July 26,2006 Bank of Communications (3328.HK) Goldman Sachs Global Investment Research 1 July 26,2006 COMPANYUPDATE Bank of Communications (3328.HK) BoCom/CCB: CEO of both banks resign; retain Neutral ratings What's changed According to CCB and BoCom press releases, the President of CCB, Mr Chang Zheng Ming who has been with CCB for two years, and the President of BoCom, Mr. Zhang Jian Guo who has been with BoCom for around five years, have both resigned. According to an unconfirmed report in Bloomberg, Mr. Zhang Jian Guo may replace Mr. Chang as the new President of CCB, while Mr. Chang may become the new President of Citic Group. Implications We note that the Chairman of BoCom, Mr Jiang Chao Liang, and the Chairman of CCB, Mr Guo Shu Qing, who have been instrumental in the reform and strategy of each bank, will both remain with their respective companies. We maintain our Neutral ratings and price targets on BoCom and CCB. Valuation Our 12 month price target for BoCom is HK$5.22 on 2.45X 2007EBVPS. Our 12 month price target for CCB is HK$3.38 on 2.25X 2007EBVPS. Key risks Key risks include macro hard landing/overheating, earnings disappointment. INVESTMENTLISTMEMBERSHIP Neutral Coverage View: Attractive China: Banks Growth Returns * Multiple Volatility Volatility Multiple Returns * Growth Investment Profile: Bank of Communications Low High Percentile 20th 40th 60th 80th 100th * Returns = Return on Capital For a complete description of the investment profile measures please refer to the disclosure section of this document. 3328.HK Asia Pacific Banks Peer Group Average Key data Current Price (HK$) 4.88 Price target (HK$) 5.22 Market cap (HK$ mn / US$ mn) 223,523.5 / 28,739.6 Foreign ownership (%) -- 12/0512/06E 12/07E 12/08E EPS (HK$) 0.210.270.350.42 EPS growth (%) 266.029.628.321.3 P/B (X) 188.8.131.52.0 P/E (X) 23.318.014.011.5 Dividend yield (%) 184.108.40.206.5 P/PPOP (X) 13.410.07.96.5 PPOP growth (%) 60.5220.127.116.11 Preprovision ROA (%) 18.104.22.168.7 Credit cost (%) 0.60.60.60.6 ROA (%) 0.730.830.900.94 ROE (%) 13.714.717.218.7 Price performance chart 2.5 3.0 3.5 4.0 4.5 5.0 5.5 Jul-05 Oct-05 Feb-06 May-06 150 170 190 210 230 250 270 Bank of Communications (L) MSCIACAsia Pacific ex JPBanks (R) Share price performance (%) 3 month 6 month 12 month Absolute 5.510.968.3 Rel. to MSCIACAP ex-JPBanks 11.66.846.7 Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 7/25/2006 close. Ning Ma +852-2978-1677 | email@example.com Goldman Sachs (Asia) L.L.C. Roy Ramos +852-2978-0457 | firstname.lastname@example.org Goldman Sachs (Asia) L.L.C. Jennifer Meng +852-2978-0169 | email@example.com Goldman Sachs (Asia) L.L.C. Analysts employed by non-US affiliates are not required to take the NASD/NYSE analyst exam. The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the text preceding the disclosures. For other important disclosures go to /research/hedge.html. The Goldman Sachs Group, Inc. Global Investment Research July 26,2006 Bank of Communications (3328.HK) Goldman Sachs Global Investment Research 2 Bank of Communications: Summary financials Profit model (Rmb mn) 12/0512/06E 12/07E 12/08EBalance sheet (Rmb mn) 12/0512/06E 12/07E 12/08E Net interest income 31,591.039,348.347,346.655,873.6 Gross loans 769,540.0926,831.51,102,264.31,307,454.5 Non-interest income 3,562.03,964.05,491.16,977.6 NPLs 21,579.025,467.830,266.636,896.0 Operating revenue 35,153.043,312.352,837.762,851.2 Loan loss reserves 12,601.017,270.722,927.429,514.1 Non-interest expense (18,012.0) (20,310.0) (23,599.6) (27,540.0) Total interest earning assets 1,383,341.01,642,193.01,915,305.12,214,822.8 Preprovision oper profits 17,141.023,002.329,238.135,311.2 Other non-interest earning assets 40,098.042,212.245,337.548,734.8 Total provision charge (4,298.0) (5,169.7) (6,206.7) (7,286.7) Total assets 1,423,439.01,684,405.21,960,642.62,263,557.6 Associates 0.00.00.00.0 Customer deposits 1,212,128.01,445,300.11,686,799.71,948,161.4 Pretax profit 12,843.017,832.623,031.428,024.5 Total interest-bearing liabilities 1,318,765.01,569,970.91,833,946.22,122,278.9 Tax (3,600.0) (5,008.8) (6,579.5) (8,062.1) Total equity 83,146.090,753.5100,647.5112,624.9 Minorities 6.00.00.00.0 Net profit 9,249.012,823.916,451.919,962.4 CAMEL ratios (%) 12/0512/06E 12/07E 12/08E C: Tier 1 capital ratio 22.214.171.124.9 Dividends (3,664.0) (5,129.5) (6,580.8) (7,985.0) C: Equity/loans 11.010.09.38.8 Dividends payout (%) 42.640.040.040.0 C: Equity/assets 126.96.36.199.0 A: NPL ratio 188.8.131.52.8 Earnings growth drivers (%) 12/0512/06E 12/07E 12/08EA: Loan loss reserves/NPLs 58.467.875.880.0 Net interest margin 184.108.40.206.7 E: Net interest margin 220.127.116.11.7 Provision charge/total loans 0.60.60.60.6 E: Non int inc/oper revenues 10.139.1510.3911.10 YoYGrowth (%) E: Cost-income ratio 51.246.944.743.8 Customer deposits 18.419.216.715.5 E: ROAA 0.730.830.900.94 Loans 18.104.22.1688.4 L: Loan/deposit ratio 62.462.964.065.6 Net interest income 25.424.620.318.0 Fee income 25.939.037.731.7 Key CAMELOT assumptions 12/0512/06E 12/07E 12/08E Non-interest income 43.611.338.527.1 GSCAMELOT fair P/B (X) -- -- 2.4 -- Operating revenue 27.023.222.019.0 GSCAMELOT fair P/E (X) -- -- 15.5 -- Operating expenses 6.012.816.216.7 Risk-free rate (%) -- -- -- -- Preprovision Operating profit 60.522.214.171.124 Equity risk premium (%) -- -- -- -- Provision charges 33.720.320.117.4 CAMELOT beta (X) -- -- 1.2 -- Pretax profit 72.038.929.221.7 Risk-adjusted cost of equity (%) -- -- -- -- Net profit 476.638.728.321.33-yr adjusted DPSCAGR (%) -- -- 24.8 -- EPS 266.029.628.321.3 Sustainable ROE estimate (%) -- -- 15.8 -- DPS -- 28.527.421.3 LT dividend payout estimate (%) -- -- 30.0 -- Ex-growth bond-equivalent P/B (X) -- -- -- -- Market dimensions 12/0512/06E 12/07E 12/08E No of branches 2,592.0 -- -- -- Loan portfolio (%) 12/0512/06E 12/07E 12/08E No of staff (000) 57,323.0 -- -- -- Commercial & corporate 78.678.177.977.5 Revenues/staff (Rmb) 613.2 -- -- -- Mortgages/home loans 10.211.012.013.2 Net profit/staff (HK$) 164.2 -- -- -- Consumer 13.513.413.914.5 Valuation (current price) 12/0512/06E 12/07E 12/08E DuPont analysis (%) 12/0512/06E 12/07E 12/08E ROE 13.714.717.218.7 P/E basic (X) 23.318.014.011.5 x leverage 126.96.36.199.3 P/B (X) 188.8.131.52.0 = ROA 0.730.830.900.94 P/PPOP (X) 13.410.07.96.5 Dividend yield (%) 184.108.40.206.5 % of assets 12/0512/06E 12/07E 12/08E Net interest income 220.127.116.11.6 EPS, basic (Rmb) 0.220.280.360.44 Fee income 0.20.20.20.3 EPS, fully-diluted (Rmb) 0.200.280.360.44 Non-interest income 0.30.30.30.3 Operating revenue 18.104.22.168.0 EPS, basic growth (%) 257.428.928.321.3 Operating expenses 22.214.171.124.3 EPS, fully diluted Growth (%) 232.338.728.321.3 Preprovision Operating profit 126.96.36.199.7 Loan loss provisions 0.30.30.30.3 BVPS (HK$) 1.751.922.132.39 Pretax profits 1.01.11.31.3 DPS (HK$) 0.080.110.140.17 Taxes 0.30.30.40.4 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates. Analyst Contributors Ning Ma firstname.lastname@example.org Roy Ramos email@example.com Jennifer Meng firstname.lastname@example.org July 26,2006 Bank of Communications (3328.HK) Goldman Sachs Global Investment Research 3 RegAC I, Ning Ma, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my 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. Disclosures Coverage group(s) of stocks by primary analyst(s) Ning Ma: Asia Pacific Financials. Asia Pacific Financials: Bangkok Bank, Bank of Ayudhya, Bank of China, Bank of Communications, Bank of East Asia, BOCHong Kong (Holdings), Bursa Malaysia, Cathay Financial, China Construction Bank, China Life Insurance Company, China Merchants Bank, Chinatrust Financial Holdings, CITICInt'l Financial, Cosmos Bank, Daegu Bank, Dah Sing Banking Group, Dah Sing Financial Holdings, DBSGroup Holdings, Fubon Financial Holdings, Hana Financial Group, Hang Seng Bank, Hong Kong Exchanges, HSBCHoldings, Hua Xia Bank, ICBC (Asia), Kasikornbank, Kookmin Bank, Krung Thai Bank, Liu Chong Hing Bank, Mega Financial Holdings, Oversea-Chinese Banking Corp., PICCProperty and Casualty, Ping An Insurance Group, Polaris Securities, Pusan Bank, Samsung Fire & Marine, Shanghai Pudong Development Bank, Shenzhen Development Bank, Shin Kong Financial Holdings, Shinhan Financial Group, Siam Commercial Bank, Singapore Exchange, SinoPac Holdings, Standard Chartered Bank, Taishin Financial Holdings, Thanachart Capital, TISCOBank, United Overseas Bank, Wing Hang Bank, Wing Lung Bank, Woori Finance Holdings, Yuanta Core Pacific. 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 beneficially owned 1% or more of the common equity (including derivatives exercisable or convertible within 60 days but excluding positions held by GSAsset Mgmt.) as of the month end preceding this report: Bank of Communications (HK$4.88) Goldman Sachs has received compensation for investment banking services in the past 12 months: Bank of Communications (HK$4.88) and China Construction Bank (HK$3.39) Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Bank of Communications (HK$4.88) and China Construction Bank (HK$3.39) Goldman Sachs has received compensation for non-investment banking services in the past 12 months: Bank of Communications (HK$4.88) and China Construction Bank (HK$3.39) Goldman Sachs had an investment banking services client relationship during the past 12 months with: Bank of Communications (HK$4.88) and China Construction Bank (HK$3.39) Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: Bank of Communications (HK$4.88) and China Construction Bank (HK$3.39) Goldman Sachs had a non-securities services client relationship during the past 12 months with: Bank of Communications (HK$4.88) and China Construction Bank (HK$3.39) Goldman Sachs makes a market in the securities: Bank of Communications (HK$4.88) and China Construction Bank (HK$3.39) July 26,2006 Bank of Communications (3328.HK) Goldman Sachs Global Investment Research 4 Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global coverage universe Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 27% 59% 14% 57% 49% 45% As of July 1,2006, Goldman Sachs Global Investment Research had investment ratings on 2,129 equity securities. Prior to June 24,2006, Goldman Sachs utilized a relative rating system of Outperform, In-Line and Underperform, which, for the purposes of the above disclosure required by NASD/NYSE rules, equated to Buy, Hold and Sell. As of June 24,2006, 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. See 'Ratings, Coverage groups and views and related definitions' below. Price target and rating history chart(s) Regulatory disclosures Disclosures required by United States laws and regulations See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co- managed public offerings in prior periods; directorships; market making and/or specialist role. The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. 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(Company Number: 198602165W). United Kingdom: Persons who would be categorized as private customers in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request. European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available at Ratings, coverage groups and views and related definitions Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as a ASONDJFMAMJJASONDJFMAMJJASONDJFMAMJ 2003200420052006 2.50 3.00 3.50 4.00 4.50 5.00 5.50 100 120 140 160 180 IL Jul 28 OP Nov 3 IL Jan 17 Bank of Communications (3328.HK) Goldman Sachs rating and stock price target history Currency: Hong Kong Dollar Source: Goldman Sachs Investment Research for ratings and price targets; Reuters for daily closing prices as of 07/01/06. Rating Price target Price target at removal MSCIACAsia Pacific ex JPBanks; pricing by FactSet Covered by Ning Ma, as of Jul 18,2005 Not covered by current analyst 3.02 3.48 3.75 3.94 4.03 4.38 5.22 S to ck P ric e In de x P ric e New equity ratings, were adopted on June 24, 2006 but are not yet reflected above. The new Buy, Neutral and Sell are equivalent to OP, IL and U. The price targets shown should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as well as developments relating to the company, its industry and financial markets. July 26,2006 Bank of Communications (3328.HK) Goldman Sachs Global Investment Research 5 Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return. Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at . The analyst assigns one of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 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, if any, 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, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded. Ratings, coverage views and related definitions prior to June 26,2006 Our rating system requires that analysts rank order the stocks in their coverage groups and assign one of three investment ratings (see definitions below) within a ratings distribution guideline of no more than 25% of the stocks should be rated Outperform and no fewer than 10% rated Underperform. The analyst assigns one of three coverage views (see definitions below), which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and valuation. Each coverage group, listing all stocks covered in that group, is available by primary analyst, stock and coverage group at . Definitions Outperform (OP). We expect this stock to outperform the median total return for the analyst's coverage universe over the next 12 months. In-Line (IL). We expect this stock to perform in line with the median total return for the analyst's coverage universe over the next 12 months. Underperform (U). We expect this stock to underperform the median total return for the analyst's coverage universe over the next 12 months. Coverage views: Attractive (A). The investment outlook over the following 12 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. Current Investment List (CIL). We expect stocks on this list to provide an absolute total return of approximately 15%-20% over the next 12 months. We only assign this designation to stocks rated Outperform. 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