Analyst: Vincent Leung28 August 2007EAST ASIA SECURITIES COMPANY LIMITED 9/F , 10 Des Voeux Road Central, Hong Kong.Dealing: 3608 8000 Research: 3608 8097 Facsimile: 3608 6132HONG KONG RESEARCHth .CHINA CONSTRUCTION BANK CORPORATION (中國建設銀行)Chairman: Mr. Guo Shuqing Vice Chairman & President: Mr. Zhang JianguoInterim Results Highlights RMB millionVs 1H2006 (%)Vs 31/12/2006 (%)Net interest income 89,213 +36.7% Non-interest income 10,573 +89.5% T otal operating income 99,786 +40.8% Operating expenses(37,275) +26.3% Operating profit before impairment losses 62,511 +51.2% Impairment losses on loans and advances (11,648) +40.0% Profit before taxation 50,542 +54.0% T axation(16,287) +69.8% Profit attributable to shareholders 34,221 +47.4% T otal loans 3,165,567 +12.4% +10.2% T otal deposits 5,058,302 +12.5% +7.0% T otal assets6,117,791+18.4% +12.3%Basic EPS (RMB) 0.15 +47.4%Interim DPS (RMB) 0.067 N/ASpecial DPS (RMB)0.072716N/ASelected Ratios1H2007 1H2006 FY2006 Net interest margin 3.11% 2.70% 2.79% Cost-income ratio37.4% 41.7% 44.0% Return on average assets 1.18% 0.95% 0.92% Return on average equity 20.88% 15.67% 15.00% NPL ratio2.95%3.51% 3.29% NPL coverage ratio 90.7% 71.4% 82.2% Loan-deposit ratio 62.6% 62.6% 60.8% Capital adequacy ratio 11.34%13.15%12.11%1H2007 results within market expectations China Construction Bank (“CCB”) reported a 47.4% y-o- y rise in net profit to RMB34,221 million for 1H2007, attributable to solid top-line growth and improved operating efficiency that more than offset higher net FX loss due to the RMB appreciation and a jump in loan impairment losses. CCB’s 1H2007 bottom line was within market expectations (RMB30,625 million-RMB35,650 million).Special dividend Besides an interim DPS of RMB0.067, CCB also declared a special DPS ofRMB0.072716, being per share accumulated undistributed profits of the bank as at 30thJune 2007 (after deduction of 2007 interim dividend), prior to the A-share issuance.This report has been prepared solely for information purposes and we are not soliciting any action based upon it. Neither this document nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever . The information is based upon information which we consider reliable, but accuracy orWidening NIM Net interest income jumped by36.7%y-o-y in1H2007on an18.7%y-o-y jump in average interest-earning assets and an expanded net interest interest margin widened by 41bps y-o-y to3.11%for1H2007on a stronger average asset yield amid rising interest rates following rate hikes by the PBOC as well as improvement in asset-liability management.The buoyant domestic stock market helped raise the proportion of lower-cost demand deposits further to56.7%of total deposits as of30/06/2006(31/12/2006:55.3%;30/06/2006:53.7%)from time deposits.Reduction in the low-yielding discounted bills to4.6%of total loan portfolio as of30/06/2007(31/12/2006:5.5%;30/06/2006:9.1%)also helped lift the average asset yield.Solid loan growth CCB’s loan book expanded by10.2%h-o-h during1H2007.Corporate loans increased by9.5%h-o-h and accounted for71.2%of total loans as of30/06/2007.The expansion in the bank’s corporate loan book was primarily driven by a12.0%h-o-h increase in infrastructure loans that accounted for35.3%of total corporate loans as well as a15.2%rise in SME loans that accounted for10%of the corporate book.Personal loans grew by16.3%and accounted for21.5%of total loans.Residential mortgage loans jumped10.7%during the half-year period,enabling CCB to remain the largest mortgage lender on the mainland.On the other hand,the lower-yielding discounted bills dropped by8.8%h-o-h.Meanwhile,with total deposits growth of7.0%h-o-h,CCB’s loan-to-deposit ratio increased to62.6%as of30/06/2007from60.8%as of31/12/2006.Strong fee income growth Net fee and commission income shot up101.8%,with growth momentum seen in various categories on increased investment in fee-based businesses.The biggest5categories -agency fees(+261.3%),bankcard fees(+32.7%),remittance,settlement&account management fees(+22.5%),consultancy&advisory fees(+62.0%)and commission on trust business(+80.9%)-accounted for92.9%of total fee income.On the other hand,the bank booked a RMB3.6-billion net FX loss in1H2007(1H2006:RMB2.4bn),mainly due to RMB appreciation and derivative costs.As a result,net non-interest income jumped a tamer89.5%y-o-y.Rise in operating expenses Operating costs increased26.3%y-o-y,driven by a26.6%increase in staff costs on higher salaries,a35.8%surge in business tax&surcharges as well as a32.0%rise in other G&A expenses driven by branch transformation and advertising expenses.Nevertheless,a stronger40.8%growth in total operating income helped improve the bank’s cost-to-income ratio to37.4%from41.7%a year earlier.Meanwhile,the bank’s management said expense growth willaccelerate in2H2007while cost-to-income ratio will be stable at the current level.Improving loan quality NPL ratio improved to2.95%as of30/06/2007from3.29%as of31/12/2006 while NPL balance dropped by 1.0%h-o-h on strengthened efforts in recoveries and write-offs.Meanwhile,provision for loan impairment losses jumped40.0%in1H2007,and allowance coverage was bolstered to90.7%as of30/06/2007from82.2%as of31/12/2006.US subprime exposure As of30/06/2007,the bank has holdings of US$1,062million(or2.75%of the bank’s foreign-currency denominated bond portfolio)in US-subprime mortgage loan backed securities, all with ratings of AA or above,compared with ICBC(stock code:1398)’s US$1.2billion and Bank of China(stock code:3988)’s US$B had made a RMB139-million(or US$18m)provision on these securities.Strong profitability and healthy financial position CCB’s profitability enhanced notably,with ROAA and ROAE up to1.18%and20.88%respectively for1H2007from0.95%and15.67%for1H2006.Meanwhile,the bank’s CAR stood at11.34%as of30/06/2007.Should the proposed special cash dividend,amounting to RMB16.3billion,be deducted from capital,CAR would then become10.87%.Outlook & ProspectsStrong fundamentals and business outlook CCB has the highest net interest margin among H-share banks and2nd highest ROE[just behind China Merchants Bank(stock code:3968)].Continual robust growth in fee income and retail banking business(25.1%of1H2007pre-tax profit)given its strong customer base should propel strong earnings growth going forward.In fact, CCB has the largest personal loan book(30/06/2007:RMB680.6bn)and is the No.1residential mortgage lender in China.Rising provisioning In1H2007,CCB made a RMB11.6billion provision charge,representing a 40%or RMB3.3billion increase y-o-y while provision coverage rose to90.7%.Management said the bank raises the provision coverage on expectation that the series of austerity measures by the central government may have an adverse impact on loan quality in the future.Such move by CCB should provide strong cushion for any asset quality deterioration should there be an economic downturn.Maintain Buy on strong fundamentals Valuations of CCB’s shares,which are now trading at3.7x FY2007E P/B and22.8x FY2007E P/E is well supported by the solid earnings outlook andthe strong profitability in terms of ROE.The pending A-share listing in4Q2007should serve as an added catalyst for CCB’s shares.As such,we maintain our“Buy”rating for the counter. Recommendation:BuyAppendix I I.Impairment allowances,overdue and rescheduled advances of China Construction BankAs%of total customer advances IndividualallowanceCollectiveallowanceNPLsAs of 30/06/2007 1.61% 1.07% 2.95%As of31/12/2006 1.45% 1.25% 3.29%As of 30/06/2006 1.30% 1.21% 3.51%parison of China Construction Bank’s loan book:30/06/2007vs31/12/2006Loans-by industry30th June,2007Up/(down)31st Dec,2006RMB million RMB millionManufacturing564,902+10.7%510,427Other corporate loans1,689,181+9.2%1,547,534Personal mortgage loans474,037+10.7%428,039Other personal loans206,534+31.5%157,046Discounted bills145,403-8.8%159,368Loans for overseas operations85,510+20.1%71,1953,165,567+10.2%2,873,609parison of China Construction Bank’s loan book:30/06/2007vs30/06/2006Loans-by industry30th June,2007Up/(down)30th June,2006RMB million RMB millionManufacturing564,902+16.3%485,817Other corporate loans1,689,181+12.4%1,503,210Personal mortgage loans474,037+21.0%391,875Other personal loans206,534+60.8%128,465Discounted bills145,403-43.4%257,035Loans for overseas operations85,510+74.6%48,9663,165,567+12.4%2,815,368IV.China Construction Bank’s pre-tax profit breakdown by businessesPre-tax profit by businesses Breakdown (RMB million)1H20071H2006y-o-y(%)1H20071H2006 Corporate banking27,98420,145+38.9%55.4%61.4% Personal banking12,6986,247+103.3%25.1%19.0% Treasury operations10,1677,672+32.5%20.1%23.4% Others&unallocated(307)(1,250)-75.4%(0.6%)(3.8%) Total pre-tax profit27,98420,145+54.0%100.0%100.0%Appendix II Breakdown of loan book of China Construction BankImportant Disclosure / Analyst Certification / DisclaimerThis document is published by East Asia Securities Company Limited,a wholly-owned subsidiary of The Bank of East Asia,Limited(BEA).The research analyst primarily responsible for the content of this report,in part or in whole certifies that the views on the companies and their securities mentioned in this report accurately reflect his/her personal views.The analyst also certifies that no part of his/her compensation was,is,or will be, directly,or indirectly,related to specific recommendations or views expressed in this report.This report has been prepared solely for information purposes and has no intention whatsoever to solicit any action based upon it.Neither this report nor its contents shall be construed as an offer, invitation,advertisement,inducement or representation of any kind or form whatsoever.The information is based upon information,which East Asia Securities Company Limited considers reliable,but accuracy or completeness is not rmation and opinions expressed herein reflect a judgment as of the date of this document and are subject to change without notice.Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee.This report is not to be taken in substitution for the exercise of judgment by respective readers of this report,who should obtain separate legal or financial advice.East Asia Securities Company Limited and/or The BEA Group accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or further communication given in relation to this report.At time of this report,East Asia Securities Company Limited has no position in securities of the company or companies mentioned herein the report,while BEA along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this report.BEA and its associates,its directors,and/or employees may have positions in,and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.BEA and/or any of its affiliates may beneficially own a total of1%or more of any class of common equity securities of the subject company or companies mentioned in this report and may,within the past12months,have received compensation and/or within the next3months seek to obtain compensation for investment banking services from the subject company or companies mentioned in the report.This document 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,publication, availability or use would be contrary to law and regulation.。