Company Update
　　What's new
　　Agricultural Bank of China （ABC） organized a reverse road show inWenzhou on June 12–13. It introduced its inclusive financial servicesand SME lending, and also arranged visits to county-level markets.
　　We expect large upside in rural financial services amid China’sefforts to revive the economies of its towns and villages. Weforesee strong demand in deposits, loans, payments, settlementsand wealth management. We believe the challenges of SME lendinglie in risk identification and pricing.
　　Comments
　　Improving environment for SME lending business. The balance ofCBIRC broad-scope SME loans and CBIRC inclusive SME loans wasRmb33.5trn and Rmb9.4trn as of end-2018. ABC booked Rmb3.8bngains from the PBoC’s targeted RRR cut in 2018, and Rmb400mn fromVAT reduction.
　　Risk identification and pricing biggest challenges for commercialsustainability. The interest rate on ABC’s SME loans is 4.63% forborrowers. We estimate the rate at 5.14–5.48% for ABC if policy gainsare taken into account. ABC plans to further increase exposure tounsecured loans. We believe this may entail higher requirements forits risk identification.
　　ABC has lured some top-tier clients from agricultural commercialbanks and credit cooperatives thanks to its low loan rates. It is hardfor non-top-tier clients to obtain loans from ABC.
　　Valuation and recommendation
　　ABC-A/H is trading at 0.76x and 0.57x 2019e P/B. Maintain BUY andTP at Rmb4.7 and HK$4.77 （0.95x and 0.85x 2019e P/B）， implying25% and 49% upside. ABC is the first large bank to elaborate on itsinclusive financial services for the capital market, which we believewill be conducive to easing market concerns.
　　Risks
　　Lending in rural areas is characterized by small loans for a largenumber of borrowers, short cycles, and weak risk resistance inborrowers. High exposure to SME lending may increase cyclicality inABC’s business operations.