

26% 33%

30% 37%

34% 42%

38% 47%

42% 53%

47% 58%

49% 61%

2.4%

19%

26%

34%

39%

45%

51%

57%

63%

70%

73%

Dividend yield

62%

62%

62%

62%

62%

62%

62%

62%

62%

70%

Discount rate Perpetual growth rate

10% 2.5%

Corresponding to 2011E net profit NIM assumption

Contributions to intrinsic value/share (HK$) 0.4%

1.92

0.8%

3.83

1.2% 1.6%

5.75 7.67

2.0%

9.59

2.4%

11.50

Source: BOCOM Int’l Download our reports from Bloomberg: BOCM〈enter〉

Page 33

BOCHK(2388.HK)

30 December 2011

6.

Faster expansion of RMB investment channels is key to outperformance

Forecasts and valuations

1.

Earnings forecast

We estimate that the loan and asset growth of BOCHK will slow down in the next 3 years alongside with weaker economic and RMB deposit growth. NIM may expand due to expanding investment channels of RMB capital and rising interest rates. Proportion of classified loans and credit costs would probably rebound from their current low levels. Profit growths for 2011-2013 are estimated to be 24%/1.3%/14.9%, respectively.

Chart 71: Major assumptions for BOCHK’s profit forecast 2008

2009

2010

2011E

2012E

2013E

11.5%

11.8%

19.1%

17.5%

16.0%

15.0%

Interest-earning assets growth

8.3%

5.6%

38.3%

13.6%

14.8%

13.9%

Deposits growth

1.1%

4.9%

21.9%

16.0%

15.0%

14.0%

Interest-bearing liabilities growth

8.5%

4.6%

41.4%

14.4%

16.0%

14.8%

NIM

2.00%

1.66%

1.42%

1.26%

1.29%

1.30%

Growth of fees and commissions income

-17.5%

25.7%

8.2%

21.5%

18.0%

17.0% 13.0%

Loan growth

Growth of premium income

-30.1%

31.5%

-16.3%

18.0%

15.0%

Return of equity investments

-0.01%

-0.04%

0.18%

0.15%

0.13%

0.15%

Effective tax rate

-26.3%

-14.8%

-15.5%

-16.0%

-16.0%

-16.0%

Proportion of classified loans

0.46%

0.34%

0.14%

0.12%

0.20%

0.28%

Growth of classified loans

18.6%

-17.3%

-51.0%

-0.3%

93.3%

61.0%

Credit costs

0.15%

0.02%

-0.01%

0.02%

0.10%

0.15%

Source: BOCOM Int’l

2. Intrinsic value estimated to be HK$23.83 by adopting absolute valuation model - DDM BOCHK possesses a stronger profitability among all local banks in HK. As the growth of its traditional non-RMB business is slightly slower than the industry average, we believe its future growth would depend more on the growth rate of RMB deposits and the increase in ROA brought by wider RMB investment channels, however, the development of supporting policies shows uncertainties. BOCHK’s P/E lies at the average level when compared to other listed peers in HK while its P/B is the highest among all HK-listed banks except Hang Seng Bank.

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Page 34

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Adopting the Discounted Dividend Model (DDM) and assuming the EPS CAGR for the 10 years during 2010-2020 to be 8.1% (taking into account a 12.4% CAGR in EPS during 2000-2010 and an expected slower growth in China’s economy), dividend payout ratio and perpetual dividend yield staying flat at 62% and 70%, respectively, and BOCHK to enter into the perpetual growth period starting from 2020 with a growth rate of 2.5%, we estimate that the intrinsic value per share of BOCHK is HK$23.83, corresponding to 2011E P/E and P/B of 12.17x and 1.92x, respectively.

Chart 72: Valuation of BOCHK adopting DDM HK$ bn Profits

2009

2010

2011E

2012E

2013E

2014E

2015E

2016E

2017E

2018E

2019E

2020E

14

17

21

21

24

27

29

31

32

34

36

36

373.93%

17.11%

24.08%

1.32%

14.94%

13.11%

6.77%

5.99%

5.13%

5.52%

4.19%

1.86%

EPS (HK$)

1.35

1.58

1.96

1.98

2.28

2.58

2.75

2.92

3.07

3.24

3.37

3.44

DPS (HK$)

0.86

0.97

1.21

1.23

1.41

1.60

1.71

1.81

1.90

2.01

2.09

2.41

Shareholders’ interests

107

118

131

139

151

163

175

188

201

215

230

244

Profit growth

Average shareholders’ interests ROAE Dividend payout ratio Total dividend

96

113

125

135

145

157

169

182

195

208

223

237

14.81%

14.82%

16.59%

15.50%

16.63%

17.41%

17.23%

17.01%

16.68%

16.44%

16.03%

15.34%

63%

62%

62%

62%

62%

62%

62%

62%

62%

62%

62%

70%

9

10

13

13

15

17

18

19

20

21

22

25

Ke

10.0%

g

2.5%

Intrinsic value/ share (HK$)

23.83

Source: BOCOM Int’l

Chart 73: Dividend payout ratio of HK-listed banks BOC(HK) DSB

HSB DSF

BEA CHB

WHB

Dividend payout ratio

170 120 70

20 FS 1 0 1 20 11

20 09

FY

20 08

FY

20 07

FY

FY

20 06

20 05

FY

20 04

FY

20 03

FY

20 02

FY

20 01

FY

20 00

FY

FY

FY

19 99

20

Source: Bloomberg

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Page 35

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Chart 74: P/E of HK-listed banks BOC(HK)

HSB

BEA

WHB

DSB

DSF

CHB

N -1 1

S11

J11

M -1 1

M -1 1

J11

N -1 0

S10

J10

M -1 0

M -1 0

J10

40 35 30 25 20 15 10 5 0

Source: Bloomberg

Chart 75: P/B of HK-listed banks CHB

N -1 1

DSF

S11

DSB

J11

M -1 1

WHB

M -1 1

J11

BEA

N -1 0

HSB

S10

J10

M -1 0

J10

M -1 0

BOC(HK)

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 -

Source: Bloomberg

3.

Initial coverage with “LT-Buy” rating

BOCHK has prudent operation style which could be observed from the following aspects: (1) stable NIM despite increasing competitions in attracting deposits; (2) relatively balanced business structure; (3) good asset quality with adequate provisions; (4) high CAR and good liquidity. As China gradually opens up its market, BOCHK’s offshore RMB business shows tremendous development potential. Nonetheless, the future development of investment channels will largely determine the growth of RMB business. Whether the growth in its RMB business will offset the decline in the market share of its non-RMB business is yet to tell. Download our reports from Bloomberg: BOCM〈enter〉

Page 36

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Current valuations correspond to 2012E P/E and P/B of 9.57x and 1.40x, respectively, reflecting reasonably the intrinsic value of the bank. We initiate coverage for BOCHK with “LT-Buy” rating and TP of HK$23.83, assuming its RMB business is under the neutral scenario.

7.

Major Risk Alerts:


Weaker expectations on RMB appreciation, leading to a slower growth in the company’s offshore RMB deposits;
Failure to increase ROA of RMB-denominated assets if growth in the development of RMB-denominated products is slower than our expectation;
Faster-than-expected deterioration in asset quality amid volatile global economy;
Outflow of capital due to a deterioration in European debt crisis, aggravating the liquidity risks in HK market.

Chart 76: Valuation and key financial indicators of HK-listed banks Mkt Cap.

PE

PB

CAR

CCAR TCE/RWA

NIM

ROE

2010

A/E

Net profit growth

HK$ m

2011E

2012E

2011E

2012E

2010

2010

2011E

2012E

BOCHK

194,539

10.1

10.5

1.53

1.45

16.1

11.3

16.7 1.49%

1.13% 18.03%

14.04

19.1%

-3.7%

HSB

176,176

10.9

10.1

2.29

2.10

13.6

10.8

20.5 1.72%

1.71% 23.22%

13.10

7.4%

8.4%

BEA

61,037

13.4

13.0

1.27

1.19

13.2

9.8

NA 0.87% 10.98%

10.98

8.4%

3.9%

WHB

19,019

10.0

10.6

1.18

1.09

16.6

10.3

13.8 1.84%

1.06% 14.01%

11.14

16.0%

-4.6%

DSB

8,108

7.3

7.4

0.56

0.54

16.3

10.2

15.1 1.68%

0.88%

8.81%

9.73

3.0%

-0.7%

DSF

6,808

6.6

6.5

0.45

0.43

16.3

10.2

15.7 1.68%

0.76%

8.00%

8.09

1.9%

2.2%

CHB

6,003

11.1

15.6

0.85

0.82

17.9

11.2

14.8 1.21%

0.66% 10.54%

11.29

14.4%

-39.5%

9.9

10.5

1.16

1.09

1.60%

1.01% 13.37%

11.20

Average

2010

ROA

10.9

Source: Bloomberg, based on closing prices on 2011/12/30

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Page 37

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Appendix: Chart 77: Shareholding structure of BOCHK

Source: Company, BOCOM Int’l

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Page 38

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

BOCHK (2388.HK): Financial indicators and forecasts Balance Sheet (HK$bn)

Asset quality

As at 31 Dec Total loans Loans and advances to customers Debt securities investments Balances and placements with banks and other financial institutions Interest-earning assets Due from banks Total deposits Bonds payable Other interest-bearing liabilities Interest-bearing liabilities Share capital Total Assets Total liabilities Share equity

2009

2010

2011E

2012E

2013E

515 527

613 645

721 765

836 894

961 1,036

358 161

430 416

478 417

545 438

604 469

1,107 100 842 27 16

1,531 314 1,027 27 25

1,739 367 1,191 28 8

1,996 441 1,370 29 9

2,274 520 1,562 31 9

985 53 1,213 1,106 107

1,393 53 1,661 1,543 118

1,594 53 1,940 1,809 131

1,848 53 2,231 2,092 139

2,121 53 2,543 2,393 151

2009

2010

2011E

2012E

2013E

21.7 -3.8 17.9 8.5 -2.0

23.4 -4.7 18.7 9.5 -2.4

31.1 -10.5 20.6 11.6 -3.0

36.2 -12.2 24.0 13.6 -3.5

42.3 -14.5 27.8 16.0 -4.2

6.5

7.0

8.6

10.1

11.8

Income Statement (HK$bn) As of 31 Dec Interest income Interest expenses Net interest income Fee and commission income Fee and commission expenses Net fee and commission income Net premium income Net operating profit Net investment income from fair value change Return from equity investments Other operating income Total operating income Net insurance claims Profit before provision Valuation allowance Net operating income Operating profit Pre-tax profit Profit for the period Profit attributable to shareholders

7.7 1.5 -0.7

6.5 1.4 0.7

7.7 0.8 0.5

8.8 0.9 0.8

9.9 1.2 0.9

-0.1

0.7

0.6

0.6

0.8

0.5 33.3 -7.3 26.1 1.2 27.2 15.1 16.7 14.3 13.9

0.5 35.5 -8.0 27.5 0.3 27.8 18.2 19.7 16.7 16.2

0.5 39.2 -8.7 30.5 -0.1 30.4 23.0 24.7 20.7 20.1

0.5 45.7 -9.6 36.2 -0.8 35.4 23.8 25.0 21.0 20.4

0.5 52.9 -10.5 42.4 -1.3 41.0 27.9 28.7 24.1 23.4

As of 31 Dec Classified loans % change in classified loans Proportion of classified loans Provision coverage ratio Loan provision ratio Credit cost Proportion of portfolio provision Mortgage loan restructure Credit card default rate Credit card write-off rate

2009

2010

2011E

2012E

2013E

1.77 -17.3% 0.34% 128.3% 0.44% 0.02% 70.4% 0.04% 0.23% 2.69%

0.87 -51.0% 0.14% 266.6% 0.38% -0.01% 85.9% 0.02% 0.15% 1.36%

0.86 -0.3% 0.12% 291.8% 0.35% 0.02%

1.67 93.3% 0.20% 199.7% 0.40% 0.10%

2.69 61.0% 0.28% 174.4% 0.49% 0.15%

Growth rate As of 31 Dec Total loans Total deposits Interest-earning assets Interest-bearing liabilities Assets Net interest income Operating income Profit before provisions Operating profit (YoY) Pre-tax profit (YoY) Net profit (YoY)

2009

2010

2011E

2012E

2013E

11.84% 4.95% 5.59% 4.60% 5.71% -11.04% 0.32% 2.07% 261.17% 310.10% 373.93%

19.08% 21.93% 38.34% 41.44% 36.96% 4.47% 6.46% 5.58% 20.76% 18.05% 17.11%

17.50% 16.00% 13.61% 14.40% 16.80% 10.01% 10.48% 10.97% 26.11% 24.88% 24.08%

16.00% 15.00% 14.78% 15.98% 15.00% 16.51% 16.61% 18.49% 3.55% 1.32% 1.32%

15.00% 14.00% 13.95% 14.77% 14.00% 15.73% 15.68% 17.18% 17.13% 14.94% 14.94%

Income structure As of 31 Dec

2009

2010

2011E

2012E

2013E

Net interest income Net fee and commissions income Net premium income Other income

53.8% 19.5% 23.2% 3.5%

52.8% 19.8% 18.3% 9.1%

52.6% 21.8% 19.5% 6.1%

52.5% 22.1% 19.2% 6.2%

52.5% 22.3% 18.8% 6.3%

Profitability

Key valuation indicators (HK$) As of 31 Dec

2009

2010

2011E

2012E

2013E

EPS Net assets per share DPS P/E P/B Dividend payout ratio

1.32 10.11 0.86 13.97 1.82 63.4%

1.53 11.19 0.97 12.01 1.64 61.6%

1.90 12.42 1.21 9.68 1.48 62.0%

1.93 13.19 1.23 9.56 1.39 62.0%

2.21 14.24 1.41 8.32 1.29 62.0%

As of 31 Dec Core operating expenses/net operating income before provision Effective tax rate NIS NIM ROAA ROAE

2009

2010

2011E

2012E

2013E

-46.6%

-34.8%

-24.2%

-32.0%

-31.0%

-14.8% 1.62% 1.66% 1.21% 14.81%

-15.5% 1.38% 1.42% 1.16% 14.82%

-16.0% 1.20% 1.26% 1.15% 16.59%

-16.0% 1.23% 1.29% 1.01% 15.50%

-16.0% 1.25% 1.30% 1.01% 16.63%

Asset-liability structure As of 31 Dec

2009

2010

2011E

2012E

2013E

Loan-to-deposit ratio Asset-liability ratio Average current fund (%)

61.1% 76.2% 40.2%

59.7% 66.6% 38.8%

60.5% 65.9%

61.0% 65.5%

61.5% 65.3%

Capital indicators As of 31 Dec

2009

2010

2011E

2012E

2013E

RWA Core CAR CAR

51.1% 11.6% 16.9%

41.6% 11.3% 16.1%

34.0% 13.0% 17.6%

32.0% 13.1% 17.4%

32.0% 12.6% 16.4%

Source: Company, BOCOM Int’l estimates

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Page 39

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

BOCOM International 9/F, Man Yee Building, 68 Des Voeux Road Central, Hong Kong. Main: (852) 3710 3328; Fax: (852) 3798 0133 www.bocomgroup.com Rating System Company Rating Buy: Expect more than 20% upside in 12 months LT Buy: Expect more than 20% upside but longer than 12 months Neutral: Expect low volatility Sell: Expect more than 20% downside in 12 months Sector Rating Outperform: Expect more than 10% upside in 12 months Market perform: Expect low volatility Underperform: Expect more than 10% downside in 12 months Analyst Certification The authors of this report, hereby declare that: (i) all of the views expressed in this report accurately reflect their personal views about any and all of the subject securities or issuers; and (ii) no part of any of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report; (iii) no insider information/ non-public price-sensitive information in relation to the subject securities or issuers which may influence the recommendations were being received by the authors. The authors of this report further confirm that (i) neither they nor their respective associates (as defined in the Code of Conduct issued by the Hong Kong Securities and Futures Commission) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of the report; (ii)) neither they nor their respective associates serve as an officer of any of the Hong Kong listed companies covered in this report; and (iii) neither they nor their respective associates have any financial interests in the stock(s) covered in this report.

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Page 40

BOCHK(2388.HK)

30 December 2011

Faster expansion of RMB investment channels is key to outperformance

Disclaimer By accepting this report (which includes any attachment hereto), the recipient hereof represents and warrants that he is entitled to receive such report in accordance with the restrictions set forth below and agrees to be bound by the limitations contained herein. Any failure to comply with these limitations may constitute a violation of law. This report is strictly confidential and is for private circulation only to clients of BOCOM International Securities Ltd. This report is being supplied to you strictly on the basis that it will remain confidential. No part of this report may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of BOCOM International Securities Ltd. BOCOM International Securities Ltd, its affiliates and related companies, their directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this report or any securities related thereto and may from time to time add to or dispose of, or may be interested in, any such securities. Further, BOCOM International Securities Ltd, its affiliates and its related companies may do and seek to do business with the company(ies) covered in this report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking, advisory, underwriting, financing or other services for or relating to such company(ies) as well as solicit such investment, advisory, financing or other services from any entity mentioned in this report. In reviewing this report, an investor should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. The information contained in this report is prepared from data and sources believed to be correct and reliable at the time of issue of this report. This report does not purport to contain all the information that a prospective investor may require and may be subject to late delivery, interruption and interception. BOCOM International Securities Ltd does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information and opinion contained in this report and accordingly, neither BOCOM International Securities Ltd nor any of its affiliates nor its related persons shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof. This report is general in nature and has been prepared for information purposes only. It is intended for circulation amongst BOCOM International Securities Ltd’s clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. The information and opinions in this report are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, related investments or other financial instruments thereof. The views, recommendations, advice and opinions in this report may not necessarily reflect those of BOCOM International Securities Ltd or any of its affiliates, and are subject to change without notice. BOCOM International Securities Ltd has no obligation to update its opinion or the information in this report. Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction in respect of the securities of company(ies) covered in this report. The securities of such company(ies) may not be eligible for sale in all jurisdictions or to all categories of investors. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to any law, regulation, rule or other registration or licensing requirement. BOCOM International Securities. Ltd is a wholly owned subsidiary of Bank of Communications Co Ltd.

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Page 41