PAB is proposing to issue A-share convertible bonds (CB) of up toRmb26 bn, subject to approval of shareholders and regulators(CBRC+CSRC). The Extraordinary General Meeting will be heldon Aug 14 to review this issuance plan.
The proposed term of CB would be six years, allowing investors toconvert six months post the issuance. The conversion price shallnot be lower than BVPS by the latest audit (Rmb10.61 in FY16).PAB is trading at 0.91x 2016 P/B and might be able to launch asuccessful issuance given the deferred conversion.
Assuming full conversion of the CBs would add roughly 100 bp toPAB's CET1 ratio (8.28% as of 1Q17), the EPS would be lower by11-12% and ROE by 110-120 bp due to the dilution.
PAB has shifted focus from higher-yielding(which gave elevated loan losses) to unsecured consumer. It hasneeded fresh equity every year for several years now (number ofshares 3.4x vs. profits up 2.3x in four years 2012 to 2016).
Risk: Key risks to our Rmb8.6 target price and NEUTRAL