May 3, 2016

INITIATION China Zheshang Bank Co. (2016.HK)

Neutral Equity Research Corp banking franchise, resilient asset quality priced in; initiate Neutral

Investment view Investment Profile We initiate on Zheshang Bank with a Neutral rating. Zheshang is a nascent Low High nationwide joint-stock bank (JSB) headquartered in Zhejiang province, Growth Growth with US$159bn total assets, 17.0% ROAE in 2015 and 60.4% loan exposure Returns * Returns * Multiple Multiple to East China in 9M15. Leveraging its corporate banking franchise and Volatility Volatility relatively resilient asset quality, we expect Zheshang to deliver 16% NPAT Percentile 20th 40th 60th 80th 100th CAGR in FY15-18E with its “full asset class operation” strategy. However, China Zheshang Bank Co. (2016.HK) we believe NPL pressure may continue near term amid the slowing Asia Pacific Banks Peer Group Average Zhejiang economy, while its high non-standard credit assets exposure via * Returns = Return on Capital For a complete description of the investment profile measures please refer to the receivables and investments may add to potential NPL/provision pressure. disclosure section of this document.

Key data Current Core drivers of growth Price (HK$) 3.92 We forecast 16% NPAT CAGR over FY15-FY18E vs. average 7% for China 12 month price target (HK$) 4.30 Market cap (HK$ mn / US$ mn) 70,402.0 / 9,075.7 banks under our coverage, driven by: (1) Rapid asset expansion under its Foreign ownership (%) --

“full asset class operation” strategy (i.e., achieving efficient management 12/15 12/16E 12/17E 12/18E of the financial market business and promoting diversified financial assets) EPS (Rmb) 0.54 0.47 0.55 0.62 EPS growth (%) 22.1 (13.0) 16.3 13.1 at a 3-year CAGR of 19%; and (2) 29% non-interest income CAGR on wealth P/B (X) NM 0.9 0.8 0.7 P/E (X) NM 7.0 6.0 5.3 management products and custodian fees. This could more than offset the Dividend yield (%) NM 3.6 4.2 4.7 modest build-up of its cost-income ratio and credit cost, in our view. P/PPOP (X) 3.5 2.8 2.4 2.1 PPOP growth (%) 48.4 24.7 17.6 14.3 Preprovision ROA (%) 2.0 1.8 1.8 1.7 Risks to the investment case Credit cost (%) 2.2 2.4 2.5 2.6 ROA (%) 0.83 0.72 0.69 0.68 Upside: Better asset pricing/quality. Downside: weak asset quality pressure, ROE (%) 17.0 14.5 13.9 14.1 high leverage, and regulatory tightening against equity-linked financing. Price performance chart Valuation 3.97 9,500 Our 12-m TP of HK$4.3, implying 10% upside and 1.03X FY16E P/B, is based 3.96 9,200 on the median 1.15X price/historical BV of 5 H-share China banks with small 3.95 8,900 free float. These banks have been consistently trading around/above their 3.94 8,600 historical book for up to 2 years due to their shareholder structure, small free- 3.93 8,300 3.92 8,000 float. Trading at 0.94X 2016E P/B (H-share avg: 0.74X), we think Zheshang’s 3.91 7,700 corporate banking franchise and earnings growth potential are priced in. 3.90 7,400 Jan-16 Mar-16 Mar-16 Industry context China Zheshang Bank Co. (L) Hang Seng China Ent. Index (R) We see Industrial Bank, H-share JSBs, Bank of Nanjing as close comparables.

INVESTMENT LIST MEMBERSHIP Share price performance (%) 3 month 6 month 12 month Neutral Absolute ------Rel. to Hang Seng China Ent. Index ------

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 4/29/2016 close. Coverage View: Neutral Jessica Wu +86(10)6627-3487 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with companies Nan Li, CFA covered in its research reports. As a result, investors should be +86(10)6627-3021 [email protected] Beijing Gao Hua Securities Company Limited aware that the firm may have a conflict of interest that could Wendy Chen affect the objectivity of this report. Investors should consider +65-6654-5218 [email protected] Goldman Sachs (Singapore) Pte this report as only a single factor in making their investment Lucy Li +65-6654-5426 [email protected] Goldman Sachs (Singapore) Pte decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research May 3, 2016 China Zheshang Bank Co. (2016.HK)

China Zheshang Bank Co.: Summary Financials

Profit model (Rmb mn) 12/15 12/16E 12/17E 12/18E Balance sheet (Rmb mn) 12/15 12/16E 12/17E 12/18E

Net interest income 20,585.8 26,289.6 30,804.3 34,183.8 Gross loans 345,422.9 409,558.1 469,558.1 524,859.1 Non-interest income 4,544.6 6,195.9 7,861.6 9,717.9 NPLs 4,233.0 6,530.1 9,253.6 12,376.2 Operating revenue 25,130.4 32,485.5 38,665.9 43,901.7 Loan loss reserves (10,193.9) (15,358.0) (21,521.6) (28,594.6) Non-interest expense (8,257.3) (11,451.0) (13,921.7) (15,626.1) Total interest earning assets 1,020,086.7 1,283,711.4 1,501,451.1 1,699,233.3 Preprovision operating profit 16,873.1 21,034.5 24,744.1 28,275.6 Other non-interest earning assets 11,563.7 17,246.2 24,954.3 34,110.6 Total provision charge (7,492.7) (9,790.7) (11,673.1) (13,495.6) Total assets 1,031,650.4 1,300,957.7 1,526,405.4 1,733,343.9 Associates 0.0 0.0 0.0 0.0 Customer deposits 516,026.3 639,872.6 735,853.5 824,155.9 Pretax profit 9,380.4 11,243.8 13,071.1 14,780.0 Total interest-bearing liabilities 960,619.7 1,208,395.4 1,421,514.5 1,615,260.3 Tax (2,329.7) (2,792.5) (3,246.3) (3,670.8) Total equity 49,657.1 66,913.9 74,625.8 83,278.8 Minorities ------Net profit 7,050.7 8,451.3 9,824.7 11,109.2 CAMEL ratios (%) 12/15 12/16E 12/17E 12/18E C: Tier 1 capital ratio 9.4 9.6 8.9 8.5 Dividends 2,335.0 2,112.8 2,456.2 2,777.3 C: Equity/loans 14.8 17.0 16.7 16.8 Dividends payout (%) 33.1 25.0 25.0 25.0 C: Equity/assets 4.8 5.1 4.9 4.8 A: NPL ratio 1.2 1.6 2.0 2.4 Earnings growth drivers (%) 12/15 12/16E 12/17E 12/18E A: Loan loss reserves/NPLs (240.8) (235.2) (232.6) (231.0) Net interest margin 2.42 2.26 2.18 2.10 E: Net interest margin 2.42 2.26 2.18 2.10 Provision charge/total loans 2.24 2.48 2.61 2.72 E: Non int inc/oper revenues 18.08 19.07 20.33 22.14 YoY Growth (%) E: Cost-income ratio 32.9 35.2 36.0 35.6 Customer deposits 42.3 23.7 15.8 12.0 E: ROAA 0.83 0.72 0.69 0.68 Loans 32.9 17.6 13.7 10.8 L: Loan/deposit ratio 65.0 61.6 60.9 60.2 Net interest income 41.6 27.7 17.2 11.0 Fee income 56.5 45.9 27.8 24.3 Loan portfolio (%) 12/15 12/16E 12/17E 12/18E Non-interest income 58.8 36.3 26.9 23.6 Commercial & corporate 70.2 70.5 70.7 70.5 Operating revenue 44.5 29.3 19.0 13.5 Mortgages/home loans NM NM NM NM Operating expenses (37.0) (38.7) (21.6) (12.2) Consumer 18.3 17.9 17.9 18.3 Preprovision operating profit 48.4 24.7 17.6 14.3 Provision charges 44.3 31.9 19.1 14.7 Valuation (current price) 12/15 12/16E 12/17E 12/18E Pretax profit 38.1 19.9 16.3 13.1 P/E basic (X) NM 7.0 6.0 5.3 Net profit 38.4 19.9 16.3 13.1 P/B (X) NM 0.88 0.79 0.71 EPS 22.1 (13.0) 16.3 13.1 P/PPOP (X) 3.5 2.8 2.4 2.1 DPS -- (34.3) 16.3 13.1 Dividend yield (%) NM 3.6 4.2 4.7

Market dimensions 12/15 12/16E 12/17E 12/18E EPS, basic (Rmb) 0.54 0.47 0.55 0.62 No of branches ------EPS, fully-diluted (Rmb) 0.54 0.47 0.55 0.62 No of staff (000) ------Revenues/staff (US$) NM NM NM NM EPS, basic growth (%) 22.1 (13.0) 16.3 13.1 Net profit/staff (US$) NM NM NM NM EPS, fully diluted growth (%) 22.1 (13.0) 16.3 13.1

BVPS (Rmb) 3.81 3.73 4.16 4.64 DuPont analysis (%) 12/15 12/16E 12/17E 12/18E DPS (Rmb) 0.18 0.12 0.14 0.15 ROE 17.0 14.5 13.9 14.1 x leverage 4.9 5.0 5.0 4.8 =ROA 0.830.720.690.68

% of assets 12/15 12/16E 12/17E 12/18E Net interest income 2.42 2.25 2.18 2.10 Fee income 0.48 0.51 0.54 0.58 Non-interest income 0.53 0.53 0.56 0.60 Operating revenue 2.95 2.79 2.74 2.69 Operating expenses 0.97 0.98 0.98 0.96 Preprovision operating profit 1.98 1.80 1.75 1.73 Loan loss provisions 0.73 0.70 0.69 0.68 Pretax profits 1.10 0.96 0.92 0.91 Taxes 0.270.240.230.23

Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.

Analyst Contributors

Jessica Wu Lucy Li [email protected] [email protected]

Nan Li, CFA [email protected]

Wendy Chen [email protected]

Goldman Sachs Global Investment Research 2 May 3, 2016 China Zheshang Bank Co. (2016.HK)

Table of contents

Overview: Corporate banking franchise underpins N-T growth; initiate with Neutral 5 Valuation: 12-m TP of HK$4.3 based on price to historical book 8 Corporate banking franchise and relatively resilient asset quality 10 Key risks 13 Financials 16 Appendix 21 Disclosure Appendix 22

The prices in the body of this report are based on the market close of April 28, 2016.

Exhibit 1: Zheshang is trading at 0.94X 2016E P/B, 25% higher than H share bank avg. but in-line with A share JSBs

Adj. P/B 28-Apr Mkt Cap 12M Potential P/B (X)(X) P/E (X) P/PPOP (X)Div yield (%) EPS growth (%) Target Upside/ Price (US$ bn) Rating Price downside 2016E 2017E 2016E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E H-shares (HKD) ICBC (H) 1398.HK Buy 4.27 196 5.05 18% 0.72 0.66 0.87 5.0 4.8 2.9 2.6 6.4 6.4 -2.0 3.6 BOC (H) 3988.HK Neutral 3.23 123 3.25 1% 0.65 0.60 0.77 5.2 5.1 2.6 2.7 6.2 6.0 -1.1 1.1 CCB (H) 0939.HK Buy 5.07 163 5.94 17% 0.73 0.66 0.86 5.1 4.9 2.8 2.7 6.3 6.3 -3.1 3.6 ABC (H) 1288.HK Buy 2.82 118 3.48 23% 0.66 0.61 0.76 4.7 4.6 2.5 2.4 6.7 6.7 -2.7 2.1 BoCom (H) 3328.HK Neutral 5.06 48 5.83 15% 0.60 0.55 0.73 5.1 5.0 2.7 2.5 5.5 5.6 -1.0 2.5 CMB (H) 3968.HK Neutral 16.70 54 17.16 3% 0.93 0.83 1.10 6.0 5.5 2.6 2.3 5.0 5.4 5.2 9.3 CNCB (H) 0998.HK Buy* 4.92 30 5.83 19% 0.60 0.55 0.82 5.0 4.7 2.2 2.0 5.0 5.3 5.0 4.9 CQRCB 3618.HK Neutral 4.11 4.9 4.49 9% 0.65 0.57 0.76 4.4 4.0 2.1 1.9 6.3 6.8 3.2 9.4 BOCQ 1963.HK Neutral 6.13 2.1 6.73 10% 0.70 0.63 0.80 5.3 4.6 2.6 2.3 4.7 5.4 8.7 15.5 BOQD 3866.HK Neutral 4.88 2.5 5.10 5% 0.93 0.84 1.10 8.0 6.8 4.7 4.0 3.8 4.4 14.1 16.7 Zheshang 2016.HK Neutral 3.92 6.6 4.30 10% 0.94 0.84 1.30 7.4 6.4 3.0 2.5 3.4 3.9 -17.8 16.3 H-share average 0.74 0.67 0.90 5.6 5.1 2.8 2.5 5.4 5.7 0.8 7.7

A-shares (RMB) ICBC (A) 601398.SS Buy 4.28 235 4.90 14% 0.81 0.74 0.98 5.6 5.4 3.2 3.0 5.7 5.7 -2.0 3.6 BOC (A) 601988.SS Sell 3.37 153 3.10 -8% 0.76 0.70 0.90 6.1 6.0 3.1 3.2 5.3 5.2 -1.1 1.1 CCB (A) 601939.SS Buy 4.70 181 5.70 21% 0.76 0.69 0.90 5.3 5.1 3.0 2.8 6.0 6.1 -3.1 3.6 ABC (A) 601288.SS Neutral 3.13 157 3.30 5% 0.83 0.75 0.95 5.9 5.8 3.2 3.0 5.4 5.4 -2.7 2.1 BoCom (A) 601328.SS Neutral 5.42 62 5.60 3% 0.72 0.66 0.88 6.1 6.0 3.3 3.0 4.6 4.7 -1.0 2.5 CMB (A) 600036.SS Buy* 17.88 70 18.70 5% 1.12 1.00 1.32 7.3 6.6 3.1 2.8 4.1 4.5 5.2 9.3 CNCB (A) 601998.SS Neutral 5.90 43 6.30 7% 0.81 0.74 1.10 6.7 6.4 2.9 2.7 3.7 3.9 5.0 4.9 SPDB 600000.SS RS 17.90 52 NA NA 1.04 0.91 1.54 6.4 5.9 3.1 2.8 4.7 5.1 7.7 8.7 Industrial 601166.SS Neutral 16.18 40 14.40 -11% 0.95 0.84 1.30 6.0 5.8 2.7 2.6 3.8 4.1 4.9 3.8 PAB 000001.SZ Neutral 10.66 24 10.90 2% 0.83 0.74 1.17 6.5 5.9 2.4 2.1 1.8 1.9 5.9 8.9 Hua Xia 600015.SS Sell 10.26 17 7.80 -24% 0.81 0.74 1.24 6.1 6.2 3.1 2.8 3.9 3.9 -5.4 -1.1 BONB 002142.SZ Buy 14.25 7.1 14.20 0% 1.23 1.07 1.46 7.1 6.3 4.0 3.5 3.7 4.1 17.5 13.4 BONJ 601009.SS Neutral 16.92 8.8 15.80 -7% 1.05 0.93 1.30 7.0 6.2 3.1 2.8 3.5 3.7 17.0 13.4 CEB 601818.SS Neutral 3.68 26.5 3.80 3% 0.77 0.70 1.02 5.8 5.6 2.7 2.4 5.1 5.3 1.4 4.1 A-share average 0.89 0.80 1.15 6.3 5.9 3.1 2.8 4.4 4.5 3.5 5.6 Big banks average 0.79 0.72 0.93 5.7 5.6 3.1 3.0 5.6 5.6 -2.2 2.6 Shareholding banks average 0.88 0.79 1.20 6.4 6.1 2.9 2.7 4.0 4.2 3.0 5.1 City Bank Average 1.14 1.00 1.19 7.1 6.2 3.5 3.2 3.6 3.9 17.3 13.4 Note: * on our regional Conviction List; RS = Rating Suspended adj. P/B = equity valuation/adj. book value. Adj. book value is calculated based on the shortfall of provisions if assuming 7-9% adj. NPL ratio of loans&non-standard credits

Source: Datastream, Goldman Sachs Global Investment Research

Goldman Sachs Global Investment Research 3 May 3, 2016 China Zheshang Bank Co. (2016.HK)

Exhibit 2: Zheshang: Summary of financial ratios and key P&L/balance sheet items

2014 2015 2016E 2017E 2018E 2014 2015 2016E 2017E 2018E Factors driving earnings performance (%) Profit and loss (Rmb mn) Gross loans to customers 19.3 33.4 18.6 14.6 11.8 Net interest income 14,535 20,586 26,290 30,804 34,184 Customer deposits 13.6 42.0 24.0 15.0 12.0 Non-interest income 2,862 4,545 6,196 7,862 9,718 Net interest margin(1) 2.52 2.42 2.26 2.18 2.10 Operating income 17,397 25,130 32,486 38,666 43,902 Net interest income 30.8 41.6 27.7 17.2 11.0 Operating expenses (6,028) (8,257) (11,451) (13,922) (15,626) Non-interest income 20.2 58.8 36.3 26.9 23.6 Preprovision operating profits 11,368 16,873 21,034 24,744 28,276 Fee income 13.0 56.5 45.9 27.8 24.3 Impairment losses (4,576) (7,493) (9,791) (11,673) (13,496) Operating revenues 28.9 44.5 29.3 19.0 13.5 Operating expenses 14.4 37.0 38.7 21.6 12.2 Profit before tax 6,792 9,380 11,244 13,071 14,780 Preprovision op. profits (PPOP) 38.2 48.4 24.7 17.6 14.3 Income tax expense (1,697) ( 2,330) (2,793) (3,246) (3,671) Impairment losses 168.7 63.7 30.7 19.2 15.6 Minority interests - - - - - NPAT after minority interests 4.0 38.4 19.9 16.3 13.1 NPAT after minority interests 5,096 7,051 8,451 9,825 11,109 Credit cost 1.65 1.79 1.99 2.07 2.12 Interest earning assets 37.3 54.1 26.1 17.2 13.5 CAMEL ratios (%) Balance sheet (Rmb mn) C. Tier I CAR 8.6 9.4 9.6 8.9 8.5 Gross loans to customers 259,023 345,423 409,558 469,558 524,859 C: CAR 10.6 11.0 10.9 9.9 9.4 Total gross earning assets 668,587 1,030,281 1,299,069 1,522,973 1,727,828 C: Equity/gross loans 12.8 14.4 16.3 15.9 15.9 Allowance for impairment loss (6,710) ( 10,194) (15,358) (21,522) (28,595) C: Equity/assets 4.9 4.8 5.1 4.9 4.8 Net interest earning assets 661,877 1,020,087 1,283,711 1,501,451 1,699,233 A: NPL ratio 0.88 1.23 1.59 1.97 2.36 Other non-interest earning assets 8,081 11,564 17,246 24,954 34,111 A: LLR/NPL 293 241 235 233 231 Total assets 669,957 1,031,650 1,300,958 1,526,405 1,733,344 A: LLR/total loans (%) 2.59 2.95 3.75 4.58 5.45 NPLs 2,290 4,233 6,530 9,254 12,376 A: NPL/(Equity + LLR) (%) 5.7 7.1 7.9 9.6 11.1 Customer deposits 363,280 516,026 639,873 735,853 824,156 E: ROAA 0.88 0.83 0.72 0.69 0.68 Total interest-bearing liabilities 626,176 960,620 1,208,395 1,421,515 1,615,260 E: ROAE 16.7 17.0 14.5 13.9 14.1 Non-interest-bearing liabilities 10,631 21,374 25,648 30,265 34,805 E: Cost to income 34.7 32.9 35.2 36.0 35.6 Share capital 11,507 13,037 17,960 17,960 17,960 E: Cost to income (excluding biz tax) 28.3 27.7 28.6 29.4 29.0 Total equity 33,150 49,657 66,914 74,626 83,279 E: Fee income/revenue 15.1 16.3 18.4 19.8 21.7 Total liabilities and equity 669,957 1,031,650 1,300,958 1,526,405 1,733,344 L: Gross loans/deposits 71.3 66.9 64.0 63.8 63.7 L: Avg. loans/gross earning assets 41.2 35.6 32.4 31.2 30.6 Loan portfolio breakdown 2014 9M15 L: Avg. gross earning assets/assets 99.7 99.8 99.9 99.8 99.7 Manufacturing 17.2% 14.6% ROAA/ROAE DuPont analysis(%) Wholesale and retail 11.7% 11.7% ROAE 16.7 17.0 14.5 13.9 14.1 Property 13.6% 11.3% leverage (Asset to equity, X) 19.0 20.5 20.0 20.0 20.6 Water and environment 5.9% 6.7% ROAA 0.88 0.83 0.72 0.69 0.68 Others 31.6% 38.2% Net interest inc. as % of avg. assets 2.51 2.42 2.25 2.18 2.10 Corporate 79.9% 82.4% Non-interest inc. as % of avg. assets 0.49 0.53 0.53 0.56 0.60 Mortgage 0.3% 0.5% Net fee income as % if avg. assets 0.45 0.48 0.51 0.54 0.58 Other consumer 0.1% 0.1% Op. rev. as % of avg. assets 3.00 2.95 2.79 2.74 2.69 Personal commercial 19.8% 16.9% Op. exp. as % of avg. assets (1.04) (0.97) (0.98) (0.98) (0.96) Retail PPOP as % of avg. assets 1.96 1.98 1.80 1.75 1.73 Market dimensions Impairment losses as % of avg. assets (0.79) (0.88) (0.84) (0.83) (0.83) No. of branches 128 Pretax as % of avg. assets 1.17 1.10 0.96 0.92 0.91 No. of staff 7,564 Tax as % of avg. assets (0.29) (0.27) (0.24) (0.23) (0.23) Attributable NPAT 0.88 0.83 0.72 0.69 0.68 Asset market share in JSB segment 2.8% PPOP/avg. RWA 3.28 3.57 3.27 3.10 3.00 Loan market share in JSB segment 2.1% Note: (1) The NIM above is based on the average of beginning and end balances of gross earnings assets rather than average daily balance. (2) The leverage ratio above refers to asset to equity ratio.

Source: Company data (2013-2015), Goldman Sachs Global Investment Research (2016E-2018E).

Exhibit 3: SWOT analysis for Zheshang

Strengths Key issues / swing factors Weaknesses 1. Corporate banking franchise backed by 1. Can Zheshang defend asset 1. Slightly softer ROE on funding cost and fee income innovative/client-oriented products quality after rapid asset growth and mgmt. changes? 2. Above-peer N-T earnings growth driven by rapid 2. Weak retail and deposit franchise asset expansion under its "full-asset class operation" 2. Can Zheshang defend its loan strategy pricing? 3. High leverage ratio and rapid capital deployment. 3. Resilient asset quality 3. Will Yangtze River Delta see Opportunities the stabilization of corporate Risks earnings? 1. Potential to defend its asset yields via product 1. High exposure to NSCA and equity-linked financing innovation and convenient services 4. Can Zheshang defend the 2. Develop interbank franchise/asset-mgmt. fee asset quality of its equity-linked 2. High balance sheet leverage income to cope with capital markets development financing if A share index 3. Any potential regulatory tightening against equity- 3. Potential to lower funding cost amid rate cuts weakens further? linked products 4. Defend asset quality as Zhejiang province might see an earlier stabilization trend.

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 4 May 3, 2016 China Zheshang Bank Co. (2016.HK)

Overview: Corporate banking franchise underpins N-T growth; initiate with Neutral

We initiate on Zheshang Bank with a Neutral and 12-m TP of HK$4.3. Zheshang is a nascent nationwide JSB headquartered in the Zhejiang province. It owned US$159bn total assets and US$7.6bn total equities, and delivered 17.0% ROAE in 2015. The bank accounted for 2.8% market share (source: PBOC) of joint-stock banks’ total assets and had 60.4% loan exposure to East China, as of 9M15. Leveraging its corporate banking franchise and relatively resilient asset quality vs. peers, we expect Zheshang to deliver 16% NPAT CAGR in FY15-FY18E with its “full-asset class operation” strategy (i.e., achieving efficient management of the financial market business and promoting diversified financial assets) offsetting a modest rise in its cost-income ratio.

Company strategy: Aiming to be Zhejiang province’s key financial platform According to Zheshang, it will continue to implement its “full-asset class operation” strategy, via traditional banking and cooperation with various financial institutions, to deliver comprehensive financial solutions to clients with the aim to become a nationwide leading JSB and one of Zhejiang province’s key financial platforms. We believe this strategy could drive the bank to further deliver client-oriented services, and expand its branches and assets.

Key strengths 1) Corporate banking franchise: We believe Zheshang has built up its corporate banking franchise by providing clients with convenience – in terms of bills management, flexible pledged financing, customized loan quota/duration/pricing as well as user-friendly e- banking transactions – and meeting their needs quickly. In addition, the bank offers innovative and diversified products which meet the funding demands of its clients.

2) Above-peer near-term earnings growth at 38% NPAT yoy/48% PPOP yoy in 2015, driven by the rapid asset expansion under its “full-asset class operation” strategy. To cope with interest rate deregulation and the rate cut cycle, the bank has been adjusting its asset allocation under the “full-asset class operation” strategy. It raised the proportion of investment assets significantly by 10pp which supported its significant asset growth at 50% and asset yields in 9M15.

3) Relatively resilient asset quality as evidenced by below-peer NPL+SML ratio and overdue formation rate as well as its resilience during 2012-2013 when the Zhejiang province saw rapidly rising NPLs. Looking forward, its macro environment – mainly the Zhejiang economy – although still challenging may see lower NPL formation rate than other regions as its NPL crystallization started 2-3 years earlier than peers and its economic structure is less exposed to upstream sectors. That said, after the rapid asset expansion, especially in 2015, the bank could face more challenges on asset quality.

Key risks Upside risk Better asset pricing and quality could lead to a rerating. If the NPL cycle (especially in Zhejiang Province) were to see an earlier recovery, the above- expectation asset quality may lead to rerating of the stock. In addition, if the solid corporate banking franchise of the bank were to derive better-than-expected asset pricing ability, then it could be an upside risk.

Goldman Sachs Global Investment Research 5 May 3, 2016 China Zheshang Bank Co. (2016.HK)

Downside risk 1) NPLs and financial market volatility may lead to earnings pressure given the bank’s relatively high exposure to NSCAs and equity-linked financing Under its “full-asset class operation” strategy, the bank has grown assets rapidly driven by investment receivables. Although such non-standard credit assets (NSCAs) could support its asset yields in the short term, they may add potential NPL/provision pressure in future. If the Rmb125bn/Rmb391bn structured financing/investment receivables excl. debt securities in 3Q15 were to be treated as loans, we calculate the adjusted provision/loan ratio would be at 2.19%/1.39% and adjusted L/D ratio would be at 93%/146%. That said, we believe its credit risk could be somewhat mitigated by various guarantee and credit enhancement measures and centralized credit extension management for interbank business and counterparty selection.

Substantial exposure to equity-linked investment in Zheshang’s off-balance sheet wealth management product (WMP) portfolio could impact the bank during capital market volatility, in our view. The balance of wealth management products issued by Zheshang increased from Rmb51.7bn at YE12 to Rmb168bn as of 3Q15. Equity products and NSCAs accounted for 50% and 14% of the balance, respectively, as of 3Q15.

2) High balance sheet leverage The bank’s rapid asset growth and below-peer return may result in pressure on capital positon and leverage ratio. We expect tier-1 CAR to decline to 8.5% in YE18 (vs. 8.5% regulatory minimum) from 9.6% in YE16. In addition, the bank had the lowest leverage ratio of 4.04% among its comparable peers as of September 30, 2015, compared with the regulatory minimum of 4%. We believe its relatively thin capital and leverage buffer could constrain the bank’s longer-term growth potential in more adverse macro and earnings scenarios. 3) Any regulatory tightening against equity-linked products could slow down relevant on and off balance sheet asset expansion There is no clear regulatory rule on whether or how much a bank can invest in equity- linked products via WMPs and receivables investments. For 3Q15, equity-linked products accounted for 50% of Zheshang’s WMP balance and hence any regulatory tightening could slow down its asset expansion on and off the balance sheet.

Financials In FY15-FY18E, we expect Zheshang to register 16% NPAT CAGR vs. average 7% for listed banks under our coverage, with gradual NIM decline and rapid fee income growth offsetting modest rise in cost-income ratio and relatively high credit cost.

We expect rapid 19% asset CAGR in FY15-FY18E to lead to 18% net interest income CAGR. In addition to the 14% loan CAGR, we expect investment assets to expand at 23% CAGR under its “full-asset class operation” strategy.

We forecast Zheshang’s NIM to gradually decline by 32bp in FY15-FY18E given rate cuts and rate deregulation since November 2014. We believe the company will see manageable asset yields at 5.1% in 2016E, 5.0% in 2017E, and 4.8% in 2018E amid the rate cut cycle.

We project non-interest income CAGR in FY15-FY18E of 29% on the back of its growth momentum in wealth management products and other fee businesses’ development on a low base.

We believe its cost-income ratio may edge up on branch expansion, and expect credit cost to move up to 199bp/207bp/212bp in 2016E/2017E/2018E on rapid balance sheet expansion, strong PPOP growth, and China’s ongoing NPL cycle.

Goldman Sachs Global Investment Research 6 May 3, 2016 China Zheshang Bank Co. (2016.HK)

Company profile Initially incorporated as Zhejiang Commercial Bank in 1993, the bank was reorganized as a nationwide joint-stock bank and renamed as China Zheshang Bank Co., Ltd. (Zheshang) in 2004. The headquarters of Zheshang is in Hangzhou, the capital city of Zhejiang.

Zheshang is an early entrant to the SME market, with its first SME specialized sub-branch opened in 2006. The bank also launched its first SME specialized online banking system in China in 2007.

In 2015, Zheshang issued 3.0 bn new shares and increased its capital reserves.

Post its recent IPO (March 2016), Zheshang’s major shareholders included:

 Zhejiang Provincial Financial Holding and Zhejiang Harbour Investment Group, owned by the affiliate of People’s Government of Zhejiang, holds a 20.53% combined stake.

 Traveller Automobile Group, a private-owned enterprise specializing in cars sales, investment, imports and exports, owns a 7.5% stake.

 China Wanxiang Holding owns a 37.32% stake in Minsheng Life Insurance Company, another shareholder of Zheshang; together, they own a 7.5% stake.

Zheshang has started opening branches outside of the Zhejiang province since 2006 and has 128 branches covering 12 provinces in Mainland China as of September 30, 2015.

Exhibit 4: Current shareholding structure

Domestic Zhejiang Provincial Traveller Hengdian Group Zhejiang Provincial Minsheng Life Other domestic shareholders Financial Holdings Automobile Group Holdings Limited Energy Group Insurance Co. shareholders

H‐share Zhejiang Harbour Yanzhou Coal Int'l Shaoxing Lingyan Shenwan Hongyuan Other H shareholders Investment Group Holdings Investment Partners Group Ltd. shareholders

14.96%5.57%7.50% 2.23% 6.92% 1.39% 5.11% 1.10% 4.47% 10.84% 40%

100% China Zheshang Bank

Source: Company data.

Exhibit 5: Milestones of Zheshang

1993 Zhejiang Commercial Bank, the predecessor of Zheshang, was established in Ningbo, Zhejiang

2004 The bank was renamed as “China Zheshang Bank Co.,Ltd.” and obtained approval to operate foreign exchange settlement business

The bank opened its first specialized sub‐branch which serves small and micro enterprises exclusively, also opened first branch outside 2006 of Zhejiang in Chengdu

The bank officially launched online banking with a Small Enterprise Version, which was the first online banking service specially 2007 designed for small enterprises in China

The bank launched a new generation of the counter business processing system and became the first bank to develop information 2009 systems, reengineering business processes based on enterprise‐level service‐oriented architecture (SOA) in China

Shen Renkang joined the bank as the Chairman of board; Liu Xiaochun joined the bank as the President; the bank was the first to 2014 launch the “Yongjin Bills Pool” that helped to rapidly gain market share in the professional bill services sector

2015 8,648 million RMB capital injection was made by subscribing shareholders, which helped increase the bank's capital reserve

Source: Company data.

Goldman Sachs Global Investment Research 7 May 3, 2016 China Zheshang Bank Co. (2016.HK)

The bank has a diversified shareholding structure and no single controlling shareholder holding more than a 30% stake. Since its capital injection in 2015, the bank has 26 registered shareholders and the aggregate shareholding of private-owned enterprise shareholders has exceeded 70%.

In 2014, Zheshang’s president, Liu Xiaochun, and chairman of the board, Shen Renkang, joined the bank. The chairman has over 30 years of experience in the government, including being the Mayor of Quzhou City in the Zhejiang province; the president has over 32 years of experience in China’s banking industry, including being the general manager of Agricultural Bank of China’s Hong Kong Branch. We note that, in 2015, Zheshang saw an acceleration in asset growth with its total assets exceeding Rmb1tn.

Valuation: 12-m TP of HK$4.3 based on price to historical book

Our 12-m target price of HK$4.3 implies 10% potential upside and 1.03X FY16E P/B. This is based on the median 1.15X P/historical BV of 5 H-share China banks with small free float. These banks have been consistently trading around/above their historical book for up to 2 years, likely due to their shareholder structure and small free-float. Their H shareholding is concentrated in major domestic shareholders and the free-float portion is less than 40%, which results in less than US$1.5mn daily turnover.

Even though our RIM-based valuation method suggests 0.68X 2016E P/B, we believe it is tough for its share price to converge to its implied valuation in 12 months based on trading history of H-share banks with comparable shareholder structure and small free-float. With small free-float and limited involvement of institutional investors, we believe its valuation may hover around/slightly above its historical book value similar to the other five listed banks. (RIM assumptions: 7.5% NPA ratio of loans/non-standard credits in its on-B/S investments and off B/S wealth management products or 26.9% deduction of its equity, 12.4% COE and 0.55% 2025E ROA).

Exhibit 6: BOQD, Zhengzhou, Jinzhou traded at 1.00X-1.33X vs. historical book value. The 5 banks on avg. traded at 1.15X their historical book value

Market Price P/E (X) P/B (X) ROE (%) Daily cap Free Float turnover (%) (US$ mn) Ticker Company 4/28/2016 (US$ mn) 2016E 2017E Historical 2015 2016E 2017E 2015 2016E 2017E 2016.HK Zheshang 3.9 6,589 7.4 6.4 1.00 0.87 0.94 0.84 17.0 14.5 13.9 0.31 25 3866.HK BOQD 4.9 2,523 8.0 6.8 1.06 0.99 0.93 0.84 13.7 12.4 13.0 0.12 21 3698.HK Huishang 3.8 5,427 5.1 4.6 1.18 0.82 0.72 0.64 15.0 14.8 14.1 1.20 38 2066.HK Shengjing 11.2 8,414 7.3 6.5 1.64 1.22 1.10 0.97 18.3 15.8 15.4 1.35 28 6196.HK Zhengzhou 4.2 2,943 NA NA 1.12 1.02 NA NA 23.0 NA NA 0.10 33 0416.HK Jinzhou 6.0 4,800 NA NA 1.33 1.11 NA NA 23.8 NA NA 0.95 29 Median 7.4 6.5 1.15 1.00 0.93 0.84 15.9 14.6 14.0 0.6 28 Note: (1) The 2016E-2017E estimates of Shengjing and Huishang Bank are based on Bloomberg’s consensus. (2) The timeframe of daily turnover and free-float is from January 1, 2016 to April 28, 2016.

Source: Bloomberg, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 8 May 3, 2016 China Zheshang Bank Co. (2016.HK)

Exhibit 7: Huishang has been trading at 0.93X-1.24X Exhibit 8: Shengjing has been trading at 1.01X-1.85X historical BV with much lower volatility than peers in the past two years

Huishang' share price Sector 12m forward PB(RHS) Shengjing's share price Sector 12m forward PB(RHS)

7.0 1.6 Huishang's PB(2013A, RHS) 20.0 PB(1H13A, RHS) 2.0

18.0 1.8 6.0 1.4 16.0 1.6 1.2 5.0 14.0 1.4 1.0 4.0 12.0 1.2 0.8 10.0 1.0 3.0 0.6 8.0 0.8

2.0 6.0 0.6 0.4

4.0 0.4 1.0 0.2 2.0 0.2 0.0 0.0 0.0 0.0 5-Oct-15 9-Feb-15 6-Apr-15 8-Feb-16 1-Jun-15 7-Sep-15 9-Mar-15 2-Nov-15 13-Jul-15 27-Jul-15 4-May-15 19-Oct-15 12-Jan-15 26-Jan-15 23-Feb-15 20-Apr-15 11-Jan-16 25-Jan-16 22-Feb-16 29-Dec-14 15-Jun-15 29-Jun-15 14-Dec-15 28-Dec-15 21-Sep-15 23-Mar-15 10-Aug-15 24-Aug-15 16-Nov-15 30-Nov-15 18-May-15 5-Oct-15 6-Apr-15 8-Feb-16 9-Feb-15 1-Jun-15 7-Sep-15 9-Mar-15 2-Nov-15 13-Jul-15 27-Jul-15 4-May-15 19-Oct-15 20-Apr-15 11-Jan-16 25-Jan-16 22-Feb-16 12-Jan-15 26-Jan-15 23-Feb-15 15-Jun-15 29-Jun-15 14-Dec-15 28-Dec-15 29-Dec-14 21-Sep-15 23-Mar-15 10-Aug-15 24-Aug-15 16-Nov-15 30-Nov-15 18-May-15

Source: Datastream, Wind. Source: Datastream, Wind.

Exhibit 9: Dupont analysis of Zheshang and comparison with other banks (FY2015): Zheshang’s ROE slightly higher than peer JSBs mainly on higher leverage. Its ROE lower than Industrial on NIM and fees although it has higher leverage

Joint Covered Zheshang vs. covered vs. stock listed vs. JSBs listed banks' Industrial CMB CNCB SPDB HuaXia PAB banks' banks' Industrial avg 2015 2016E 2017E 2018E avg. avg

ROE 17.0% 14.5% 13.8% 14.0% -1.4% 0.2% 0.7% 18.4% 17.0% 14.2% 19.0% 17.2% 15.0% 16.8% 16.3% leverage 20.5 19.8 19.7 20.6 2.2 3.9 5.2 18.4 15.1 15.8 17.2 17.6 16.0 16.7 15.3 ROA 0.83% 0.73% 0.70% 0.68% -0.18% -0.18% -0.23% 1.00% 1.13% 0.91% 1.10% 0.98% 0.93% 1.01% 1.06% NII % avg. assets 2.42% 2.25% 2.18% 2.10% 0.00% -0.08% -0.07% 2.42% 2.68% 2.26% 2.45% 2.38% 2.82% 2.50% 2.49% Non-interest inc. % avg. assets 0.53% 0.53% 0.56% 0.60% -0.15% -0.36% -0.17% 0.69% 1.28% 0.89% 0.72% 0.67% 1.11% 0.89% 0.71% Net fee income 0.48% 0.51% 0.54% 0.58% -0.15% -0.32% -0.14% 0.64% 1.05% 0.77% 0.60% 0.64% 1.13% 0.80% 0.63% Other op income 0.05% 0.02% 0.01% 0.01% 0.00% -0.04% -0.02% 0.05% 0.23% 0.12% 0.12% 0.03% -0.02% 0.09% 0.08% Oper. rev. % avg. assets 2.95% 2.79% 2.74% 2.70% -0.15% -0.47% -0.28% 3.11% 3.96% 3.14% 3.17% 3.05% 4.10% 3.42% 3.23% Oper. exp. % avg. assets -0.97% -0.94% -0.94% -0.96% -0.04% 0.21% 0.20% -0.93% -1.33% -1.09% -0.89% -1.29% -1.57% -1.18% -1.17% Preprov op profit % avg. assets 1.98% 1.85% 1.79% 1.74% -0.19% -0.25% -0.05% 2.17% 2.63% 2.04% 2.26% 1.77% 2.53% 2.23% 2.04% Impairment losses % avg. assets -0.88% -0.88% -0.86% -0.83% -0.02% 0.03% -0.23% -0.86% -1.16% -0.86% -0.84% -0.46% -1.30% -0.92% -0.65% Pretax % avg. assets 1.10% 0.97% 0.93% 0.91% -0.21% -0.22% -0.29% 1.31% 1.47% 1.19% 1.45% 1.30% 1.23% 1.32% 1.39% Tax % avg. assets -0.27% -0.24% -0.23% -0.23% 0.00% 0.04% 0.04% -0.27% -0.33% -0.29% -0.34% -0.32% -0.30% -0.31% -0.32% Profit for the year 0.83% 0.73% 0.70% 0.68% -0.21% -0.19% -0.25% 1.04% 1.13% 0.94% 1.12% 0.98% 0.93% 1.02% 1.08% NPAT 0.82% 0.73% 0.70% 0.68% -0.20% -0.19% -6.49% 1.03% 1.13% 0.91% 1.10% 0.98% 0.93% 1.01% 7.32%

Source: Company data (2015), Goldman Sachs Global Investment Research (2016E-2018E), Data from respective companies.

Goldman Sachs Global Investment Research 9 May 3, 2016 China Zheshang Bank Co. (2016.HK)

Corporate banking franchise and relatively resilient asset quality

According to Zheshang, it will continue to carry out its “full-asset class operation” strategy via traditional banking and cooperation with various financial institutions to deliver comprehensive financial solutions to clients, with an aim to become a nationwide leading JSB and one of Zhejiang province’s key financial platforms. We believe this strategy could drive the bank to further deliver client-oriented services, expand its branches and assets, and achieve high earnings growth.

We believe Zheshang’s three key competitive strengths are: 1. Corporate banking franchise providing clients with convenience and meeting their needs quickly

 It provides corporate clients with convenience on the back of its client orientation. For example, its bills management services help improve the liquidity of its bank acceptance and its working capital management efficiency. Its innovative “asset pool” improves the convenience of loan application. Such pools can aggregate the value of a corporate client’s various financial assets and offer a comprehensive credit quota with tailored duration and pricing, in our view. Further, we note that such transactions could be easily conducted via a user-friendly e-banking website (Exhibit 6).

 In addition, the bank offers innovative and diversified products which meet the funding demand of clients such as small corporate e-banking, bill pool financing, asset pool financing, etc. The bank is also exploring the synergy between equity investments and lending by cooperating with private equity and venture capital (PEVC) non-bank FIs and leveraging various financial instruments so as to switch its exposure from traditional industry to new-economy segments.

Predominantly due to the client-oriented services above, the bank has seen a significant expansion in pledged loans and discounted bill loans over 2012-9M15 (Exhibit 7).

Exhibit 10: Its “asset pool” model assesses the value of a Exhibit 11: Discounted bills and pledged loans have been corporate client’s various financial assets and offers a expanding significantly and recorded ytd growth at 246% comprehensive credit line and customized lending and 124% in 9M15 facilities

Rmn bn Clients’ various 50 Obtain credit 44 financial assets line and raise 45 Ytd can be uploaded to money via 40 38 growth in 9M15 its asset pool… various lending 35 facilities 30 Discounted bills 246% 25 WMP investments Asset Pool Letters of credit 20 17 17 Pledged loans 124% Deposits 15 12 13 Short-term loans 10 6 Bank acceptances… 4 Entrust loans... 5 - 2012 2013 2014 9M15

Source: Company data. Source: Company data.

2. Above-peer earnings growth in the near term, driven by rapid asset expansion under its “full-asset class operation” strategy

The bank has achieved leading growth rates, especially in 9M15 at 27% NPAT growth yoy vs. a 6% average for the listed banks that we cover (Exhibit 8). The key driver behind this is

Goldman Sachs Global Investment Research 10 May 3, 2016 China Zheshang Bank Co. (2016.HK)

its rapid asset expansion on a small base, especially after the new president and CEO joined in 2014 and promoted the “full-asset class operation” strategy.

Particularly, to cope with interest rate deregulation and asset dissemination, its financial investments almost doubled, lifting up its portion to total assets meaningfully by 10.5pp in 9M15. This helped better defend Zheshang’s asset yields amid the rate cut cycle than peers, in our view. It managed to earn 6% investment asset yields in 9M15, 8bps higher than as of 2014 (Exhibit 11). That said, its rapid asset growth is accompanied by fast capital deployment and fast growth in NSCAs/equity linked products, which could limit its long- term asset growth potential and/or add NPL pressure.

Exhibit 12: Zheshang’s PPOP increased 51.1% and NPAT Exhibit 13: Total assets expanded at 50% in 9M15 and was up 26.8% in 9M15 30% 2012-14 CAGR

RMB mn PPOP yoy NPAT yoy 1,004,315 51.1%

669,957

26.8% 488,117 20.1% 393,839

6.6%

Zheshang Covered Zheshang Covered 2012 2013 2014 9M15 banks banks

Source: Company data, Data from respective banks. Source: Company data.

Exhibit 14: Under the “full-asset class operation” Exhibit 15: Investment yield based on avg. daily balance strategy, investments as % of assets meaningfully up by edged up likely thanks to expanding non-standard credits 10.5pp as its balance almost doubled while loans’ share in 9M15, offsetting rate cuts and supporting asset yield down by 5pp in 9M15

1.6% 1.7% 1.8% 1.9% Asset yield Investment yield 8% Others 16% 13% 11% 6.0% 11% 5.9% 6.0% 14% 5.8% Cash and balances with 5.7% 30% 33% central bank 5.5% 5.5% 5.4% 35% 46% Due from banks and 8% 9% other financial 5.0% institutions Financial investments 4.5% 4.4% 45% 44% 38% 33% 4.0% Loans and advances to 3.9% customers

2012 2013 2014 9M15 3.5% 2012 2013 2014 9M15

Source: Company data. Source: Company data.

3. Relatively resilient asset quality as evidenced by below-peer NPL+SML ratio in 1H15 and NPL ratio during the Zhejiang’s 2012 NPL cycle

The bank has registered below-peer NPL+SML ratio at 3.09% in 2015 vs. average of peers under our coverage at 4.4% as of 1H15. In addition, its ratio of NPLs over 1-day overdues at 67% was much higher than peers’ average (Exhibit 12). It also demonstrated resilience in 2012-2013

Goldman Sachs Global Investment Research 11 May 3, 2016 China Zheshang Bank Co. (2016.HK)

when Zhejiang saw rapidly rising NPLs. During this period, as a Zhejiang-based bank, it only reported 0.64% NPL ratio vs. 1.98% NPL ratio of Zhejiang’s banking industry in 2013 (Exhibit 13). That could be attributed to its underwriting standards and loan mix adjustment. For instance, seeing the manufacturing sector’s rising NPL risk, the bank exited some manufacturing projects and cut its exposure to this sector by c.9pp to 14.6pp from 2012 to 9M15.

Looking forward, the NPL formation rate in the Zhejiang province and Yangtze River Delta may be lower than other regions in China, in our view, as: 1) the NPL crystallization in East China started 2-3 years earlier than many inner land regions. Actually, the operating loss yoy in Yangtze River Delta last year not only decelerated vs. two years ago but was also well below the nationwide level (Exhibit 15); and 2) the economic structure in Zhejiang is much less exposed to upstream sectors and hence less NPL pressure from weak upstream sectors (16% proportion to NBS industrial companies’ sales in Zhejiang vs. 27% in China). That said, after the rapid asset expansion, especially in 2015, the bank could face more challenges on asset quality.

Exhibit 16: Zheshang registered below-peer NPL+SML Exhibit 17: Zheshang also showed resilience in 2012-2013 ratio, overdue ratio when the Zhejiang province saw rapidly rising NPLs NPL ratio 2012 2013 2014 2015 Zheshang Zhejiang Covered listed bank avg NPL + SML ratio 5.0% Peers' avg. 2.92% 2.77% 3.67% 4.81% 4.5% Zheshang 1.43% 1.74% 2.29% 3.09% 4.0% 3.5% NPL formation rate 3.0% Peers' avg. 0.24% 0.47% 0.92% 1.66% 2.37% 2.5% Zheshang 0.35% 0.67% 1.38% 1.79% 2.0% 1.5% 1 day+ overdue ratio 1.35% 1.0% Peers' avg. 1.21% 1.41% 2.16% 2.68% 1.23% Zheshang 0.77% 0.86% 1.63% 1.83% 0.5% 0.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 9M15 2015 NPL/overdue ratio Peers' avg. 77% 70% 52% 53% Zheshang 60% 74% 54% 67% Note: peers refer to our covered banks. NPL formation rate = net new NPL formation/gross loans

Source: Company data, Data from respective banks. Source: Company data, CEIC, Data from respective banks.

Exhibit 18: Zhejiang’s GDP yoy outperformed China’s in Exhibit 19: The op. loss of industrial companies in 2015, recovering from below-peer growth in 2012-2014 Yangtze River Delta (based on NBS) decreased 0.2% in December 2015, vs. 0.8% increase yoy in China Zhejiang GDP yoy minus China(RHS) % % 50 Yangtze River Delta China China Zhejiang 17 10 40 8 12 6 30 4 7 20 2 2 - 10 -3 (2) 0 -8 (4) (6) -13 -10 (8) -18 (10) -20 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Oct-99 Oct-01 Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 Oct-13 Oct-15 Feb-99 Feb-01 Feb-03 Feb-05 Feb-07 Feb-09 Feb-11 Feb-13 Feb-15 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 Jun-14

Source: CEIC. Source: CEIC.

Goldman Sachs Global Investment Research 12 May 3, 2016 China Zheshang Bank Co. (2016.HK)

Key risks

Upside risk Better asset pricing and quality could lead to a rerating. If the NPL cycle (especially in Zhejiang Province) were to see an earlier recovery, the above- expectation asset quality may lead to rerating of the stock. In addition, if the solid corporate banking franchise of the bank were to derive better-than-expected asset pricing ability, then it could be an upside risk. Downside risk 1. NPLs and financial market volatility may lead to earnings pressure given the bank’s relatively high exposure to NSCAs and equity-linked financing

We believe Zheshang’s relatively high NSCA exposure vs. our covered banks may add potential NPL/provision pressure. Under its “full-asset class operation” strategy, the bank has grown assets rapidly driven by gross investment receivables excl. debt securities, which reached Rmb391bn before provisions, equivalent to 39%/115% of total assets/loans as of September 30, 2015. Such assets expanded at 180% CAGR vs. total assets at 30.4% during 2012-2014. Among others, wealth management products sponsored by banks, and trust plans/asset management plans sponsored by other financial institutions totaled Rmb198bn and Rmb189bn, respectively, by 3Q15.

Nearly all of the investments carry fixed interest rates. Although such NSCAs could support its asset yields and earnings growth in the short term, they may add potential NPL/provision pressure in future. We believe the bank could be exposed to credit risk from part of those NSCA investment receivables, although some of the underlying assets are high-grade bonds and interbank deposits with low risks. The bank charged only 0.2% provision ratio in 3Q15. If the Rmb125bn/Rmb391bn structured financing/investment receivables in 3Q15 were to be treated as loans, we calculate the adjusted provision/loan ratio would be at 2.19%/1.39% and adjusted L/D ratio would be at 93%/146%.

That said, we believe its credit risk could be somewhat mitigated by: 1) various guarantee and credit enhancement measures (Exhibit 19), including guarantees by bank credits and third-party banks (51.1% of investments in trust and asset management schemes), certificate of deposits (26.9% of total), and non-bank FIs (3.1% of total) in 2015; and 2) centralized credit extension management for interbank business and counterparty selection. The risk classification and life-time management of the interbank business are consistent with those for corporate loans.

We note that substantial exposure to equity-linked investment in Zheshang’s WMP portfolio could impact the bank during capital market volatility. The balance of wealth management products issued by Zheshang increased from Rmb51.7bn at YE12 to Rmb168bn as of September 30, 2015. Equity products and NSCAs accounted for 50% and 14% of the balance respectively as of 9M15, with the rest invested into bonds and money market instruments. Zheshang did not disclose how much of the underlying assets are invested into public equity vs. non-listed companies. Although commercial banks are not allowed to make direct equity investment, structured products facilitated by WMP money allow banks to become senior fixed-income investor vs. junior tranche investor which may utilize up to 2-3 times asset/equity leverage. Exhibit 23 shows the structure of a typical equity-linked product.

Although 99% of Zheshang’s WMPs are non-principal protected as of 9M15, potential loss caused by financial market volatility may create reputational risk. Furthermore, the relatively short duration of WMPs (majority of products ranging from one month to six months) could expose the bank to liquidity risk in the case of equity investment with a

Goldman Sachs Global Investment Research 13 May 3, 2016 China Zheshang Bank Co. (2016.HK)

much longer investment horizon. We believe the market risks could be mitigated by risk management practices such as strictly following warning and liquidation levels for the bank’s counterparties.

Exhibit 20: Zheshang’s gross investment receivables excl. Exhibit 21: Zheshang’s adjusted provision/loan ratio debt securities totaled Rmb391bn in 9M15 would be at 1.39% in 3Q15, lower than our covered The breakdown of NSCAs investments, Rmb mn listed banks’ in 1H15

NSCAs to (%) 115% Dilution by interbank NSCAs 6% 9% 73% total loans Adj. provision/loan ratio for interbank NSCA Forfaiting 390,973 3.4

2.6 2.3 2.3 2.4 WMP 2.2 2.2 2.2 198,061 1.8 1.8 1.9 sponsored 1.7 1.7 1.8 by bank 188,895 1.3 1.4

Trust plans and AMP 80,329 189,109 19,159 PAB CCB BOC CMB 10,435 ICBC SPDB CNCB BONJ BONB BOCQ 76,520 Total NSCA BOQD CQRCB BoCom Hua Xia Hua Industrial 2012 2013 2014 9M15 Zheshang Note: Adjusted provision/loan = provisions/adjusted loans. Adjusted loans are Note: Included allowance for impaired losses. derived assuming interbank NSCAs to be loans.

Source: Company data. Source: Company data, Data from respective banks, Goldman Sachs Global Investment Research.

Exhibit 22: Zheshang’s adjusted L/D ratio would be at Exhibit 23: 76% of Rmb189.1bn asset mgmt/trust plans 146% in 3Q15, higher than peers in 1H15 were guaranteed by banks or CDs in 2015

(%) interbank NSCAs as % of deposits Collateralize Unsecured d by 5% Loan/deposit ratio Guaranteed by properties third-party 3% 146 companies 139 11% 108 98 102104 105 87 87 87 87 93 95 Guaranteed by 71 74 77 non-bank FIs 65 3% Guaranteed by bank credit 50% Pledged by CDs 27%

Guaranteed CEB PAB CCB ABC BOC CMB ICBC by third- BOBJ SPDB BONJ CNCB BOCQ BOQD

BoCom party banks

Industrial 1% Zheshang Minsheng

Note: Adjusted L/D = adjusted loans/deposits. Adjusted loans are derived assuming interbank NSCAs to be loans.

Source: Company data, Data from respective banks, Goldman Sachs Global Source: Company data. Investment Research.

Goldman Sachs Global Investment Research 14 May 3, 2016 China Zheshang Bank Co. (2016.HK)

Exhibit 24: Its WMP balances increased from Rmb51.6bn Exhibit 25: Equity products and NSCAs accounted for at YE12 to Rmb168bn in 3Q15 50% and 14% of the balance, respectively, as of 9M15

RMB mn 126,203 Money market instruments 9.1% Personal Bonds Other equity 27.1% products 50,673 49.6% 42,804 42,200 Corporates Non- 28,297 standard 14,871 debt assets 14.2% 986 3,264

2012 2013 2014 9M15

Source: Company data. Source: Company data.

2. High balance sheet leverage

The bank’s rapid asset growth and below-peer return may result in pressure on capital positon and leverage ratio. This may limit the bank’s growth potential in the absence of regular capital replenishment and/or improvement of ROE and return on RWAs. We expect tier-1 CAR to decline to 8.5% at YE18 (vs. 8.5% regulatory minimum) from 9.6% at YE16 on the back of our assumptions of: 1) 22% CAGR in RWA in FY15-18E, and 2) 14.1% average ROAE during the period. In addition, the bank had the lowest leverage ratio of 4.04% among its comparable peers as of September 30, 2015, compared with the regulatory minimum of 4%. We believe the relatively thin capital and leverage buffer could constrain the bank’s growth potential over the long term in more adverse macro and earnings scenarios.

Exhibit 26: Zheshang had the lowest leverage ratio of 4.04% among its peers as of September 30, 2015

8% 7.1% 7%

6% 5.6% 5.2% 5.0% 4.9% 5% 4.7% 4.7% 4.0% 4%

3%

2%

1%

0% ICBC CMB SPDB CNCB BONJ Hua Xia PAB Zheshang

Source: Company data, Data from respective banks.

Goldman Sachs Global Investment Research 15 May 3, 2016 China Zheshang Bank Co. (2016.HK)

3. Any regulatory tightening against equity-linked products could slow down relevant on and off balance sheet asset expansion

While regulators set the ceiling for the NSCA exposure of WMPs (35% of WMP balance last year or 4% of total assets last year, whichever is lower), there is no clear rule on whether or how much a bank can invest in equity-linked products via WMPs and receivables investments. For 3Q15, equity-linked products accounted for 50% of Zheshang’s WMP balance and hence any regulatory tightening could slow down its asset expansion on and off the balance sheet.

Exhibit 27: A typical financing structure for corporates’ major shareholders by exploring the synergy between equity investment and lending. Its off balance sheet WMP funds invested in a private equity fund as a senior tranche ultimately go to the company’s equity Illustration of a typical equity-linked product structure

Enterprise

Bank loan Debt PE fund Banks' off B/S WMP AMF Senior tranche Equity Major shareholders of Junior the enterprise tranche

Note: AMF denotes asset management plans.

Source: 21st Century Business Herald, Goldman Sachs Global Investment Research.

Financials

In FY15-FY18E, we expect Zheshang to register 16% NPAT CAGR vs. average 2% for listed banks under our coverage, with gradual NIM decline and rapid fee income growth offsetting modest rise in cost-income ratio and relatively high credit cost.

 We expect 19% asset CAGR in FY15-FY18E to lead to 18% net interest income CAGR under its “full asset class operation” strategy. In addition to 14% loan CAGR, we expect investment assets to expand at 23% CAGR leveraging its corp banking franchise and innovative products.  We forecast Zheshang’s NIM to gradually decline to 2.26%/2.18%/2.10% in FY16E/FY17E/FY18E from 2.42% in FY15 given rate cuts and rate deregulation since November 2014. We believe the company will see manageable asset yields at 5.1% in 2016E, 5.0% in 2017E and 4.8% in 2018E amid rate cuts, largely owing to its investment assets and product innovation. Its funding cost could trend down based on its time deposit pricing at 1.3X-1.35X the benchmark rate.  We project its non-interest income in FY15-FY18E at 29% CAGR. We expect the bank’s WMP fees’ growth momentum to continue. Other businesses, including credit card and wealth management services, may also take off after initial investment.  We expect the cost-income ratio to edge up to 35.6pp in 2018E vs. 32.9pp in 2015 because of branch expansion and retail business investment. As a nationwide bank, it only owned 128 branches covering 12 provinces as of 3Q15, much smaller than other

Goldman Sachs Global Investment Research 16 May 3, 2016 China Zheshang Bank Co. (2016.HK)

JSBs with thousands of branches. That said, due to its good cost control and strong top-line revenue growth, we project the CIR to be still well below peers’ post 2015.

 As a result, we forecast PPOP to grow at 19% FY15-FY18E CAGR.  In terms of credit cost, we expect it to move up to 199bp/207bp/212bp in 2016E/2017E/2018E, higher than our covered JSBs’ average at 155bp/157bp/166bp, since its credit assets tend to grow meaningfully faster than peers, and its strong PPOP growth leaves room for buildup of provisions during a challenging macro environment in China.

Exhibit 28: Zheshang’s P&L statement

INCOME STATEMENT YoY growth FY15 to 18E Rmb mn 2012 2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E CAGR Interest income 18,489 23,013 32,198 47,430 59,827 70,033 78,530 24% 40% 47% 26% 17% 12% 18% Interest expense (8,997) (11,898) (17,663) (26,844) (33,538) (39,229) (44,346) 32% 48% 52% 25% 17% 13% 18% Net interest income 9,492 11,115 14,535 20,586 26,290 30,804 34,184 17% 31% 42% 28% 17% 11% 18%

Non-interest income 974 2,380 2,862 4,545 6,196 7,862 9,718 144% 20% 59% 36% 27% 24% 29% Fee and commission income 969 2,366 2,691 4,194 6,114 7,817 9,707 144% 14% 56% 46% 28% 24% 32% Agency service 244 1,062 1,405 859 1,031 1,186 1,364 336% 32% -39% 20% 15% 15% 17% Wealth management business 417 649 354 2,131 3,538 4,782 6,216 56% -45% 502% 66% 35% 30% 43% Custodian and other fiduciary service 12 234 267 159 238 286 329 1841% 14% -40% 50% 20% 15% 27% Credit commitment 137 176 265 484 580 667 767 29% 51% 82% 20% 15% 15% 17% Underwriting service 59 126 276 335 418 511 588 114% 118% 21% 25% 22% 15% 21% Settlement business 49 54 42 84 110 137 158 9% -21% 100% 30% 25% 15% 23% Others 51 66 83 142 199 248 286 28% 26% 70% 40% 25% 15% 26% Fee and commission expense (92) (47) (70) (93) (130) (168) (201) -49% 49% 32% 40% 29% 20% 29% Net fee and commission income 878 2,319 2,621 4,101 5,984 7,650 9,506 164% 13% 56% 46% 28% 24% 32% Non-NII or fees income 97 62 240 444 212 212 212 -36% 291% 85% -52% 0% 0% -22% Operating income 10,466 13,496 17,397 25,130 32,486 38,666 43,902 29% 29% 44% 29% 19% 14% 20%

Operating expenses -4,045 -5,271 -6,028 -8,257 -11,451 -13,922 -15,626 30% 14% 37% 39% 22% 12% 24% Staff costs (1,442) (2,286) (2,722) (4,304) (5,853) (7,282) (8,156) 59% 19% 58% 36% 24% 12% 24% D&A (150) (177) (195) (208) (250) (297) (333) 18% 11% 7% 20% 19% 12% 17% Business tax and surcharges (799) (941) (1,101) (1,305) (2,176) (2,537) (2,875) 18% 17% 19% 67% 17% 13% 30% Others (1,654) (1,867) (2,010) (2,440) (3,172) (3,806) (4,263) 13% 8% 21% 30% 20% 12% 20%

Pre-provision operating profit 6,422 8,225 11,368 16,873 21,034 24,744 28,276 28% 38% 48% 25% 18% 14% 19%

Impairment losses on assets -1,063 -1,703 -4,576 -7,493 -9,791 -11,673 -13,496 60% 169% 64% 31% 19% 16% 22%

Profit before income tax 5,359 6,521 6,792 9,380 11,244 13,071 14,780 22% 4% 38% 20% 16% 13% 16% Income tax expense (1,333) (1,620) (1,697) (2,330) (2,792) (3,246) (3,671) 22% 5% 37% 20% 16% 13% 16% Tax rates -24.9% -24.8% -25.0% -24.8% -24.8% -24.8% -24.8%

Net profit 4,026 4,901 5,096 7,051 8,451 9,825 11,109 22% 4% 38% 20% 16% 13% 16%

Note: Non-interest income equals to operating income minus net interest income.

Source: Company data (2012-2015), Goldman Sachs Global Investment Research (2016E-2018E).

Goldman Sachs Global Investment Research 17 May 3, 2016 China Zheshang Bank Co. (2016.HK)

Exhibit 29: Zheshang’s balance sheet

BALANCE SHEET YoY growth FY15 to Rmb mn 2012 2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E 18E CAGR ASSETS Cash and balances with central banks 61,018 64,356 75,427 87,650 108,651 125,459 140,470 5% 17% 16% 24% 15% 12% 17% Deposits and placements with banks & other FIs 117,726 158,521 93,686 76,607 85,800 94,380 103,818 35% -41% -18% 12% 10% 10% 11% Loans to customers 178,740 212,571 252,312 335,229 394,200 448,036 496,265 19% 19% 33% 18% 14% 11% 14% Gross loans to customers 182,306 217,137 259,023 345,423 409,558 469,558 524,859 19% 19% 33% 19% 15% 12% 15% Corporate loans excl. discounted bills 141,544 170,690 194,149 242,485 288,557 331,840 370,002 21% 14% 25% 19% 15% 12% 15% Personal loans 34,922 42,931 52,071 63,111 73,209 84,190 95,977 23% 21% 21% 16% 15% 14% 15% Discounted bills 5,840 3,516 12,803 39,827 47,793 53,528 58,881 -40% 264% 211% 20% 12% 10% 14% Impaired loans 845 1,387 2,290 4,233 6,530 9,254 12,376 64% 65% 85% 54% 42% 34% 43% Impaired loan ratios 0.5% 0.6% 0.9% 1.2% 1.6% 2.0% 2.4% Less: Allowance for impairment losses (3,565) (4,566) (6,710) (10,194) (15,358) (21,522) (28,595) 28% 47% 52% 51% 40% 33% 41% Financial investments, financial assets at fair value through profit or loss 31,810 46,748 240,657 520,848 695,333 834,399 959,559 47% 415% 116% 34% 20% 15% 23% TOTAL ASSETS 393,839 488,117 669,957 1,031,650 1,300,958 1,526,405 1,733,344 24% 37% 54% 26% 17% 14% 19%

LIABILITIES Due from banks and other FIs 91,744 127,342 214,998 354,657 442,612 524,496 584,813 39% 69% 65% 25% 19% 12% 18% Due to customers 266,888 319,795 363,280 516,026 639,873 735,853 824,156 20% 14% 42% 24% 15% 12% 17% Retail deposits 22,009 23,108 22,743 21,681 24,645 25,766 25,974 5% -2% -5% 14% 5% 1% 6% Corp deposits 237,944 289,947 336,921 490,101 608,685 707,880 795,710 22% 16% 45% 24% 16% 12% 18% Debt issued 4,450 5,950 47,898 89,936 125,910 161,165 206,292 34% 705% 88% 40% 28% 28% 32% Other liabilities 8,048 7,221 10,631 21,374 25,648 30,265 34,805 -10% 47% 101% 20% 18% 15% TOTAL LIABILITIES 371,130 460,308 636,807 981,993 1,234,044 1,451,780 1,650,065 24% 38% 54% 26% 18% 14% 19%

EQUITY Share capital 10,007 11,507 11,507 14,510 17,960 17,960 17,960 15% 0% 26% 24% 0% 0% 7% Reserves and retained earnings 12,703 16,302 21,643 35,147 48,954 56,666 65,319 28% 33% 62% 39% 16% 15% 23% TOTAL EQUITY 22,709 27,808 33,150 49,657 66,914 74,626 83,279 22% 19% 50% 35% 12% 12% 19% TOTAL EQUITY AND LIABILITIES 393,839 488,117 669,957 1,031,650 1,300,958 1,526,405 1,733,344 24% 37% 54% 26% 17% 14% 19% Source: Company data (2012-2015), Goldman Sachs Global Investment Research (2016E-2018E).

Exhibit 30: 2016E earnings sensitivity: Zheshang’s FY16E earnings are more sensitive to NIM and securities yield than our covered banks’ average

Net new NPL Credit cost Tipping points Loan Operating formation rates (as (as % of Deposits Net fee Securities to hurt 2016E growth NIM expenses % of beginning loan ending loan costs income yield book value (yoy) growth (yoy) balance) balance)

(maximum NPL Change by: 10bp formation 1bp 1pp 10bp 1bps 1pp 1pp 10bp rates)

ICBC -2.23% 4.1% -0.37% 1.6% 6.6% -0.51% 0.41% -0.63% 1.56% CCB -2.35% 3.9% -0.40% 1.6% 6.5% -0.51% 0.40% -0.69% 1.43% ABC -2.66% 3.4% -0.45% 2.0% 8.2% -0.64% 0.37% -1.00% 1.79% BOC -2.83% 3.3% -0.46% 1.8% 8.1% -0.58% 0.49% -0.91% 2.03% BoCom -3.07% 3.0% -0.51% 2.2% 9.0% -0.60% 0.43% -0.96% 2.08% CMB -2.24% 4.0% -0.38% 1.8% 6.8% -0.46% 0.76% -0.85% 1.88% CNCB -2.80% 3.2% -0.48% 2.0% 9.1% -0.59% 0.61% -0.89% 3.08% CQRCB -1.77% 5.0% -0.31% 1.6% 7.4% -0.49% 0.16% -0.87% 1.97% BOCQ -1.70% 5.1% -0.30% 1.2% 6.9% -0.45% 0.30% -0.66% 1.97% BOQD -1.73% 4.9% -0.31% 0.9% 8.0% -0.47% 0.28% -0.75% 4.00% Zheshang -1.94% 4.4% -0.35% 0.9% 9.4% -0.52% 0.35% -0.77% 4.90% SPDB -2.18% 4.1% -0.38% 1.6% 7.6% -0.48% 0.43% -0.60% 2.47% Industrial -1.77% 5.1% -0.30% 1.3% 8.3% -0.41% 0.47% -0.69% 3.80% PAB -2.64% 3.3% -0.47% 1.6% 8.9% -0.61% 0.90% -1.21% 1.97% Hua Xia -2.90% 3.1% -0.50% 2.1% 8.8% -0.61% 0.45% -1.07% 1.77% BONB -1.63% 5.3% -0.29% 1.6% 7.3% -0.39% 0.41% -0.70% 3.55% BONJ -1.38% 6.1% -0.25% 1.0% 8.5% -0.52% 0.31% -0.73% 4.67% Average -2.22% 4.2% -0.38% 1.6% 7.8% -0.51% 0.45% -0.81% 2.48%

Listed bank average -2.22% 4.2% -0.38% 1.6% 7.8% -0.51% 0.45% -0.81% 2.48% H-shares -2.27% 4.07% -0.39% 1.60% 7.75% -0.52% 0.44% -0.82% 2.32% A-shares -2.13% 4.4% -0.37% 1.5% 7.9% -0.49% 0.46% -0.78% 2.73% Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 18 May 3, 2016 China Zheshang Bank Co. (2016.HK)

Industrial Bank, H-share JSB banks and Bank of Nanjing (BONJ) are comparables We believe Industrial Bank and our covered JSBs (CMB, CNCB) are its direct comparables as they have nationwide operation licenses and adopt more market-oriented schemes than SOE banks. We also see Bank of Nanjing as a meaningful comparable in terms of balance sheet expansion, scale, and geographic exposure despite different banking licenses.

We see Industrial Bank as the closest comparable in terms of fundamentals among the joint-stock banks that we cover.

Zheshang vs. Industrial: Focus on interbank/corp banking, and comparable leverage and shareholding structure; better asset quality, growth capital, but softer ROE as of 9M15

Similarities: Both focus on interbank/corp banking, high leverage, comparable shareholding structure

 Both JSBs have high exposure to interbank and corp banking, deliver innovative products, have high exposure to receivables investments and interbank funding, and low exposure to retail businesses.

 The major shareholders are local provincial government entities with less than 30% stake.

 Both have high leverage.

Differences: Zheshang has better asset quality, higher earnings growth and more capital, but softer ROE and smaller scale  Business: – Zheshang had a later entry into the interbank non-standard credit market while Industrial has a strong franchise of interbank trading and services. – Zheshang is at its fast expansion stage on a small base. Yet, its scale remains much smaller than Industrial (Rmb1tn vs. Rmb5tn+assets in 3Q15).  Profitability: – Zheshang generated softer ROE mainly on lower fees, as a later entrant to the interbank and WMP business.  Asset quality: – Meaningfully lower NPL ratio and overdue ratio. Lower exposure to the risky manufacturing and wholesale sector. – Corporate earnings loss yoy in Yangtze River Delta much lower than that in Fuzhou where Industrial’s headquarters is located.  Provisions: – Higher NPL coverage ratio, provision/loan ratio and adjusted provision/loan ratio if treating its non-standard credits structured investments as loans. For FY15, compared with the two H-share joint-stock banks that we cover, we note Zheshang earns higher ROE than CNCB on better NIM and cost control, and may see faster earnings growth on the back of its more market-oriented scheme and diversified shareholding structure as well as slightly better asset quality thanks to lower exposure to risky manufacturing and wholesale & retail sectors. However, Zheshang, with higher leverage, is more aggressive at expansion and product innovations and much weaker in terms of retail franchise and fees.

For FY15, compared with the leading H-share joint-stock bank CMB, Zheshang has weaker NIM, fees, provisions and retail franchise despite slightly better asset quality especially in MSEs (the NPL ratio of personal commercial loans of Zheshang in 3Q15 at 0.77% vs. 1.53% of CMB in FY15).

Goldman Sachs Global Investment Research 19 May 3, 2016 China Zheshang Bank Co. (2016.HK)

We also see A-share listed BONJ as a meaningful comparable given similar scale, high exposure to Yangtze River Delta, and fast assets and earnings growth rates. In terms of the differences (as of 2015), Zheshang enjoys better asset quality indicated by lower NPL formation rate, NPL+SML ratio, and stronger growth potential with a nationwide banking license vs. BONJ’s regional banking license, despite slightly softer ROE on loan yields and lower provision/loan ratio.

Exhibit 31: Peer comparison: Smaller asset size, less retail-focus, softer ROE on lower loan yields, NIM and fees. Below- peer 1 day+ overdue ratio but lower adj. provision/total credits ratio

Zheshang vs. Overview Zheshang CMB CNCB Industrial BONJ SPDB Industrial Scale (Rmb mn) Total assets 1,004,315 5,222,292 4,653,138 5,289,398 731,302 4,822,629 ‐0.8pp Total loans 339,138 2,718,502 2,377,570 1,753,850 204,049 2,187,944 ‐0.8pp No. of branches(peers 1H15) 128 1,588 1,254 1,555 133 1,368 ‐0.9pp Market share in HQ's province Loans' mkt. share (2014) 1.7 NA NA 7.8 5.0 6.0 Loan mix (peers 1H15) East China loan exposure (%) 60.7 18.8 23.5 40.3 92.7 35.8 20pp Retail loans exposure(%) 17.6 40.6 26.2 25.0 18.4 24.2 ‐7pp

Profitability(%) Zheshang CMB CNCB Industrial BONJ SPDB vs. Industrial NIM 2.41 2.75 2.44 2.59 2.70 2.56 ‐0.2pp Loan yield(peers 1H15) 6.1 6.3 6.1 6.1 7.2 6.1 0.0pp Deposit costs(peers 1H15) 2.6 1.9 2.3 2.5 2.7 2.4 0.1pp Cost/income ratio(%) 29.9 31.1 32.8 28.8 31.5 26.5 1.2pp PPOP % avg. assets(9M15) 1.95 2.90 1.58 3.43 2.21 2.38 ‐1.48pp ROAA (9M15) 0.90 1.30 1.00 1.18 1.02 1.12 ‐0.28pp ROAE (9M15) 18.7 19.8 16.1 21.5 17.9 19.2 ‐2.8pp PPOP growth CAGR(FY15‐FY18E) 18.8 8.7 7.6 5.3 15.8 7.1 13.4pp NPAT growth CAGR(FY15‐FY18E) 16.4 6.3 5.4 3.5 17.4 8.5 12.9pp Asset growth CAGR(FY15‐FY18E) 18.9 10.3 10.2 9.1 42.5 11.3 9.8pp ROAE(FY15) 17.0 17.0 14.2 18.8 16.6 19.0 ‐1.8pp Asset quality (%) Zheshang CMB CNCB Industrial BONJ SPDB vs. Industrial NPL ratio 1.2 1.6 1.4 1.6 1.0 1.4 ‐0.3pp NPL ratio + SML ratio (peers 1H15) 3.0 3.9 5.2 4.0 3.3 4.5 ‐1.0pp Est. NPL formation ratio 1.74 2.11 1.45 2.16 1.90 1.20 ‐0.42pp 1 day+ overdue ratio(peers 1H15) 2.0 3.1 3.6 3.4 1.5 2.8 ‐1.39pp NPL coverage 228 195 178 190 377 249 38pp Adjusted provision/total credits(peers 1H15) 1.39 2.4 1.7 1.7 1.8 2.2 ‐0.3pp Mfg. & wholesale loans % total loans(peers 1H15) 26 23 29 32 28 32 ‐5.6pp Liquidity(%) Zheshang CMB CNCB Industrial BONJ SPDB vs. Industrial L/D 68 78 76 72 44 73 ‐4pp Adjusted L/D(peers 1H15) 146 98 104 139 87 108 7pp Off‐balance sheet items/total loans(2014) 72 50 63 55 85 50 17pp Asset to equity (x) 21X 15X 16X 19X 15X 18X 2X Capital(%) Zheshang CMB CNCB Industrial BONJ SPDB vs. Industrial Tier I CAR 9.5 10.8 9.0 8.5 9.1 8.4 1.0pp RWA/Assets in FY15 54 59 69 65 63 65 ‐10pp

Note: The data refers to 9M15 unless otherwise stated.

Source: Company data (2014-1H15), Data from respective banks.

Goldman Sachs Global Investment Research 20 May 3, 2016 China Zheshang Bank Co. (2016.HK)

Appendix

Exhibit 32: Board structure and senior management

Joining Name Age Position Organization Experience date Board Directors Vice secretary, acting mayor and mayor of Quzhou City from 2012 to 2014; From 2000 to 2012, he had SHEN Renkang 52 ED, Chairman 2014 Management successively held several positions in Lishui City including vice secretary

ED, Vice Chairman, Held several positions in Agricultural Bank of China, including general manager of HK branch and vice LIU Xiaochun 56 2014 Management President president of Zhejiang provincial branch

Deputy Secretary of CPC committee in Zheshang; She was vice general manager and director of Zhejiang ZHANG Luyun 53 ED 2015 Management Communications Investment Group from 2001 to 2014

Before joining Zheshang he was member of the party committee and vice president of Hangzhou central XU Renya 50 ED, Vice President 2004 Management branch of PBOC; department chief of accounting and financial department

Zhejiang Provincial Manager of financial management department of Zhejiang Provincial Financial Holdings Co., Ltd since WANG Yibing 49 Non-ED 2015 Financial Holdings 2012 Traveller Automobile WANG Mingde 73 Non-ED 2010 Vice president of Traveller Automobile Group since 2010. Group China Light & Textile SHEN Xiaojun 56 Non-ED 2009 Chairman of the labor union of Zhejiang China Light & Textile Industrial City Group Co., Ltd Industrial City Group GAO Qinhong 52 Non-ED 2004 Zhejiang Hengyi Group Chief financial advisor and director of Zhejiang Hengyi Group Co., Ltd

HU Tiangao 50 Non-ED 2004 Hengdian Group Director and vice president of Hengdian Group Holdings Limited

LOU Ting 39 Non-ED 2015 Guangsha Chief executive officer of Guangsha Holding Group Co., Ltd Zhejiang Provincial WEI Dongliang 41 Non-ED 2015 Director of asset operation department of Zhejiang Provincial Energy Group Company Energy Group Senior Management Several positions in CITIC Industrial Bank since 1995, including manager and president assistant of YE Jianqing 52 Vice President 2004 Management Hangzhou branch and concurrently president of Tianshui sub-branch. Several positions in Agricultural Bank of China since 1981, including division chief of market development CHEN Chunxiang 53 Vice President 2004 Management division, corporate business division and agricultural credit division. Several positions in Industrial Bank since 1997, including president of Guangzhou branch, president of ZHANG Changgong 50 Vice President 2015 Management Nanjing branch and president of Hangzhou branch.

Secretary of the Vice secretary general and executive office director of Quzhou Municipal Government; before that he was LIU Long 50 2014 Management Board chairman of People’s Political Consultative Conference for Changshan County

Source: Company data.

Goldman Sachs Global Investment Research 21 May 3, 2016 China Zheshang Bank Co. (2016.HK)

Disclosure Appendix Reg AC We, Jessica Wu and Nan Li, CFA, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Jessica Wu: China Financials. Nan Li, CFA: China Brokers, China Financials. China Brokers: China Galaxy Securities, China International Capital Corp., China Merchants Securities, CITIC Securities (A), CITIC Securities (H), Everbright Securities, GF Securities Co.(A), GF Securities Co.(H), Haitong Securities (A), Haitong Securities (H), Huatai Securities (A), Huatai Securities (H). China Financials: Agricultural Bank of China (A), Agricultural Bank of China (H), Bank of Beijing, Bank of China (A), Bank of China (H), Bank of Chongqing, Bank of Communications (A), Bank of Communications (H), Bank of Nanjing, Bank of Ningbo, Bank of Qingdao Co., China Cinda Asset Management Co., China CITIC Bank (A), China CITIC Bank (H), China Construction Bank (A), China Construction Bank (H), China Everbright Bank, China Huarong Asset Management Co., China Life Insurance Co. (A), China Life Insurance Co. (H), China Merchants Bank (A), China Merchants Bank (H), China Minsheng Banking (A), China Minsheng Banking (H), China Pacific Insurance (A), China Pacific Insurance (H), China Taiping Insurance Holdings, China Zheshang Bank Co., Chongqing Rural Commercial Bank, Far East Horizon, Hua Xia Bank, ICBC (A), ICBC (H), Industrial Bank, New China Life Insurance (A), New China Life Insurance (H), PICC Group, PICC Property and Casualty, Ping An Bank Co., Ping An Insurance Group (A), Ping An Insurance Group (H), Shanghai Pudong Development Bank, Universal Medical. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs has received compensation for investment banking services in the past 12 months: China Zheshang Bank Co. (HK$3.92) Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: China Zheshang Bank Co. (HK$3.92) Goldman Sachs had an investment banking services client relationship during the past 12 months with: China Zheshang Bank Co. (HK$3.92) Goldman Sachs had a non-securities services client relationship during the past 12 months with: China Zheshang Bank Co. (HK$3.92) Goldman Sachs has managed or co-managed a public or Rule 144A offering in the past 12 months: China Zheshang Bank Co. (HK$3.92) Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe

Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 32% 53% 15% 65% 58% 51% As of April 1, 2016, Goldman Sachs Global Investment Research had investment ratings on 3,029 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by the FINRA Rules. See 'Ratings, Coverage groups and views and related definitions' below. The Investment Banking Relationships chart reflects the percentage of subject companies within each rating category for whom Goldman Sachs has provided investment banking services within the previous twelve months.

Goldman Sachs Global Investment Research 22 May 3, 2016 China Zheshang Bank Co. (2016.HK)

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Goldman Sachs Global Investment Research 23 May 3, 2016 China Zheshang Bank Co. (2016.HK)

months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. 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