Digital Currency: Reinventing the Yuan for the Digital Age

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Equity Research

November 17, 2020 | 07:14PM CST

Digital Currency

Reinventing the Yuan for the Digital Age

In ten years we expect DC/EP to reach 1 billion addressable users, Rmb1.6tn in issuance, Rmb19tn in annual Total Payment Value and account for 15% of total consumption payments. Incorporating digital currency wallets into bank apps will level the playing field in the Rmb 3tn revenue pool for retail finance by bringing consumers back to bank channels, thereby expanding their customer base and MAUs. This will likely slow the rate that banks have been ceding ground to fintech, and even reverse market share losses over the long-term if DC/EP gains in popularity. In the meantime, PAB and CMB will benefit most from DC/EP as they are best placed to commercialize returning app users thanks to their leading retail franchises, premium client bases, superior fintech capability and strategic focus on retail finance. Shuo Yang, Ph.D. +86 10 6627-3054 [email protected] Beijing Gao Hua Securities Company Limited

Yingqi Lin +86 21 2401-8691 [email protected] Beijing Gao Hua Securities Company Limited

Derek Su +852 2978-7436 [email protected] Goldman Sachs (Asia) L.L.C.

Goldman Sachs 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 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.

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China is at the forefront of digital currency development and will likely be one of the first countries to issue a sovereign digital currency (known as “DC/EP”). As a gradual replacement for physical cash, in the early stages DC/EP will facilitate small payments for consumables such as meals, groceries and transport, but over time will expand to larger and more complex, value-added services such as government subsidies and cross-border payments. Even in a cashless environment, DC/EP will be an attractive alternative to fintech platforms given its anonymity, the ability to operate outside of wireless networks, and interconnectivity among different payment methods. Successful adoption will ultimately require government promotion, which has the wherewithal to drive a rapid uptake.

Goldman Sachs

China Financial Services

Table of Contents PM Summary: Digital Currency — Reinventing the Yuan for the Digital Age

5

China at the forefront of digital currency development

7

Cash for the 21st Century

15

Petty cash payments and red packets to start

23

China already on the path to becoming cashless

32

Boost competition, level the playing field for banks

43

Gateway to banks’ retail finance channels; CMB and PAB best placed to capitalize

54

Rmb 3tn revenue pool for retail finance by 2025, 9% CAGR

63

Appendix

73

Acronyms

75

References

76

Disclaimer for company logos

77

Disclosure Appendix

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We would like to thank Piyush Mubayi, Elsie Cheng and Thomas Wang for their contributions to this report.

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20 FAQs on Digital Currency / Electronic Payment Will DC/EP reduce banks' balance sheet? Yes, if DC/EP is converted from deposits; No, if converted from cash.

What is the PBOC’s motivation to issue DC/EP? Address the challenges posed by other digital currencies (e.g. Libra), improve efficiency in the payment system, reduce the cost of cash.

What will its main application be? Facilitate small payments for consumables (e.g. meals, groceries, transport).

When will DC/EP be launched? No timeline has been provided. Testing has already started in four cities and DC/EP will feature at the 2022 Beijing Winter Olympics. An official launch looks most likely in 2023.

What is the “dual offline" transfer? Payments can still be made without mobile internet access or network connectivity (e.g. subway, airline, mountainous area).

Will DC/EP be anonymous? Yes, for small transactions. Large payments may require ID verification.

Do users need a bank account to use DC/EP? No, unless replenishing a DC/EP wallet.

Will the PBOC distribute DC/EP to customers? No, commercial banks will circulate DC/EP to consumers after the PBOC distributes it to commercial banks. Will DC/EP disintermediate banks? No, DC/EP will not pay interest, caps can be set on wallets and commercial banks will be the 2nd pillar in the two-tier issuance system. Is DC/EP a cryptocurrency? No, the DC/EP system will be built on a centralized ledger, not a blockchain.

Is DC/EP legal tender? Yes, it has the same legal status as Rmb cash.

Will DC/EP expand the PBOC's balance sheet? Not likely as DC/EP can be converted from bank deposit reserves.

Can DC/EP be used for government subsidies? Yes, real-time tracking can be used to monitor a transaction and it can be disabled once reaching the intended recipient. Will DC/EP pay interest? No, according to the PBOC.

Will DC/EP charge fees? Unlikely, but the PBOC could charge a fee to enable a negative interest rate on DC/EP. Is DC/EP necessary in an already cashless society? Yes, still DC/EP has advantages over fintech: anonymity, dual-offline transfers, inclusion and interconnectivity among payment methods.

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What is the PBOC's objective for DC/EP? A substitute for cash (M0).

Will banks be the only institutions operating DC/EP? Yes, as DC/EP is the digitalization of legal tender. However, fintech firms can add DC/EP as a payment method in their apps. Will take rates for consumption payments fall? No, take rates would be stable as DC/EP payments still need to use existing offline channels and infrastructure. What will be the impact on banks? Incorporating DC/EP wallets into bank apps will bring consumers back to bank channels, expanding their customer base and MAUs.

Goldman Sachs

China Financial Services

PM Summary: Digital Currency — Reinventing the Yuan for the Digital Age China at the forefront of digital currency development The People’s Bank of China has already started testing a central bank digital currency, known as Digital Currency/Electronic Payment (DC/EP), while most other countries are in the early stages of research and development. Although no official timeline has been announced, pilot testing recently commenced in four cities and digital currency will feature at the 2022 Winter Olympics in Beijing. If successful, China could be one of the first countries to issue a sovereign digital currency. With DC/EP to eventually replace physical cash, it will embed similar characteristics such as anonymity, offline payments, financial inclusion, and ease of use.

Cash for the 21st Century China’s DC/EP system will feature (1) two-tier issuance, with the PBOC issuing digital currency for commercial banks to distribute and interface directly with customers; (2) controllable anonymity, with DC/EP wallets independent of bank accounts for smaller transactions; and (3) centralized processing instead of a distributed ledger, meaning DC/EP will not be a cryptocurrency. Converting household deposits to DC/EP wallets will not result in banking-sector disintermediation as the objective of DC/EP is to replace cash not deposits, DC/EP wallets will not be paid interest, and most transactions will be small.

In the early stages, DC/EP will primarily facilitate small payments for consumables such as meals, groceries and transport. However, as safety, security and functionality improve over time, applications will expand to larger and more complex, value-added services such as traceable government subsidies and cross-border payments.

China already on the path to becoming cashless Use of cash at the point of sale and the M0 to M2 ratio in China is already among the lowest globally. Even in a cashless environment, DC/EP will have attractive features relative to current fintech offerings including anonymity, financial inclusion, the ability to operate outside of wireless networks, and interconnectivity among different payment methods. Successful adoption will require promotion from the government, which has demonstrated the wherewithal to drive a rapid uptake. As the second pillar of the DC/EP system, commercial bank networks will likely be mobilized in this process. In ten years we expect DC/EP to reach 1 billion addressable users, Rmb1.6tn (US$240bn) in issuance, Rmb19tn (US$3tn) in annual Total Payment Value (TPV) and Rmb162bn (US$24bn) in annual cost savings — although our forecasts could differ from actual figures given limited details, including the timing of a public launch. While direct cost savings to the financial system from replacing physical cash with digital currency will likely be small relative to bank earnings and GDP, DC/EP will reduce the invisible cost of cash and have a significant impact on China’s payment system.

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Petty cash payments and red packets to start

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China Financial Services

Boost competition, level the playing field for banks DC/EP will become the third pillar of China’s payments system alongside banks and fintech, and in the process, increase competition. By 2029, we expect DC/EP to account for 15% of total consumption payments (TPV of Rmb128tn) as fintech market share tapers off (albeit still dominating the space) and usage of cash and physical bank cards shrink. Within the payment ecosystem, commercial banks will be clear beneficiaries as they compete on a more level playing field, third-party payment digital wallet issuers will face stiffer competition in the long term (but limited in the early stages), third-party payment acquirers will benefit from higher volumes and increased demand for mobile payments, and software/hardware vendors will benefit from R&D outsourcing and hardware upgrades. We provide a list of companies that have already participated in DC/EP development or may have exposure to the DC/EP system once it rolls out.

Gateway to banks’ retail finance channels; CMB and PAB best placed to capitalize Incorporating digital currency wallets into bank apps will bring consumers back to bank channels, expanding their customer base, MAUs and stickiness. A 10% increase in the bank app users would lift revenues by 2%-5%. PAB and CMB are best placed to commercialize returning app users given their leading retail franchises, premium client bases, superior fintech capability and strategic focus on retail finance. We reiterate our Buy ratings on CMB-H/A (A on the Conviction List) and PAB.

Rmb 3tn revenue pool by 2025, fintech to continue capturing incremental market share We forecast a Rmb 3tn revenue pool for retail finance by 2025 (excluding mortgages) at 9% CAGR 20-25E as growth in payments and retail lending slows but wealth management and insurance agency remain brisk. Over the next five years, we expect Fintech to grow revenues at almost double the rate of banks as they continue to capture

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incremental market share across the retail finance ecosystem. The DC/EP roll-out will likely slow the rate that banks cede ground to fintech, and even reverse over the long-term, albeit in a more competitive environment.

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China at the forefront of digital currency development Chief Asia Economist Andrew Tilton explains the impact of a digital currency on China’s economy in his companion report “Asia Economics Analyst: China’s digital yuan and its macro implications

The People’s Bank of China has already started testing a central bank digital currency, known as Digital Currency/Electronic Payment (DC/EP), while most other countries are in the early stages of research and development. Although no official launch timeline has been announced, pilot testing recently commenced in four cities and digital currency will feature at the 2022 Winter Olympics in Beijing. If successful, China could be one of the first countries to issue a sovereign digital currency. With DC/EP to eventually replace physical cash, it will embed similar characteristics such as anonymity, offline payments, financial inclusion, and ease of use.

Pace of digital currency development accelerating globally Central banks have been researching Central Bank Digital Currency (CBDC) issuance

n

US Fed officials said in August 2020 that they have conducted in-house experimentation of a “hypothetical digital currency oriented to central bank uses” through the Federal Reserve Board’s Technology Lab in collaboration with MIT;

n

Pilot testing of China’s DC/EP system recently commenced in four cities (Shenzhen, Suzhou, Xiong’an and Chengdu) and digital currency will feature at the Beijing Winter Olympics in 2022;

n

The ECB said in May 2020 that they have set up a task force to examine the viability of its own CBDC within the euro system;

n

Sweden’s Riksbank begun testing its e-krona project this year, although it is yet to provide any further updates.

COVID has accelerated digital payment adoption as a CBDC can also (1) function as a sanitized substitution for cash, and (2) be used for direct subsidy payments to individuals by governments.

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n

In March 2020, the US economic stimulus package draft bill for the House Democrats mentioned the creation of a “digital dollar” to aid individuals amid COVID, although this proposal was removed in a later version of the bill.

n

An expert meeting hosted by China’s National Development and Reform Commission (NDRC, a macroeconomic management agency under the State Council) noted that China’s CBDC development may be accelerated amid COVID and be used as a payment mechanism for special subsidies.

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since 2014-2015 following the melt up of cryptocurrencies (Exhibit 1). Facebook’s Libra proposal (a decentralized blockchain) in mid-2019 increased the urgency of central banks to research and develop a CBDC given concern about the impact to monetary sovereignty. This year in particular has seen significant progress:

Goldman Sachs

China Financial Services

Exhibit 1: China is at the forefront of CBDC development, and although no timetable for a public launch has been provided, will likely be one of the first central banks globally to issue a sovereign CBDC

Source: PBOC, Caixin, Xinhua, CNBC, Reuters, Bloomberg, various central banks

Exhibit 2: China and Sweden have started testing their CBDCs; other central banks are still in the R&D stage Central ba Central bank nk

P Project Prroject oject name name

P Progress Prrogress ogress

Details Det Details ai l s

China China

PBOC

DC/EP

Testing

In Aug. 2020 PBOC said DC/EP will be tested internally in Shenzhen, Suzhou, Xiong'an, Chengdu and Beijing Winter Olympics

Sweden Sweden

Riksbank

e-krona

Testing

In Jan. 2020 Riksbank said it started testing its CBDC

US US

Federal Reserve

Unknown

Research

Europe Europe

ECB

Unknown

Research

France France

Banque de France

Unknown

Research

In Jul. 2020 The Bank of France started working on CBDC experiment with eight firms

UK UK

BOE

Unknown

Research

In Mar. 2020, the BoE issued an in-depth discussion paper devoted to CBDCs

Japan Japan

BOJ

Unknown

Research

In Jul. 2020 the Bank of Japan has created a dedicated team to intensify its work on CBDC

Hong Kon Hong Kong g

HKMA

Unknown

Research

In Jan. 2020 HKMA and the Bank of Thailand published a report on a joint CBDC research project

Singapore Singapore

MAS

Ubin

Research

In Sep. 2019 the MAS successfully developed a blockchain-based prototype of cross-border payment

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Country/area Country/area

Fed official said in Aug. 2020 that they have conducted in-house experimentation through the Federal Reserve Board’s Technology Lab in collaboration with MIT In May 2020 the ECB said they have set up a task force to examine the viability of its own CBDC within the euro system

Source: Various central banks, Reuters, CNBC, Bloomberg

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Exhibit 3: An increasing number of central banks are engaged in developing a CBDC

Exhibit 4: EMs appear more motivated than DMs in issuing a CBDC Motivations for issuing a retail CBDC: average importance of central banks surveyed by BIS

Engagement in CBDC work: share of central banks surveyed by BIS

Advanced economies 81%

Emerging economies

Payment safety/robustness Domestic payment efficiency Financial stability

71%

Monetary policy implementation 65%

Cross-border payment efficiency Financial inclusion

2017

2018

Note: Sample of 66 central banks surveyed by BIS.

2019

0

1

2

3

4

Note: 1 = not so important; 2 = somewhat important; 3 = important; and 4 = very important. Sample of 66 central banks surveyed by BIS.

Source: BIS Source: BIS

PBOC likely one of the first central banks to issue a CBDC

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The PBOC is leading progress globally in developing a CBDC, starting on-the-ground testing of its digital currency system (Exhibit 5), known as DC/EP (Digital Currency/Electronic Payment) this year. Research started as early as 2014 and by 2015 a prototype had been devised. By mid-2020, several Chinese banks had tested the mobile app internally. Although no official launch timeline has been provided, pilot testing has already started in four cities (Shenzhen, Suzhou, Xiong’an, and Chengdu) and digital currency will feature at the 2022 Winter Olympics in Beijing. As of early October, it was reported that the PBOC opened 113,000 consumer digital wallets and nearly 9,000 corporate wallets in its pilot programs, with DC/EP already used for more than RMB 1.1 bn worth of transactions. If its pilot programs are successful, the PBOC may be one of the first central banks globally to issue a CBDC. Exhibit 5: The PBOC has been researching CBDC as early as 2014, on-the-ground testing has already started in four cities

Source: PBOC, Caixin, Xinhua

Key central bank considerations in issuing a digital currency The underlying benefits of CBDCs are generally policy goals that central banks aim to 17 November 2020

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achieve in the design process, while the concerns are generally risks they are trying to avoid. Benefits include: n

Competition with other currencies. There have been numerous discussions on how cryptocurrencies may influence financial stability by circumventing capital controls and even replacing legal tender, particularly in emerging economies with relatively unstable currencies. The most recent challenge to financial sovereignty has come from Facebook’s Libra program as its large global user base has the potential to disrupt elements of the financial system. On the other hand, issuing a CBDC can reinforce the competitiveness of legal tender with other currencies.

n

Improving efficiency and reducing costs. The printing and operating cost of cash can be a considerable expense for an economy, and illicit activities and tax evasion are facilitated by using cash. Beyond that, the inefficiencies of existing domestic and cross-border payment systems (as evidenced by high cost and slow speed) suggest significant room to improve. A CBDC can be an efficient and low-cost alternative to existing payment methods.

n

Promote financial inclusion: According to the World Bank, the unbanked population (>20%) in some emerging economies is much higher than in developed countries (€100 account for only 17% of total cash volume... Volume of Euros in circulation by denomination

Volume of US cash in circulation by denomination

€ 200, 1% € 500, 4% $100 note, 32%

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Exhibit 52: $100 and $1 notes together account for 60% of total currency in US circulation by volume

$1 note, 28%

€ 5, 10%

€ 100, 12% € 10, 13%

$2 note, 3% $50 note, 4%

€ 20, 18% € 50, 42%

$5 note, 7% $20 note, 21%

$10 note, 5%

As of 2019

As of 2014

Source: Federal Reserve

Source: ECB

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Exhibit 54: ...while in Japan, ¥10,000 notes account for 63% of total cash volume

Exhibit 55: Large denomination notes ($100 and above) represent over 80% of total US currency in circulation by volume... Value of US cash in circulation by denomination

Volume of Japanese Yen in circulation by denomination

$5 note, 1% $2 note, 0% $1 note, 1% $10 note, 1%

¥500, 2%

$20 note, 11% ¥1,000, 30%

$50 note, 5%

¥10,000, 63% ¥2,000, 1%

$100 note, 81%

¥5,000, 5%

As of 2014

As of 2019

Source: BOJ

Source: Federal Reserve

Exhibit 56: ...as is the case in the EU...

Exhibit 57: ...and Japan

Value of Euros in circulation by denomination € 5, 1%

Coins, 3%

€ 10, 2%

Value of Japanese Yen in circulation by denomination Coins, 5%

€ 20, 6%

¥500, 0% ¥5,000, 3% ¥1,000, 4% ¥2,000, 0%

€ 500, 30%

€ 50, 35%

€ 200, 4%

As of 2014

As of 2014

Source: ECB

Source: BOJ

Exhibit 58: China’s M0 value is around 65% that of the US...

Exhibit 59: ...but due to foreign exchange differences, China’s M0 volume may be more than four times that of the US...

M0 value

M0 volume vs. M0 amount: China as % of US

US$ tn

China

0.8

1.2

1.1

1.0

0.9

0.9

0.9

M0 volume

US

1.0

1.0

1.0

1.0

485%

1.1

M0 amount

1.7

1.6

1.5

1.4

1.3

1.3

a2810045d5314637bdba4864b34fcf51

¥10,000, 87%

€ 100, 19%

506%

500%

504%

480%

472%

480%

463%

450%

451%

1.1

0.7

72%

2010

2011

2012

Source: Federal Reserve, PBOC

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2013

2014

2015

2016

2017

2018

2019

2010

78%

2011

79%

2012

81%

2013

78%

2014

76%

2015

72%

2016

69%

2017

68%

2018

65%

2019

Source: Federal Reserve, PBOC

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Exhibit 60: ...as such, China’s currency printing cost to M0 (in US$) may be much higher, even after adjusting for purchasing power differences

Exhibit 61: We estimate the annual production cost of the Renminbi is Rmb12bn (US$2bn) Estimated new currency production cost

Estimated new currency production cost / M0 (in US$) China 0.22%

0.23%

0.24%

0.23%

China

US

US 2.29

0.21%

0.20%

0.21% 0.18%

2.04

0.18%

2.14

2.08

2.02

1.90

1.79 0.16%

1.93

1.76

US$ bn

1.43

0.06%

2010

0.07%

0.06%

2011

2012

0.06%

2013

0.06%

2014

0.05%

2015

0.05%

2016

0.04%

2017

0.05%

2018

0.60

0.65

0.72

0.72

0.71

0.69

0.67

0.66

0.80

0.64

0.04%

2010

2019

Note: We assume a lower production cost for the same volume of cash for China by adjusting the ratio with the purchasing power parity factor from the World Bank (~1.6x as of 2019).

2011

2012

2013

2014

2015

2016

2017

2018

2019

Note: Production cost of currency is derived by multiplying the production cost/M0 ratio by M0. Source: Federal Reserve, National Bureau of Statistics of China, World Bank, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Source: Federal Reserve, World Bank, NBS, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 62: The PBOC bears 3% of the total cost of cash with commercial banks bearing 40% Countries

Central bank

Share of cash costs by each sector Commercial Retailers Households bank

% of GDP

Source

Share of cash costs Norway

3%

40%

27%

30%

0.1%

Norges Bank (2014)

Sweden

3%

39%

34%

14%

0.4%

Riksbank (2007)

Netherlands

2%

48%

0.4%

Netherlands Central Bank (2005)

16%

0.5%

Reserve Bank of Australia (2007)

0.6%

National Bank of Belgium (2006)

21%

0.6%

Bank of Uruguay (2019)

54%

Australia

50% 30%

Belgium

2%

47%

Uruguay

2%

13%

51% 64%

China

3%

40%

57%

0.4%

GS estimates

162

231

406

GS estimates

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Estimated share of cash costs

Estimated value of cash costs (Rmb bn) China

12

Note: We calculate the PBOC’s share of cash cost using comparable data from the central banks of Norway and Sweden as both countries have a low portion of cash usage like China Source: Norges Bank, Riksbank, Netherlands Central Bank, Reserve Bank of Australia (RBA), National Bank of Belgium, Bank of Uruguay, Goldman Sachs Global Investment Research, Gao Hua Securities Research

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Boost competition, level the playing field for banks DC/EP will become the third pillar of China’s payments system alongside banks and fintech, and in the process, increase competition. By 2029, we expect DC/EP to account for 15% of total consumption payments (TPV of Rmb128tn) as fintech market share tapers off (albeit still dominating the space) and usage of cash and physical bank cards shrink. Within the payment ecosystem, commercial banks will be clear beneficiaries as they compete on a more level playing field, third-party payment digital wallet issuers will face stiffer competition in the long term (but limited in the early stages), third-party payment acquirers will benefit from higher volumes and increased demand for mobile payments, and software/hardware vendors will benefit from R&D outsourcing and hardware upgrades. We provide a list of companies that have already participated in DC/EP development or may have exposure to the DC/EP system once it rolls out.

Centralization of deposits for client reserves, processing payments n

Licensing. The PBOC has not granted any Third Party Payment licenses since 2015, and has canceled ~30 licenses since 2016 (Exhibit 63).

n

Centralized deposits for client reserves: From 2017, Third Party Payment institutions have been required to deposit the full client reserve (monetary capital received in advance to handle the payment business on behalf of the client) with the PBOC.

n

Centralized processing of payments at NetsUnion: From June 30, 2018, all non-bank payment institutions’ network payment business (involving bank accounts) have been processed through NetsUnion, which acts like a clearing house.

n

One QR code for all: According to the PBOC’s FinTech Development Plan (2019-2021) published in September 2019, the interconnection of QR codes (one QR code for all) will be completed by the end of 2021.

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Over the last few years, the PBOC has introduced several measures: (Exhibit 127):

Goldman Sachs

China Financial Services

Exhibit 63: Since 2016, no new Third Party Payment licenses have been issued and 32 have been canceled

Exhibit 64: Fintech players have achieved mutual recognition of their QR codes with a few banks, however “One QR code for all” will be completed by the end of 2021

No. of Third Party Payment licenses New licenses

Cancellations

120

269 101

Existing licenses No. (RHS) 300

266

250

96

100

269

247

238

237

237

250

197 200

80 60

150

53

101 100

40

19

20 0

19

0

0

0

0

2011

2012

2013

2014

2

2

2015

0

3

2016

50

9 1

0

0

0

2017

2018

2019

0

0

0

2020

Source: PBOC

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 65: Centralized deposits of client reserves increased to 100% in 2019; total client reserves were Rmb1.6tn as of Aug. 2020 Centralized client reserve of Third Party Payment institutions Centralized client reserve

% of centralized client reserve required by PBOC 120%

2,500

100%

2,000

Rmb bn

1,500

Proportion of centralized deposit of client reserve increased

80%

60%

1,000

500

20%

0% Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20

0

a2810045d5314637bdba4864b34fcf51

40%

PBOC required centralized deposit of client reserve

Source: PBOC

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Exhibit 66: The government has introduced several measures over the last few years, including: (1) centralized deposits of client reserves; and (2) centralized clearance of payments at NetsUnion

Source: PBOC, iResearch, Goldman Sachs Global Investment Research, Gao Hua Securities Research

DC/EP will reduce costs, boost competition and improve connectivity

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n

Reduce the cost of cash. We forecast a ~15% substitution rate for cash by DC/EP in ten years, which will cut the processing cost of cash (printing, transport etc.) for banks and the PBOC and reduce demand along the cash management industry chain.

n

Introduce competition. We expect DC/EP to become the third pillar of China’s payments system alongside banks and fintech payments, introducing new competition into the system. That said, initially at least we expect the DC/EP take rate paid to banks and other service providers in offline consumption to be in line with the current ecosystem (Exhibit 68), since DC/EP would need to leverage the existing infrastructure and provide incentives to related parties.

n

Increase interconnectivity of existing payment methods. In addition to the “one code for all” policy that promotes the interconnection of QR codes, we expect DC/EP to enhance the connectivity of existing payment methods because it will be a DC/EP a widely-accepted digital legal tender that becomes a “bridge” for all parties.

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Once DC/EP is rolled out nationwide over the next few years, we expect it to bring about several important changes to the payment industry:

Goldman Sachs

China Financial Services

Exhibit 67: DC/EP will become the third pillar of the payment industry value chain alongside bank cards and Third Party Payments

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

a2810045d5314637bdba4864b34fcf51

Exhibit 68: Although there are no details about the fee structure of DC/EP, we expect it to be akin to app-based payments as the operating framework is similar

Note: Our take rate forecasts are a rough estimate based on our channel checks and may vary due to merchant discounts and other factors. Source: iResearch, PBOC, Goldman Sachs Global Investment Research, Gao Hua Securities Research

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Goldman Sachs

China Financial Services

Leveling the playing field in payments Rise of fintech payments driven by mobile payment penetration The surge in Fintech digital wallets in recent years has been driven by increased penetration of mobile payments. As shown in Exhibit 69, the TPV of Third Party Payment Institutions (fintech) grew 10-fold over 2015-2019 to reach Rmb250tn (US$37tn), with growth slowing to 20% yoy in 2019 as penetration had already reached a very high level. Of that, mobile payments increased from 43% (of third party payments) in 2015 to 90% in 2019 (Exhibit 70). Among different types of payments, 54% of TPV is from transfers, 20% from consumption and 22% from finance (Exhibit 73). AliPay and Tenpay dominate the third party payment landscape, together accounting for over 90% in terms of TPV (Exhibit 74). Exhibit 69: Third Party Payment transaction value reached Rmb251tn in 2019...

Exhibit 70: ...with mobile payments accounting for the vast majority

Third Th Third ird pa party rty pa payment yment vvalue alue 3rd party payment transaction value

Third Th Third ird pa party rty pa payment yment vvalue: alue: m mobile obile vvs. s. de desktop sktop

Growth YoY (RHS)

300

Mobile

120% 100%

101%

Desktop

250

250

100%

25%

19%

13%

10%

87%

90%

2018

2019

208 80%

Rmb tn

200 143

150

44%

49%

57%

60%

45%

99 40%

100 49 50

75%

81%

20% 20%

25

51%

43%

0%

0 2014

2015

2016

2017

2018

2019

2014

2015

2016

2017

Source: PBOC

Source: PBOC, iResearch

Exhibit 71: Growth in Third Party Mobile Payment transaction value has slowed in recent years, but was still a healthy 19% in 2019

Exhibit 72: Growth in Third Party Desktop Payment transaction value declined in 2019 Third Th Third ird party party mobile mobile desktop desktop payment payment value value

Third Th Third ird pa party rty m mobile obile pa payment yment vvalue alue 3rd party payment transaction value: mobile 250

392%

191

200

3rd party payment transaction value: desktop

Growth YoY (RHS) 450% 226 400%

383%

35

25

200%

100 103%

50 6

150%

105% 19%

0

50% 0%

2014

Source: PBOC, iResearch

17 November 2020

2015

2016

2017

2018

70%

29

25 47%

20

2019

60% 50%

40%

40%

20

30% 15

10

20%

12 4%

8

10%

100%

58%

12

Rmb ttn Rmb n

Rmb Rm Rmb b ttn n

250%

120

80% 28

50%

350%

150

Growth YoY (RHS)

68%

30

300%

59

a2810045d5314637bdba4864b34fcf51

Third party desktop payment value: by transaction type Third

0% 5

-14%

0

-10% -20%

2014

2015

2016

2017

2018

2019

Source: PBOC, iResearch

47

Goldman Sachs

China Financial Services

Exhibit 73: 54% of Third Party Payment transaction value is from transfers, 20% from consumption and 22% from finance

Exhibit 74: Alipay and Tenpay together account for over 90% market share in Third Party Payments (in terms of TPV) Third party mobile payment market share

Third Th Third ird party party payment payment value: value: by transaction transaction type type Transfer

Finance

Consumption

Alipay

Others

7%

34%

26%

16%

12%

19%

22%

18%

22%

Tenpay

Others 5%

6%

6%

40%

39%

39%

52%

55%

54%

54%

2016

2017

2018

2019

10%

11% 16%

31%

21%

10%

38% 20%

32%

82% 62% 33%

32%

2014

2015

2016

Source: iResearch

61%

57%

54%

2017

2018

2019

2014

74%

2015

Source: iResearch

Consumption payments to see banks and fintech aggressively compete

Consumption payments will be where banks and fintech providers compete most aggressively as this is what consumers access most frequently, providing a gateway to other retail finance businesses. Third Party Payment systems have overwhelmingly become the platform of choice (Exhibit 77) — as of 2019, we estimate 68% of consumption payments came from the digital wallets of Third Party Payment providers, compared to only 12% for bank cards (excluding digital wallet binding payments, Exhibit 79). On the flipside, bank cards have dominated the transfer payment space relative to fintech payment platforms (Exhibit 78). Fintech platforms have several advantages over bank cards when users make consumption payments:

17 November 2020

n

Their ecosystems (e-commerce, instant messaging, food delivery) drive significant user stickiness;

n

QR code payments at the point-of-sale are more convenient than physical credit cards, with fintech platforms rapidly able to expand coverage of offline merchants (by providing printed QR code cards at a low cost and offering subsidies) in recent years.

48

a2810045d5314637bdba4864b34fcf51

Financial payments are categorized as: (1) consumption (online and offline); (2) transfers; and (3) finance (e.g. wealth management and retail lending). Among these categories, consumption is the major source of income for Third Party Payment (3PP) providers given the higher take rate than transfers and finance; thus consumption payments are regarded as “commercial payments” by payment institutions.

Goldman Sachs

China Financial Services

Exhibit 75: Growth in bank card transactions value fell to only 3% in 2019

Exhibit 76: The vast majority of bank card payment value comes from transfers Bank card payment value: by transaction type

Bank card payment value Bank card transaction value

1,000 900

Growth YoY (RHS)

800

886

862

49%

742

60%

Cash deposit

Cash withdrawal

Property & wholesale

Consumer goods & services

3% 7%

50%

762

Transfer

2% 6%

2% 6%

2% 7%

2% 9%

2% 11%

70%

73%

74%

75%

75%

670

700

40%

tn Rmb Rm Rmb b tn

600 450

500

58%

30%

400 300

13%

11%

200

20%

6% 3%

3%

100 0 2014

2015

2016

2017

2018

10%

17% 11%

9%

16%

9%

0%

11%

10%

9%

7% 7%

6% 6%

2014

2015

2016

2017

2018

2019

2019

Source: PBOC

Source: PBOC

Exhibit 77: Third Party Payment providers have captured the lion’s share of consumption payments (compared to bank cards)

Exhibit 78: Transfer payments, on the other hand, are dominated by bank cards Transfer Tr Transfer ansfer pa payment: yment: bank bank card card vvs. s. tthird hird party party payment payment

Consumption pa Consumption payment: yment: ban bankk c card ard vvs. s. tthird hird pa party rty pa payment yment

3rd party transfer+finance payment

3rd party consumption payment Bank card consumption payment (ex. property & wholesale)

60

55

600

50

20

14

12

5

18

17

19

20

400 262

300

171

200

8

63

100 8

0

188

123 15

0 2014

Source: PBOC, iResearch

17 November 2020

2015

2016

2017

2018

2019

2014

2015

2016

2017

2018

2019

a2810045d5314637bdba4864b34fcf51

10

13

15

Rmb ttn Rmb n

Rmb ttn Rmb n

30

560

543 471

500

39

40

Bank card transfer payment 665 650

700

Source: PBOC, iResearch

49

Goldman Sachs

China Financial Services

Exhibit 79: Consumption payments will see banks and fintech aggressively compete; Third Party Payment platforms account for 68% of consumption payments vs. only 12% for bank cards (excluding digital wallet binding payments); Rmb

Note: Transaction value in Rmb; data as of 2019. 1) Assumes 60% bank card transactions are via third party payments; 2) Calculated by subtracting bank card & third party payments from total offline consumption; 3) Assumes services consumption is 50% of goods consumption value. Source: PBOC, iResearch, NBS, Goldman Sachs Global Investment Research, Gao Hua Securities Research

DC/EP to capture 15% of consumption payments in ten years, 3PP share to taper and stabilize

17 November 2020

n

Slowing growth in fintech (Third Party Payments) to an 8% CAGR in 2020-2029, a sharp decline from 57% in 2015-2019, given the already high penetration (68% in 2019, rising to 82% in five years). As DC/EP is fully rolled out and rises to 15% of consumption payments, we expect the market share of fintech to taper off and stabilize at ~80%.

n

Wider declines in physical bank card payments (-6% CAGR in 2020-2029E vs. -1% in 2015-2019); after adding back payments through fintech platforms, we expect bank card payments to see a 7% CAGR in 2020-2029E. Excluding the binding of digital wallets, we expect bank cards to comprise only 3% of consumption payments in 2029, a sharp drop from 12% in 2019.

n

Cash payments to decrease at a 7% CAGR in 2020-2029E (vs. -13% in 2015-2019) as it is gradually replaced by DC/EP and other means of mobile payments. We expect cash to account for only 5% of total consumption payments in 2029, from ~20% in 2019, as China steadily heads towards a cashless society.

50

a2810045d5314637bdba4864b34fcf51

Based on our forecast that DC/EP will reach Rmb19tn (US$3tn) in annual TPV, a 42% CAGR in 2025-2029 (Exhibit 46) and 15% of social consumption, we forecast (Exhibit 80-Exhibit 81):

Goldman Sachs

China Financial Services

Exhibit 80: DC/EP will be the fastest growing means of payment within the consumption landscape (in terms of TPV) China consumption payment value: by means of payment Cash

DC/EP

Bank card (ex. fintech overlap)

Fintech 128 119 111

CAGR: 7%

91 85 10

79

10

73 68

CAGR: 11%

65

61 13

55

8

49 22

44

10 0 5

10 1 5

2 4

8

28

58

8 8

13

7 3

3

14

-13%

16

-7%

4

DC/EP

4

4

42%

N/A

Bank card (incl. fintech overlap)

64

70

75

83

79

87

93

98

7%

Bank card (ex. fintech overlap)

-1%

51

46

8

10

7

10%

7

7

9

Cash

6

6

31

28

3 3

8

20-29E CAGR*

19

104 97

15-19 CAGR

6

-6% Fintech

32

57%

17

2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E

8%

Unit: Rmb tn Note: *25-29E for DC/EP

Source: PBOC, iResearch, Wind, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 81: DC/EP to account for 15% of consumption TPV in ten years

China consumption payment value breakdown: by means of payment DC/EP

Bank card (ex. fintech overlap)

5%

5%

12%

11%

9%

6%

13%

12%

7%

13%

2% 4%

4% 3%

10%

13%

14%

15%

7%

1% 6%

7%

9%

3%

3%

3%

3%

20% 36%

58%

Fintech

3%

15-19 chg.

20-29E chg.* Cash

-46ppt

a2810045d5314637bdba4864b34fcf51

Cash

-18ppt

12%

57%

DC/EP

64% N/A

+15ppt

12% Bank card (incl. fintech overlap) -1ppt

78%

12% 16%

79%

81%

82%

82%

81%

80%

78%

78%

77%

68%

19%

+56ppt

2016

2017

-9ppt

Fintech

31%

17%

2015

Bank card (ex. fintech overlap) -10ppt

52%

26%

-1ppt

2018

2019

2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E

+12ppt

Note: *25-29E for DC/EP

Source: PBOC, iResearch, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Impact across China’s payment system The rising penetration of DC/EP will impact China’s payment system in a number of 17 November 2020

51

Goldman Sachs

China Financial Services

ways: n

Commercial Banks: Commercial banks will be the only institutions permitted to operate in DC/EP exchange as it is the digitalization of legal tender. This will effectively level the playing field with fintech platforms, enabling banks to once again compete head-to-head with them in consumption payments. Binding a DC/EP wallet to a bank account may increase customer stickiness to bank mobile apps, as well as promote other banking services such as wealth management and retail lending, which we discuss in the next section. So far, the big four banks and other banks have participated in DC/EP R&D and tested the DC/EP wallet in 2020.

n

Third Party Payment providers (digital wallet issuers): Fintech platforms will eventually face new competition from banks in the payment space, although this is likely to be limited over the next few years as the adoption of DC/EP will only be gradual. It is also possible that fintech firms will add DC/EP as a payment method in their apps. In the long term, even if take rates face downward pressure from intensified competition, leading Third Party Payment players could still supplement lower commissions with higher payment volumes and value-add services such as marketing, fintech and SaaS (Exhibit 82).

n

Third Party Payment providers (acquirers): The take rate paid to acquirers will continue to be stable as DC/EP payments will still need to use existing offline channels and infrastructure (such as QR code scanners). We think this will benefit leading acquirers given higher payment volumes and increased demand by merchants for mobile payments.

n

Software/hardware vendors: Vendors should also benefit from the PBOC, commercial banks and Third Party Payment institutions outsourcing DC/EP R&D, and from hardware upgrades.

a2810045d5314637bdba4864b34fcf51

We summarize listed companies that have already participated in the DC/EP system or will likely have exposure to it (Exhibit 85). Exhibit 82: Third Party Payment ecosystem provides value-added service to merchants

Source: Yeahka, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020

52

Goldman Sachs

China Financial Services

Exhibit 83: Traditional bank card payment take rates have declined while take rates for app-based payments have increased

Exhibit 84: Yeahka’s tech-enabled revenue contribution rose to 18% in 1H20

Yeahka payment take rate Overall

App-based payment

Yeahka tech-enabled business revenue contribution

Traditional payment

Profit contribution

Revenue contribution

20.8 24.3%

18.6

17.3

bps

16.4

18.1% 13.9

12.9

12.4

9.5

9.5

8.4%

8.8

17.8%

13.9

8.1

4.0%

7.8%

2.5%

1.7%

2017

2018

2019

1H20

2017

Source: Company data

2018

2019

1H20

Source: Company data

Exhibit 85: Listed companies that have participated in DC/EP development, or in the case of third

Commercial Banks

Company name

Details of engagement

Industrial and Commercial Bank of China Limited

601398.SH/1398.HK

Participated in the DC/EP R&D and tested the DC/EP wallet in 2020

China Construction Bank Corporation

601939.SH/0939.HK

Participated in the DC/EP R&D and tested the DC/EP wallet in 2020

China CITIC Bank Corporation Limited

601998.SH/3998.HK

Participated in the DC/EP R&D and tested the DC/EP wallet in 2020

Agricultural Bank of China Limited

601288.SH/1288.HK

Participated in the DC/EP R&D and tested the DC/EP wallet in 2020

Postal Savings Bank of China Co.,Ltd.

601658.SH/1658.HK

Involved in the DC/EP project in 2020

Bank of Communications Co.,Ltd.

601328.SH/3328.HK

Involved in the DC/EP project in 2020

China CITIC Bank Corporation Limited

601998.SH/0998.HK

Involved in the DC/EP project in 2020

Lakala Payment Co.,Ltd.*

300773.SZ

Business includes providing payment service to merchants

N/A

Yeahka Limited*

9923.HK

Business includes providing payment service to merchants

N/A

Huifu Payment Limited*

1806.HK

Business includes providing payment service to merchants

N/A

Digital China Information Service Company Ltd.*

000555.SZ

Participated in DC/EP R&D and testing of one commercial bank

Company disclosure

Huafon Microfibre(Shanghai)Co., Ltd.*

300180.SZ

Its subsidiary Weifutong has participated in DC/EP R&D and testing of one commercial bank

Company disclosure

GRG Banking Equipment Co., Ltd.*

002152.SZ

Did research in to DC/EP in 2019-2020

Company disclosure

Shenzhen Sunline Tech Co., Ltd.*

300348.SZ

Did research in to DC/EP in 2019-2020

Company disclosure

Feitian Technologies Co.,Ltd.*

300386.SZ

Did research in to DC/EP in 2019-2020

Company disclosure

XGD INC.*

300130.SZ

Did research in to DC/EP in 2019-2020

Company disclosure

Global Infotech Co.,Ltd.*

300465.SZ

Did research in to DC/EP in 2019-2020

Company disclosure

Shenzhen Forms Syntron Information Co., Ltd.*

300468.SZ

Did research in to DC/EP in 2019-2020

Company disclosure

Guangzhou Kingteller Technology Co.,Ltd.*

002177.SZ

Did research in to DC/EP in 2019-2020

Company disclosure

Third Party Payment providers (acquirers)

Software/hardware vendors

Info source

PBOC

Caixin

a2810045d5314637bdba4864b34fcf51

Main areas

Note: *Denotes Not Covered companies. Source: PBOC, Caixin, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020

53

Goldman Sachs

China Financial Services

Gateway to banks’ retail finance channels; CMB and PAB best placed to capitalize Incorporating digital currency wallets into bank apps will bring consumers back to bank channels, expanding their customer base, MAUs and stickiness. A 10% increase in the bank app users would lift revenues by 2%-5%. PAB and CMB are best placed to commercialize returning app users given their leading retail franchises, premium client bases, superior fintech capability and strategic focus on retail finance. We reiterate our Buy ratings on CMB-H/A (A on the Conviction List) and PAB.

DC/EP will bring customers back to bank apps, opening a gateway to other products Local branches were once the main channel through which banks acquired retail

DC/EP will level the playing field in retail banking. Banks will be the only institutions permitted to operate DC/EP — even digital currency wallets held with fintech firms will need to be linked with bank accounts to convert deposits and cash to DC/EP. With DC/EP embedded into bank apps, we expect customers to return to bank channels, increasing their customer base, MAUs and customer stickiness. Should DC/EP gain traction, banks should be able to recapture lost market share and grow revenues across payments, consumer lending (and deposits), wealth management, and insurance (Exhibit 88).

17 November 2020

54

a2810045d5314637bdba4864b34fcf51

customers. However, with digital wallets the dominant platform for consumption payments (Exhibit 81), fintech firms have swelled their customer base by linking their payment services with frequently used applications such as e-commerce and instant messaging. For the most part, bank apps have struggled to compete, with MAU typically less than 1/10th that of the top fintech apps due to fewer apps/services and less cutting edge design and functionality (Exhibit 86). CMB, on the other hand, has enjoyed considerable success in migrating its retail banking products to online from offline, with wealth management sales through its app rising to 78% of total sales in 1H20 from 43% in 2017 (Exhibit 87). We put this down to its strong retail franchise and fintech capability.

Goldman Sachs

China Financial Services

Exhibit 86: MAUs for bank apps have been significantly lower than fintech

Exhibit 87: CMB’s app has become the main channel to sell its wealth management products CMB’s wealth management sales value by channel

Mobile app MAU ranking 1,200 1,000

MAU As of Aug. 2020

On app

App MAU/ bank retail customers (RHS) 33%

991

30%

29%

35%

28%

25%

22%

41%

30%

800

Offline

40%

57%

mn

20% 600

15%

11% 6%

10%

5%

400

72%

5% 0%

200

69

65

54

43

41

37

33

32

CCB

ABC

CMB

CMB credit card

BOC

PSBC

PAB

-5%

78%

59% 43%

-10%

0 Wechat ICBC

Source: Analysys, Company data

2017

2018

2019

1H20

Source: Company data

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

A 10% increase in bank app users would boost revenues by 2-5%; PAB and CMB the largest beneficiaries To gauge the impact of DC/EP on bank revenues and earnings we look at the potential increase in active app users for four banks that comprehensively disclose retail banking metrics — two large banks (ICBC and PSBC) and two retail-focused joint-stock banks (CMB and PAB): n

17 November 2020

ICBC and PSBC have a high number of retail customers (650mn and 605mn, respectively) but a low percentage using their mobile apps (56%/43% for ICBC/PSBC, Exhibit 89). On the other hand, CMB and PAB have fewer customers but their mobile app penetration rate is much higher (71%/92%) given their greater emphasis on developing fintech applications across their businesses. 55

a2810045d5314637bdba4864b34fcf51

Exhibit 88: DC/EP rollout would open a new gateway for banks to grow their retail banking businesses

Goldman Sachs

China Financial Services

n

PSBC, CMB and PAB derive a higher portion of revenue and profit from retail banking than ICBC, whose strength is in corporate banking (Exhibit 90).

n

CMB has the highest average retail revenue/profit per retail customer (Rmb990/Rmb369) thanks to its premium client base, which has close to Rmb40,000 AUM (excluding deposits) per user (Exhibit 91).

n

A 10% increase in the number of bank app users would increase revenues by 2%-5% and earnings by 2%-8% (Exhibit 92), depending bank app penetration, focus on retail banking and average income per user. PAB and CMB would be the biggest beneficiaries of a DC/EP rollout (with earnings increasing 8% and 3%, respectively) given their leading retail franchises.

Exhibit 89: ICBC and PSBC have a large number of retail customers, but the % of app users to total customers is low

Exhibit 90: PSBC, CMB and PAB derive more revenue and profit from retail than ICBC Banks’ retail revenue & profit as % of total

App penetration rate of retail customers Retail customers

App users

App users/retail customers 92%

2,000 1,800 1,600

71%

1,400 56%

mn

1,200

43%

1,000 800

650

605

600 361

400

260

200

Retail revenue % 100%

100%

90%

90%

80%

80%

70%

70%

60%

60%

50%

50%

40%

40%

30%

30%

20% 144

102

97

89

10%

0%

0 ICBC

PSBC

CMB

PAB

Retail profit % 89%

64%

64%

58%

53% 40%

45% 39%

20% 10% 0% ICBC

PSBC

CMB

PAB

As of 2019

Source: Company data

Source: Company data

Hypothetical boost of bank revenue & profit assuming 10% increase in app users

Average retail revenue, profit & AUM per retail customer Retail revenue

Retail profit

2,000

AUM ex. Deposit

8%

30,000 14,412 6,342

1,000

3,003

1,005

10,000 824

0

800

525

400 200

-10,000

461 188

20,000

292

258

5% Rmb

1,400 Rmb

Impact on profit

40,000

1,600

600

Impact on revenue

50,000

40,415

1,800

1,200

Exhibit 92: PAB and CMB would benefit the most from an increase in app users given their leading retail franchises

a2810045d5314637bdba4864b34fcf51

Exhibit 91: CMB has the highest retail revenue and profit per user, thanks to high AUM

4% 2%

3%

3%

3%

2%

-20,000 -30,000

64

0

-40,000 ICBC

As of 2019 Source: Company data

PSBC

CMB

PAB

ICBC

PSBC

CMB

PAB

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Bank valuation in a DC/EP world: Retail banking vs. Fintech Retail banking and fintech have comparable product offerings in payments, lending, wealth management and insurance. With DC/EP to level the playing field between banks and fintech, we recast our retail banking forecasts and derive and implied valuation for 17 November 2020

56

Goldman Sachs

China Financial Services

CMB’s and PAB’s retail banking businesses using a SOTP. Our target P/PPOP multiples for CMB and PAB (6.00x/3.00x) imply a 16x/13x P/E for their retail banking business, which looks reasonable compared with global peers. n

We recast our retail banking forecasts by applying key growth drivers such as app MAU, average AUM/TPV/loan balance per user and take rate (Exhibit 94), to our retail banking forecasts (Exhibit 95-Exhibit 96). Our estimates for corporate banking are unchanged.

n

We value corporate banking by applying ICBC’s target P/B multiple (0.8x) to CMB and PAB’s corporate book value, based on their corporate business assets and assuming the same leverage ratio for retail banking.

n

Deducting corporate banking valuation from overall valuation implies a valuation for CMB and PAB’s retail banking business of 16x/13x 2021E P/E, around the mid-range of global peers (Exhibit 98).

n

We then deduct the valuation of their lending segments (based on average target multiples for Capital One and American Express) from the above retail banking valuation to derive a valuation for CMB and PAB’s non-lending retail business: 17x/14x P/E.

a2810045d5314637bdba4864b34fcf51

Exhibit 93: Retail banking offerings are similar to fintech

Note: As of 2019 Source: Company data

17 November 2020

57

Goldman Sachs

China Financial Services

Exhibit 94: Reconsidering drivers for retail banking: Growing customer base key to driving banks’ revenues and earnings

a2810045d5314637bdba4864b34fcf51

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020

58

Goldman Sachs

China Financial Services

Exhibit 95: Recast financial model for CMB’s retail business: Mid-teens revenue growth in 2020-2025E

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

PAB Retail business Retail revenue Growth yoy I. Lending business Growth yoy as % of total retail revenue NIM/take rate Loan balance Growth yoy II. Non-lending business Growth yoy as % of total retail revenue 1. Payment/transaction fee Growth yoy Take rate(bps) TPV Growth yoy 2. Wealth management fee Growth yoy Take rate(bps) Non-deposit AUM Growth yoy AUM Growth yoy Private bank AUM Non-Private bank AUM Retail net profit Growth yoy

2017 47 42% 27 33% 59% 3.2% 849 57% 19 55% 41% 19 49% 4.5 41,593 26% 3 11% 41 771 39% 1,087 36%

2018 62 33% 39 42% 63% 3.4% 1,154 36% 23 19% 37% 25 36% 4.2 59,566 43% 3 9% 36 980 27% 1,417 30% 458 959

2019 80 29% 50 30% 63% 3.7% 1,357 18% 30 29% 37% 30 20% 4.8 63,114 6% 5 29% 32 1,420 45% 1,983 40% 734 1,249

2020E 90 12% 56 12% 63% 3.5% 1,603 18% 34 13% 37% 34 13% 4.7 72,753 15% 5 18% 31 1,722 21% 2,474 25% 1,040 1,435

2021E 101 13% 63 12% 62% 3.4% 1,875 17% 38 14% 38% 39 14% 4.7 83,885 15% 6 19% 30 2,113 23% 3,093 25% 1,452 1,641

2022E 115 14% 71 13% 62% 3.3% 2,171 16% 44 14% 38% 45 14% 4.6 96,745 15% 8 20% 29 2,617 24% 3,866 25% 1,997 1,868

2023E 131 14% 81 13% 62% 3.3% 2,482 14% 50 15% 38% 51 14% 4.6 111,606 15% 9 21% 28 3,261 25% 4,825 25% 2,707 2,118

2024E 151 15% 94 16% 62% 3.3% 2,799 13% 58 15% 38% 58 14% 4.5 128,788 15% 11 21% 27 4,073 25% 6,005 24% 3,615 2,390

2025E 178 18% 112 20% 63% 3.6% 3,112 11% 66 15% 37% 66 14% 4.5 148,660 15% 13 21% 26 5,083 25% 7,437 24% 4,752 2,685

16 68%

17 9%

19 14%

21 7%

23 11%

26 13%

31 17%

36 19%

45 23%

a2810045d5314637bdba4864b34fcf51

Exhibit 96: Recast financial model for PAB’s retail business: Mid- to high-teens revenue growth through 2025E

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020

59

Goldman Sachs

China Financial Services

Exhibit 97: After decomposing valuation into retail and corporate, target P/PPOP multiples for CMB and PAB (6.00x/3.00x) imply 16x/13x P/E for their retail banking business... Net profit Book value Valuation P/E 2021E P/B 2021E 2021E 2021E

Note

CMB Total

109

765

1,303

12.0x

1.7x

Our target valuation is based on 6.0x P/PPOP

65

273

997

15.5x

3.7x

Backed-out from total target valuation minus corporate valuation

Lending business

32

-

426

13.5x

-

Non-lending business

33

-

571

17.4x

-

44

492

306

6.9x

0.6x

35

369

382

11.0x

1.0x

Our target valuation is based on 3.0x P/PPOP

23

138

301

13.0x

2.2x

Backed-out from total target valuation minus corporate valuation

Lending business

5

-

53

10.1x

-

Non-lending business

18

-

248

13.9x

-

12

231

81

6.9x

0.4x

Retail business

Corporate business

Based on average target P/E of COF and AXP Backed-out from retail valuation minus lending business valuation Based on target P/E of ICBC

PAB Total Retail business

Corporate business

Based on average target P/E of COF and AXP, then apply 25% discount Backed-out from retail valuation minus lending business valuation Based on target P/E of ICBC

Comps Capital One (COF)

9.3x

0.8x

Target price implied valuation

American Express (AXP)

17.6x

4.3x

Target price implied valuation

Paypal (PYPL)

86.7x

10.4x

Target price implied valuation

Visa (V)

40.0x

14.8x

Target price implied valuation

MasterCard (MA)

45.9x

83.8x

Target price implied valuation

BlackRock (BLK)

21.3x

3.0x

Target price implied valuation

Alliance Bernstein

11.7x

0.5x

Target price implied valuation

ICBC

6.9x

0.8x

Target price implied valuation

CMB (Retail)

15.5x

3.7x

Calculated target valuation

PAB (Retail)

13.0x

2.2x

Calculated target valuation

In Rmb bn. As of Nov. 11, 2020 Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 98: ...which looks reasonable compared with global peers Target price implied P/E and P/B P/E 2021E 86.7

P/B 2021E

83.8

40.0 21.3

14.8

10.4

17.6 3.0

Paypal

MasterCard

Visa

BlackRock

15.5

13.0

4.3

3.7

American Express

CMB (Retail)

11.7 2.2

PAB (Retail)

9.3 0.5

0.8

6.9

Alliance Capital One Bernstein

a2810045d5314637bdba4864b34fcf51

45.9

0.8

ICBC

The valuations are our target price implied multiples Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

CMB, PAB best placed to capitalize on DC/EP; reiterate Buy ratings (CMB-A on the CL) Among China banks, PAB and CMB are best placed to commercialize returning app users from the roll out of DC/EP given their:

17 November 2020

n

leading retail franchises: PAB and CMB have the strongest retail franchises, especially in wealth management.

n

premium client bases: AUM (ex. deposits) of CMB and PAB are 6x/2x larger than ICBC (Exhibit 91).

60

Goldman Sachs

China Financial Services

n

advanced fintech capability: both banks enjoy higher mobile app penetration of their retail customers (71%/92% for CMB/PAB, Exhibit 89) than peers.

n

strategic focus on retail banking: CMB regards its retail business as the “main body” of its overall business, while over the last few years PAB has made the digital transition in retail banking one of its key corporate strategies.

As such, we expect both to steadily recapture or increase their market share across most retail finance categories. Exhibit 99: CMB to claw back market share in wealth management, and to a lesser extent, payments

Exhibit 100: PAB to steadily gain market share in payments and, to a lesser extent, wealth management PAB: retail income market share in each segment

CMB: retail income market share in each segment Lending

Wealth mgmt.

18% 15%

15%

14%

10%

7%

9%

16% 14%

10%

16%

17%

6%

2016

2017

17%

Lending

Wealth mgmt.

17% 14% 14% 13%

14%

12%

11%

10%

8%

7%

7%

7%

6%

6%

7%

2018

2019

2020E

11%

11%

11%

11%

9%

9%

8%

8%

7%

2021E

7%

2022E

9%

7%

2023E

7%

2024E

5%

8%

2025E

11%

11%

6%

6%

9%

7% 6% 6%

6% 6%

Payment

Insurance sales

5%

4%

4%

4%

2016

2017

2018

6%

5%

5%

2019

2020E

5%

2021E

6%

6%

2022E

7%

6%

2023E

7% 7%

2024E

7% 7%

2025E

Note: revenue as % of all banks

Note: revenue as % of all banks

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

As the leading retail banks in China that will benefit the most from the digital currency rollout, we reiterate our Buy ratings on CMB H/A (A- on the Conviction List) and PAB. Neither has participated in early testing of the DC/EP system (so far this has been limited to the big four state owned banks), however, along with all other commercial banks, we expect both will operate DC/EP in the official launch and benefit once uptake increases over time. With DC/EP still at the testing stage and timing for a full roll out yet to be determined, we make no changes to our 2020-2022E earnings forecasts, CAMELOT-derived valuation or ratings.

17 November 2020

61

a2810045d5314637bdba4864b34fcf51

Payment

Goldman Sachs

China Financial Services

Exhibit 101: China banks valuation Company

Ticker

Currency

Closing Price

TP

Upside

P/E P/B EPS growth P/PPOP ROE Div yield Target 21E Rating P/PPOP 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E

H-share ICBC

1398.HK

HK$

4.68

6.69

43%

3.50x

Buy

4.5x

4.5x

0.5x

0.5x

1%

2%

0.0x

0.0x

12%

11%

6.7%

6.9%

BOC

3988.HK

HK$

2.76

3.60

30%

2.50x

Neutral

3.8x

3.8x

0.4x

0.4x

1%

1%

0.0x

0.0x

12%

11%

8.1%

8.2%

CCB

0939.HK

HK$

6.00

8.35

39%

3.50x

Buy

4.6x

4.5x

0.6x

0.5x

4%

4%

0.0x

0.0x

13%

13%

6.7%

6.8%

ABC

1288.HK

HK$

2.88

3.90

35%

2.75x

Neutral

4.0x

3.9x

0.4x

0.4x

7%

0%

0.0x

0.0x

12%

11%

8.1%

8.2%

BoCom

3328.HK

HK$

4.22

4.47

6%

2.00x

Sell

3.4x

3.4x

0.4x

0.3x

0%

2%

0.0x

0.0x

11%

10%

8.8%

9.0%

PSBC

1658.HK

HK$

4.21

6.12

45%

3.25x

Buy

4.8x

4.4x

0.5x

0.5x

3%

9%

0.0x

0.0x

11%

11%

6.7%

7.3%

CMB

3968.HK

HK$

49.30

56.34

14%

6.00x

Buy

10.7x

9.8x

1.6x

1.4x

6%

9%

0.0x

0.0x

15%

15%

2.9%

3.2%

CEB

6818.HK

HK$

2.93

3.43

17%

1.50x

Neutral

3.4x

3.4x

0.3x

0.3x

1%

0%

0.0x

0.0x

10%

9%

8.1%

8.1%

CQRCB

3618.HK

HK$

3.34

3.44

3%

1.75x

Neutral

3.6x

3.5x

0.3x

0.3x

-8%

1%

0.0x

0.0x

10%

9%

5.6%

5.7%

4.0x

3.9x

0.4x

0.4x

1%

2%

0.0x

0.0x

12%

11%

6.7%

7.3%

5.4%

Median (H) A-share ICBC

601398.SS

Rmb

5.00

6.14

23%

3.50x

Buy

5.7x

5.6x

0.7x

0.6x

1%

2%

3.0x

2.9x

12%

11%

5.3%

BOC

601988.SS

Rmb

3.23

3.31

2%

2.50x

Neutral

5.2x

5.2x

0.5x

0.5x

1%

1%

2.6x

2.4x

12%

11%

5.7%

5.8%

CCB

601939.SS

Rmb

6.48

7.66

18%

3.50x

Buy

5.9x

5.8x

0.7x

0.7x

4%

4%

3.1x

3.0x

13%

13%

5.2%

5.3%

ABC

601288.SS

Rmb

3.19

3.57

12%

2.75x

Neutral

5.2x

5.2x

0.6x

0.5x

7%

0%

2.6x

2.5x

12%

11%

6.1%

6.1%

BoCom

601328.SS

Rmb

4.59

4.62

1%

2.25x

Sell

4.4x

4.3x

0.5x

0.4x

0%

2%

2.4x

2.3x

11%

10%

6.9%

7.0% 5.2%

PSBC

601658.SS

Rmb

4.71

5.62

19%

3.25x

Buy

6.3x

5.8x

0.7x

0.7x

3%

9%

3.1x

2.7x

11%

11%

4.8%

CMB

600036.SS

Rmb

43.84

51.68

18%

6.00x

Buy*

11.2x

10.2x

1.6x

1.5x

6%

9%

5.8x

5.2x

15%

15%

2.8%

3.0%

CEB

601818.SS

Rmb

4.05

4.19

3%

2.00x

Neutral

5.6x

5.6x

0.5x

0.5x

1%

0%

2.2x

2.0x

10%

9%

4.9%

4.9%

Industrial

601166.SS

Rmb

17.91

20.18

13%

2.50x

Buy

5.6x

5.3x

0.7x

0.6x

1%

6%

2.5x

2.2x

13%

13%

4.1%

4.4%

PAB

000001.SZ

Rmb

17.83

19.71

11%

3.00x

Buy

11.2x

9.9x

1.2x

1.1x

9%

13%

3.2x

2.8x

11%

11%

1.4%

1.6%

HuaXia

600015.SS

Rmb

6.28

6.23

-1%

1.50x

Sell

4.5x

4.6x

0.3x

0.3x

-2%

-2%

1.6x

1.5x

8%

7%

7.6%

7.4%

BONB

002142.SZ

Rmb

34.58

30.51

-12%

6.00x

Neutral 13.1x

11.8x

1.7x

1.5x

4%

11%

8.2x

7.1x

14%

14%

1.3%

1.8%

BONJ

601009.SS

Rmb

8.07

9.29

15%

3.25x

6.1x

5.8x

0.8x

0.7x

-9%

5%

3.2x

2.8x

13%

12%

4.8%

5.2%

5.7x

5.6x

0.7x

0.6x

1%

4%

3.0x

2.7x

12%

11%

4.9%

5.2%

Median (A)

Buy

Note: *Denotes stock is on our Conviction List. Priced as of Nov. 17, 2020. TPs are on a 12-month time frame. Risks: slow roll-out and less adoption of DC/EP than expected, worse asset quality, margin erosion and corporate governance issues.

a2810045d5314637bdba4864b34fcf51

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020

62

Goldman Sachs

China Financial Services

Rmb 3tn revenue pool for retail finance by 2025, 9% CAGR We forecast a Rmb3tn revenue pool for retail finance by 2025 (excluding mortgages) as growth in payments and retail lending slows but wealth management and insurance agency remain brisk. Over the next five years, we expect Fintech to grow revenues at almost double the rate of banks as they continue to capture incremental market share across the retail finance ecosystem. The DC/EP roll-out will likely slow the rate that banks cede ground to fintech, and even reverse over the long-term, albeit in a more competitive environment.

Retail finance revenue CAGR over the next five years (2020-25) by segment: n

9% in total, well below 23% annual growth in 2015-2019, as government policies to curb household leverage significantly impact retail lending (2020-25E CAGR of 9% vs. 2015-19 CAGR of 30%).

n

8% for payments (almost half that in 2015-19 of 18%) as peak penetration of mobile payments caps growth from new users.

n

9% for lending, much lower than 30% in 2015-19 given aforementioned government measure to curb household debt.

n

Mid-teens (12%/14%) for wealth management and insurance sales income (CAGR in 2020-25) given robust and sustainable asset allocation demand from the household sector.

a2810045d5314637bdba4864b34fcf51

Below, we discuss our assumptions for each segment as well as our methodology.

17 November 2020

63

Goldman Sachs

China Financial Services

Exhibit 102: China retail finance TAM: Rmb 3tn revenue pool by 2025 (excluding mortgages), 9% CAGR 2015 2016 Total retail Total retail finance finance revenue revenue (banks, (banks, fintech fintech & others) others)

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

2025E

15-19

20-25E

CAGR

CAGR

30% 14% 18% 13% 12% 23%

9% 10% 8% 12% 14% 9%

CAGR

CAGR

31% 9% 11% 9% 9% 20%

10% 8% 6% 12% 14% 9%

Change

Change

3 ppt -16 ppt -21 ppt -10 ppt -9 ppt -7 ppt

1 ppt -5 ppt -7 ppt -3 ppt -2 ppt -1 ppt

CAGR

CAGR

113% 50% 75% 36% 21% 58%

20% 13% 12% 16% 15% 15%

Change

Change

5 ppt 17 ppt 21 ppt 11 ppt 9 ppt 9 ppt

5 ppt 5 ppt 7 ppt 4 ppt 2 ppt 5 ppt

R ev en u e Revenue Lending Non-lending Payment Wealth mgmt. agency Insurance sales Total

Rmb bn Rmb bn Rmb bn Rmb bn Rmb bn Rmb bn

366 386 226 106 53 752

496 403 233 95 75 899

821 523 325 114 84 1,344

936 585 390 126 69 1,521

1,031 661 440 137 85 1,693

1,099 700 443 161 97 1,800

1,207 779 495 172 112 1,986

1,339 856 537 192 127 2,194

1,470 943 583 215 144 2,413

1,605 1,042 636 243 164 2,647

1,750 1,151 688 276 187 2,900

Rmb bn Rmb bn Rmb bn Rmb bn Rmb bn Rmb bn

261 341 214 87 40 602

317 325 192 76 57 642

530 400 248 89 64 930

662 431 282 99 49 1,092

766 477 323 99 56 1,243

816 493 314 113 66 1,308

905 542 346 119 76 1,447

984 589 370 134 85 1,573

1,083 642 397 150 95 1,725

1,195 702 427 168 107 1,897

1,321 770 459 191 120 2,090

% % % % % %

71% 88% 94% 82% 75% 80%

64% 81% 82% 79% 77% 71%

64% 77% 76% 78% 76% 69%

71% 74% 72% 79% 71% 72%

74% 72% 73% 72% 66% 73%

74% 70% 71% 70% 68% 73%

75% 70% 70% 69% 68% 73%

74% 69% 69% 70% 67% 72%

74% 68% 68% 69% 66% 71%

74% 67% 67% 69% 65% 72%

75% 67% 67% 69% 64% 72%

Rmb bn Rmb bn Rmb bn Rmb bn Rmb bn Rmb bn

3 34 13 8 13 37

11 69 41 11 17 80

22 114 78 16 20 136

41 145 107 18 20 186

62 173 117 26 29 235

83 195 129 35 31 278

104 224 148 39 36 329

125 253 166 45 42 378

150 285 186 50 49 435

173 322 209 57 57 495

187 361 229 65 67 548

% % % % % %

1% 9% 6% 8% 25% 5%

2% 17% 18% 11% 23% 9%

3% 22% 24% 14% 24% 10%

4% 25% 28% 14% 29% 12%

6% 26% 27% 19% 34% 14%

8% 28% 29% 22% 32% 15%

9% 29% 30% 23% 32% 17%

9% 30% 31% 23% 33% 17%

10% 30% 32% 23% 34% 18%

11% 31% 33% 23% 35% 19%

11% 31% 33% 23% 36% 19%

Banks a n ks B Revenue Revenue Lending Non-lending Payment Wealth mgmt. agency Insurance sales Total Market Market rket share share Ma Lending Non-lending Payment Wealth mgmt. agency Insurance sales Total Fintech i n t ec h F Revenue Revenue Lending Non-lending Payment Wealth mgmt. agency Insurance sales Total Market Market rket share share Ma Lending Non-lending Payment Wealth mgmt. agency Insurance sales Total

Note: 2015-19 CAGR for wealth management is 2016-19 due to the high base in 2015; retail lending does not include mortgages; insurance’s bank sales only includes life bancassurance while fintech sales includes both life and P&C Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 104: Fintech to grow revenues at almost double that of banks as they capture incremental market share across the retail finance ecosystem China fintech firms retail finance revenue pool

China banks retail finance revenue pool Insurance sales

Wealth mgmt. agency

Lending

Payment

2,090 1,897

1,725 CAGR: 20%

1,243 1,308

1,092 99

930

113

119

1,573 85 134

642

89

87 261

76 317

530

214

192

248

662

282

766

323

816

314

905

984

1,083

107 168

120 191

370

397

Wealth mgmt. agency

Lending

9%

1,195

427

CAGR: 15%

14% 378

Wealth mgmt.

1,321

459

329

12%

235 186

6%

29

136

10%

Payment

11%

278

CAGR: 58%

Lending

31% 346

Insurance sales

20-25E CAGR

Insurance sales

9%

99 602

95 150

15-19 CAGR

Payment

15-19 CAGR

20-25E CAGR

548

CAGR: 9%

1,447

a2810045d5314637bdba4864b34fcf51

Exhibit 103: Banks to grow retail finance revenues at a 9% CAGR in 2020-2025

41

80 22

37 41

78

107

62 117

31 35 83 129

36 39 104

42 45

495

435

57

49

57

Insurance sales 67 65

21%

50 173

187

150

36%

166

186

16%

Lending

125

113% 148

15%

Wealth mgmt.

209

229

20%

Payment

75%

12%

2015 2016 2017 2018 2019 2020E2021E2022E2023E2024E2025E

2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

Unit: Rmb bn

Unit: Rmb bn

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

Payments: Rmb 688bn revenues by 2025, 8% CAGR n

17 November 2020

TAM: Rmb 1.8tn TPV by 2025, including consumption payments (the main source of income), transfers and other types of low-fee payments. For banks, only the TPV of bank cards have been included in this calculation.

64

Goldman Sachs

China Financial Services

n

TAM growth: 8% CAGR in 2020-25 (6% for banks, 12% for fintech), down from a 13% CAGR in 2015-19 given the high penetration rate of mobile payments.

n

Take rate: Flat by 2025 as DC/EP unlikely to pressure fee rates, at least initially.

n

Revenue: Rmb 688bn revenues by 2025 on an 8% CAGR, calculated by multiplying TPV by the take rate.

n

Market structure: Banks to account for the lion’s share (73% TPV, 67% revenues), although fintech to incrementally capture market share (28% of TPV in 2025 from 22% in 2019, and 33% of revenues in 2025 from 27% in 2019).

n

Impact of DC/EP: Minimal direct impact to the revenue pool in 2025 as the fee structure for banks and fintech is unlikely to change in the near-term. At the very least, the pace at which banks cede market share should slow. Over the long-term however, competitive pressure could intensify if DC/EP gains in popularity and usage increases.

Exhibit 105: Retail payments TAM: Rmb 688bn revenues by 2025, 8% TPV CAGR 2015

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

2025E

15-19 CAGR

20-25E CAGR

Retail payment Retail payment TPV TP TPV V Banks

Rmb tn

670

742

762

862

886

860

946

1,021

1,106

1,201

1,305

7%

7%

Fintech

Rmb tn

24

79

148

220

251

276

318

356

398

446

491

80%

12%

Total

Rmb tn

694

821

910

1,082

1,137

1,136

1,263

1,377

1,505

1,648

1,796

13%

8%

Banks

Rmb tn

14

15

17

19

20

20

22

23

25

27

30

10%

7%

Fintech

Rmb tn

8

13

17

32

46

51

58

64

70

75

79

57%

9%

DC/EP

Rmb tn

-

-

-

-

-

-

0

1

2

3

7

N/A

N/A

Total

Rmb tn

21

28

34

51

66

70

80

87

95

102

109

33%

9%

Banks

bps

3.2

2.6

3.3

3.3

3.6

3.6

3.7

3.6

3.6

3.6

3.5

N/A

N/A

Fintech

bps

5.2

5.2

5.2

4.9

4.7

4.7

4.7

4.7

4.7

4.7

4.7

N/A

N/A

Total

bps

3.3

2.8

3.6

3.6

3.9

3.9

3.9

3.9

3.9

3.9

3.8

N/A

N/A

Banks

Rmb bn

214

192

248

282

323

314

346

370

397

427

459

11%

6%

Fintech

Rmb bn

13

41

78

107

117

129

148

166

186

209

229

75%

12%

Total

Rmb bn

226

233

325

390

440

443

495

537

583

636

688

18%

8%

Consumption TPV Consumption TPV

Overall take Overall take rrate at e

Revenue Revenue

a2810045d5314637bdba4864b34fcf51

Note: red numbers are GS assumptions. Source: Wind, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 106: Retail payment value to grow 8% annually through 2025

Exhibit 107: Fintech to account for almost 30% of TPV by 2025 China retail payment value breakdown

China retail payment fee income Fintech

Banks

15-19 CAGR

Fintech

20-25E CAGR

CAGR: 8%

7% 688

12%

16%

19%

636 495 440

325 226 13 214

233

117 107

148

166

229 186

209

282

75%

323

314

346

93%

370

397

28%

28%

28%

427

88%

84%

81%

78%

75%

74%

Fintech

72%

72%

72%

-19ppt

11%

+3ppt

Banks 73%

459

2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

+3ppt

6%

Unit: Rmb bn

Source: PBOC, iResearch, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020

27%

12%

Banks

78

248

26%

20-25E chg.

+19ppt

129

41 192

537

443

390

25%

15-19 chg.

Fintech

583 CAGR: 18%

22%

Banks

2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

Source: PBOC, iResearch, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

65

Goldman Sachs

China Financial Services

Exhibit 108: Payment fee income to grow at the same rate as payment value through 2025

Exhibit 109: Fintech to account for a third of payment fee income by 2025 China retail payment fee income breakdown

China retail payment fee income Fintech

Banks

15-19 CAGR

Fintech

20-25E CAGR

CAGR: 8%

18%

688 636 495 440

443

117

129

390 325 226

233

13

41

214

192

107

148

537

166

229 186

209

282

323

314

75%

24%

28%

27%

29%

30%

31%

32%

33%

33%

Fintech +3ppt

12% 94% 82%

346

20-25E chg.

+21ppt

Banks

78

248

15-19 chg.

Fintech

583 CAGR: 18%

Banks

6%

370

397

427

76%

72%

73%

Banks

71%

70%

69%

68%

67%

67%

459

2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

11%

-21ppt

+3ppt

6%

Unit: Rmb bn

Source: PBOC, iResearch, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

Source: PBOC, iResearch, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020

n

TAM: Rmb 28tn balance by 2025, which excludes mortgages.

n

TAM growth: 11% balance CAGR in 20-25E, down from 30% in 15-19 (9% for banks, 20% for fintech) as the government targets household leverage.

n

Take rate: Interest rate to remain stable in the coming years, though visibility is low as this depends on changes in monetary policy. Take rate for fintech (in loan facilitation) to remain steady at ~3%.

n

Revenue: Rmb 1.8tn by 2025 on an 9% CAGR (10% for banks, 20% for fintech ex.P2P, 3% for others including P2P), calculated by multiplying lending balance by the interest rate (or take rate).

n

Market structure: Banks to continue dominating (66% lending balance by 2025, 75% income), with fintech to double its market share off a very low base (24% of lending balance in 2025 from only 15% in 2019; and 11% of income in 2025 from 6% in 2019) as the share from other financial institutions (FIs) including P2P shrinks as they are less competitive in acquiring customers.

n

Impact of DC/EP: Minimal direct impact in the near-term as retail lending is determined by a variety of factors such as growth in consumption and housing, lending appetite and government policies. Over the long-term however, the DC/EP rollout may help banks recapture some lost market share as customers increasingly use bank apps embedded with DC/EP (increasing their customer base, MAU, and stickiness).

66

a2810045d5314637bdba4864b34fcf51

Retail Lending: Rmb 1.8tn revenues by 2025, 9% CAGR

Goldman Sachs

China Financial Services

Exhibit 110: Lending TAM: Rmb 1.8tn revenues by 2025 (excluding mortgages), 11% balance CAGR 2015

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

2025E

15-19 CAGR

20-25E CAGR

Retail lending Retail lending Lending Le Lending nding balance balance Banks

Rmb tn

4

5

8

10

11

12

13

14

15

17

18

26%

9%

Fintech (ex. P2P)

Rmb tn

0

0

1

1

2

3

4

4

5

6

7

113%

20%

Others

Rmb tn

1

1

2

2

2

2

2

3

3

3

3

22%

6%

Total

Rmb tn

5

7

11

13

15

17

19

21

23

26

28

30%

11%

Banks

%

6%

6%

7%

7%

7%

7%

7%

7%

7%

7%

7%

N/A

N/A

Fintech (ex. P2P)

%

3%

3%

3%

3%

3%

3%

3%

3%

3%

3%

3%

N/A

N/A

Others

%

12%

12%

12%

11%

11%

10%

9%

9%

9%

9%

9%

N/A

N/A

Total

%

7%

7%

7%

7%

7%

7%

7%

6%

6%

6%

6%

N/A

N/A

Banks

Rmb bn

261

317

530

662

766

816

905

984

1,083

1,195

1,321

31%

10%

Fintech (ex. P2P)

Rmb bn

3

11

22

41

62

83

104

125

150

173

187

113%

20%

Others

Rmb bn

102

168

269

234

204

201

198

229

238

237

242

19%

3%

Total

Rmb bn

366

496

821

936

1,031

1,099

1,207

1,339

1,470

1,605

1,750

30%

9%

Take Ta Take ke rate r at e

Revenue Revenue

Red numbers are GS assumptions; does not include mortgages. Source: Wind, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 111: Lending balance to grow 11% annually through 2025 (down from 30% in 2015-19)

Exhibit 112: Fintech to account for almost a quarter of lending balance (excluding mortgages) by 2025, up from only 15% in 2019

China retail lending balance Fintech (ex. P2P)

China retail lending balance breakdown

Bank 15 1 5--19 19 CAGR CAGR

CAGR: 11% 23 21

19

CAGR: 30%

17 15 13

11

5

7

2

8 4

5

2015

2016

2017

2 1

10

2018

2 2 2

11

3

2 4

28 26

3

3

17%

Others

22%

6%

13

6

6%

7%

16 1 6--19 19 chg. chg.

16%

13%

13%

11%

12%

11%

10%

10%

11%

15%

18%

20%

22%

23%

24%

24%

4

14

17

Others -4ppt

113%

15

20 2 0--25E chg. chg.

-3ppt

Fintech ex. P2P

Fintech

20% 81%

+13ppt 73%

72%

73%

18

2019 2020E 2021E 2022E 2023E 2024E 2025E

26%

72%

69%

68%

66%

65%

65%

66%

+9ppt

Banks

9% -9ppt

Unit: Rmb bn

Source: Wind, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020

21%

Bank

5

Banks 12

21%

Fintech (ex. P2P)

7

3

3

Other FIs

20 2 0--25E CAGR CAGR

2015

2016

2017

2018

-6ppt

2019 2020E 2021E 2022E 2023E 2024E 2025E

Source: Wind, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

67

a2810045d5314637bdba4864b34fcf51

Other FIs

Goldman Sachs

China Financial Services

Exhibit 113: Growth in retail lending income to slow to 9% annually through 2025 as government measures to curb household leverage take hold

Exhibit 114: Fintech to increase market share at the expense of other financial institutions; banks to account for the lion’s share

China retail lending income Other FIs

Fintech (ex. P2P)

China retail lending income breakdown

Bank 15--19 15 19 CAGR CAGR

CAGR: 9% 1,470 1,339

1,207

CAGR: 30% 936

821 234

496

1,031 204 62

1,099

201 83

168 530

261

317

2015

2016

198 104

2017

816

905

242 237 187 173

Others

19%

28%

34%

33%

3%

25%

4%

20% 6%

Fintech (ex. P2P)

18%

16%

8%

9%

17% 9%

Bank

16 1 6--19 19 chg. chg.

16%

15%

14%

10%

11%

11%

3%

Fintech ex. P2P

125

113%

20 2 0--25E chg. chg.

Others

-8ppt

150

984

1,083

1,195

1,321

662

766

2018

2019 2020E 2021E 2022E 2023E 2024E 2025E

Banks

31%

-6ppt

Fintech

20%

+5ppt

269

366 102

238 229

1,750 1,605

Other FIs

20 2 0--25 25E E CAGR CAGR

71%

64%

64%

71%

74%

74%

75%

74%

74%

74%

+5ppt

75% Banks

10% +3ppt

Unit: Rmb bn

Source: Wind, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

2015

2016

2017

2018

+1ppt

2019 2020E 2021E 2022E 2023E 2024E 2025E

Source: Wind, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020

n

TAM: Rmb 130tn AUM by 2025, including bank WMPs, mutual funds, private funds etc. We exclude trust channels and brokers in this calculation.

n

TAM growth: Mid to low teens in TPV (12% through 2025E from 14% CAGR in 2016-19) thanks to robust asset allocation demand from households.

n

Take rate: Stable management fee (for asset management products) and agency fee. Notably, the blended take rate on agency AUM (AUM multiplied by agent share in each channel) is impacted by new volume sold each year.

n

Revenue: Rmb 276bn revenues by 2025 on an 12% AUM CAGR, calculated by multiplying AUM by channel share and take rate.

n

Market structure: In terms of agency income, fintech to steadily take market share from banks and brokers (23% by 2025 from 19% in 2019) as higher app usage and better connectivity increase customer penetration and stickiness, benefiting fintech firms in particular as wealth management continues to shift online. In terms of AUM, bank WMPs, mutual funds and private funds will continue to expand their market share, accounting for ~80% of the space by 2025. Fintech firms do not have assets under management.

n

Impact of DC/EP: Minimal direct impact in the near-term as most fintech firms have an edge over most banks in terms of their app connectivity, functionality and design. Over the long-term however, DC/EP may help banks recapture market share as customers migrate back to traditional bank channels as they increasingly use bank apps embedded with DC/EP.

68

a2810045d5314637bdba4864b34fcf51

Wealth Management: Rmb 276bn revenues by 2025, 12% CAGR

Goldman Sachs

China Financial Services

Exhibit 115: Wealth Management TAM: Rmb 276bn revenues by 2025, 11% AUM CAGR 2015

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

2025E

16-19 CAGR

20-25E CAGR

Wealth mg Wealth mgmt. mt. Wealth mgmt. mt. AU AUM M Wealth mg Bank WMP

Rmb tn

17

23

22

22

23

26

29

32

36

41

47

8%

12%

Mutual fund

Rmb tn

8

9

12

13

15

18

20

22

25

28

31

15%

13%

Private funds

Rmb tn

5

8

11

13

14

16

18

21

24

28

32

28%

14%

Brokers

Rmb tn

2

2

2

2

2

2

2

2

2

3

3

6%

6%

Trust Total

Rmb tn

7

10

14

13

14

14

15

15

16

17

17

18%

4%

Rmb tn

40

52

61

63

68

75

84

93

104

116

130

14%

11%

Bank WMP

%

0.2%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

0.1%

N/A

N/A

Mutual fund

%

1.6%

1.3%

1.2%

1.2%

1.2%

1.3%

1.3%

1.3%

1.3%

1.3%

1.3%

N/A

N/A

Private funds

%

2.7%

2.1%

2.0%

2.0%

2.0%

2.2%

2.2%

2.2%

2.2%

2.2%

2.2%

N/A

N/A

Brokers

%

1.0%

1.0%

1.0%

1.0%

1.0%

1.1%

1.0%

1.0%

1.0%

1.0%

1.0%

N/A

N/A

Trust Age A Agency gency ncy AUM AUM

%

2.7%

2.1%

2.0%

2.0%

2.0%

1.8%

1.6%

1.6%

1.6%

1.6%

1.6%

N/A

N/A

Banks

Rmb tn

27

34

37

37

38

42

47

52

59

66

75

9%

12%

Fintech

Rmb tn

2

3

4

5

7

9

10

11

13

14

16

44%

14%

Brokers & others Total

Rmb tn

2

2

2

2

3

3

3

3

4

4

5

13%

11%

Rmb tn

30

39

43

44

48

54

60

67

75

85

96

12%

12%

Banks

bps

32

22

24

27

26

27

25

25

25

25

26

N/A

N/A

Fintech

bps

49

38

36

36

36

40

40

40

40

40

40

N/A

N/A

Brokers & others Total

bps

66

48

41

42

44

44

41

41

41

41

41

N/A

N/A

bps

35

24

26

29

29

30

29

29

29

29

29

N/A

N/A

Banks

Rmb bn

87

76

89

99

99

113

119

134

150

168

191

7%

12%

Fintech

Rmb bn

8

11

16

18

26

35

39

45

50

57

65

26%

16%

Brokers & others Total

Rmb bn

11

9

9

9

12

13

13

14

16

18

20

6%

9%

Rmb bn

106

95

114

126

137

161

172

192

215

243

276

9%

12%

Mgmt. fee rate r at e Mgmt. fee

Blended take rate r at e Blended take

Agency ncy fee fee income income Agency Age

Note: Red numbers are GS assumptions. For the 2015-19 CAGR calculation we use 2016-19 due to the high base in 2015 Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 116: Growth in AUM to expand to 12% through 2025 thanks to robust asset allocation by households

Exhibit 117: Market share for Bank WMPs, mutual funds and private funds to continue rising over the next five years

China Chi China na wealth wealth mgmt. mgmt. product product AUM Brokers

Private funds

Chi China China na wealth wealth mgmt. mgmt. product product AUM AUM breakdown breakdown

Mutual fund

Bank WMP

16--19 16 19 CAGR CAGR

104 93

61

63

14

13

11 12

13

52 40 7 5 8

10 8 9

17

23

2015

2016

75 68 14 14

15 15

14 16

13

15

18

22

22

23

26

2017

2018

18 20 29

28

22

32

31

36

-4%

13% 6%

Private funds

28

Private funds

Mutual fund

Bank WMP

21%

19%

23%

21%

20%

19%

18%

16%

15%

14%

13%

21%

15%

18%

20%

21%

21%

22%

22%

23%

24%

47

2019 2020E 2021E 2022E 2023E 2024E 2025E

17%

+1ppt

-1ppt

17% 19%

14%

21%

22%

23%

24%

24%

24%

24%

24%

-7ppt

13%

12%

-1ppt

Private funds

+6ppt

+4ppt

Mutual fund 44%

44%

2015

2016

36%

36%

35%

35%

2017

2018

2019 2020E 2021E 2022E 2023E 2024E 2025E

34%

34%

35%

35%

36%

Bank WMP 0%

20 2 0--25E 25E chg. chg.

24%

Mutual fund 41

16 1 6--19 19 chg. chg.

Brokers

Brokers

24

25

18%

17

32

21

Brokers

Trust 4%

10%

17

16

84

CAGR: 9%

116

Trust

Trust

130 CAGR: 12%

20 2 0--25E CAGR CAGR

a2810045d5314637bdba4864b34fcf51

Trust

+4ppt

+2ppt

Bank WMP -10ppt

+2ppt

Unit: Rmb tn

Source: PBOC, SAC, CBIRC, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

17 November 2020

Source: PBOC, SAC, CBIRC, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

69

Goldman Sachs

China Financial Services

Exhibit 118: Agency income to grow 12% annually through 2025, consistent with AUM growth

Exhibit 119: Fintech to capture almost a quarter of agency income by 2025

China wealth mgmt. product agency income Brokers & others

Fintech

China wealth mgmt. product agency income breakdown

Banks 16 1 6--19 19 C CAGR AGR 276

CAGR: 12% 215 192 CAGR: 13%

106

11 8

114 95 9 11

9 16

87

76

89

2015

2016

2017

126

161 137

9 18

12 26

99

99

2018

13 35

172 13

14

16

243 18

20

65

Brokers & others

20 2 0--25E 25E CAGR CAGR

Brokers & others

10%

10%

8%

8%

11%

14%

16 1 6--19 19 chg. chg.

8%

7%

7%

7%

7%

19%

22%

23%

23%

23%

23%

23%

-1ppt

Fintech

16% 82%

168

Brokers & others -1ppt

36%

150

20 2 0--25E chg. chg.

Fintech

57

45

134

Banks

8%

50

39

119

14%

Fintech

8%

9%

8%

Banks

113

7%

79%

78%

79%

191

+8ppt 72%

70%

69%

70%

69%

69%

Banks

9%

12% -7ppt

2019 2020E 2021E 2022E 2023E 2024E 2025E

+4ppt

69%

Unit: Rmb bn

Source: PBOC, SAC, CBIRC, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

2015

2016

2017

2018

-3ppt

2019 2020E 2021E 2022E 2023E 2024E 2025E

Source: PBOC, SAC, CBIRC, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Insurance sales: Rmb 187bn revenues by 2025, 14% CAGR TAM: Rmb 2.4tn insurance sales by 2025, which excludes tied-agents, independent brokers, and direct sales. Of note, bank sales data here only includes life bancassurance while fintech sales includes both life and P&C.

n

TAM growth: addressable Insurance sales CAGR to accelerate to 14% in 2020-25E (from 10% in 2015-19) as fintech (15% CAGR) and banks (14%) capture market share from agents and direct sales etc. However, total insurance sales volume including agents etc. to slow (9% in 2020-25E from 15% in 2015-19) following tightened regulations for high-yield products.

n

Take rate: we expect the take rate of life bancassurance to be stable at ~6% while the take rate of fintech to slightly trend up due to change in sales mix (fintech has higher take rate as it mainly sells P&C products).

n

Revenue: Rmb 187bn revenues by 2025 on a 14% sales CAGR, calculated by multiplying insurance premiums by channel share and take rate.

n

Market structure: In terms of sales volume, banks and fintech to capture market

a2810045d5314637bdba4864b34fcf51

n

share from agents and others (28% and 7%, respectively by 2025 from 21% and 5% in 2019), driven by stronger sales of savings products and non-auto P&C insurance. n

17 November 2020

Impact of DC/EP: Minimal direct impact in the near-term as this does not impact consumers’ purchasing behaviors. Over the long-term, DC/EP may help banks to compete on savings product sales if customers return to bank channels and MAUs increase.

70

Goldman Sachs

China Financial Services

Exhibit 120: Insurance sales TAM: Rmb 187bn revenues, 14% sales CAGR through 2025 2015

2016

2017

2018

2019

2020E

2021E

2022E

2023E

2024E

2025E

15-19 CAGR

20-25E CAGR

Insurance Insurance Insurance s Insurance sales al e s Banks

Rmb bn

665

958

1,058

803

898

1,077

1,239

1,387

1,554

1,740

1,949

8%

14%

Fintech

Rmb bn

92

117

139

123

200

224

258

296

342

396

460

21%

15%

Total

Rmb bn

757

1,075

1,197

926

1,098

1,301

1,497

1,684

1,896

2,136

2,409

10%

14%

Take Ta Take ke rate r at e Banks

%

6%

6%

6%

6%

6%

6%

6%

6%

6%

6%

6%

N/A

N/A

Fintech

%

15%

15%

15%

16%

15%

14%

14%

14%

14%

14%

15%

N/A

N/A

Total

%

7%

7%

7%

7%

8%

7%

8%

8%

8%

8%

8%

N/A

N/A

Banks

Rmb bn

40

57

64

49

56

66

76

85

95

107

120

9%

14%

Fintech

Rmb bn

13

17

20

20

29

31

36

42

49

57

67

21%

15%

Total

Rmb bn

53

75

84

69

85

97

112

127

144

164

187

12%

14%

Revenue Revenue

Note: Red numbers are GS assumptions. Bank agency only includes life bancassurance while fintech agency includes both life and P&C Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 121: Insurance sales volume to grow 9% annually through 2025, at a slower pace than in 2015-19

Exhibit 122: Agents to steadily give up incremental market share to fintech and banks over the next five years

China insurance sales volume Agents & others

China insurance sales volume breakdown

Fintech

Banks

CAGR: 9%

15--19 15 19 CAGR CAGR

Agents & others

20 2 0--25E CAGR CAGR

Fintech

Banks

15 1 5--19 19 chg. chg.

20 2 0--25E chg. chg.

7,030

6,418

Agents & others

Agents & others

5,864 5,362 CAGR: 15%

4,264

4,516

4,889

2,021

2,461 2,876

3,166

1,671 92 665

117 958

139 1,058

123 803

200 898

69%

65%

67%

76%

74%

71%

69%

69%

68%

67%

66%

-9ppt

+5ppt

4,621

3,658 3,802

3,096 2,428

7%

17%

3,215

224

3,392

258

3,678

3,968

4,281

296

342

396

Fintech

Fintech 15%

21%

4%

460

1,554 1,740 1,949 1,077 1,239 1,387

2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

Banks

27%

8%

4% 31%

29%

3%

5%

21%

21%

5%

5%

6%

6%

6%

7%

24%

25%

26%

26%

27%

28%

14%

Unit: Rmb bn

+2ppt

+1ppt 4%

Banks +7ppt

-6ppt

2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

Note: bank sales only includes life bancassurance while fintech sales includes both life and P&C

Source: CBIRC, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Source: CBIRC, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Exhibit 123: Insurance agency fees to grow 14% annually for banks and 15% for fintech through 2025

Exhibit 124: Banks to still comprise 64% of institutional agency fees by 2025

China insurance institutional agency fees Fintech

China insurance institutional agency fees breakdown

Banks

15--19 15 19 CAGR CAGR

25%

164 144 127 112 97 75 53

17

85

84 69 20

40

57

49

23%

24%

29%

Fintech

15 1 5--19 19 chg. chg.

34%

32%

32%

33%

34%

35%

36%

Fintech +2ppt

15%

42 36

66

20 2 0--25E chg. chg.

+9ppt

21%

75%

Banks

29

56

Banks

49

20 64

67

31

13 57

Fintech

20 2 0--25E CAGR CAGR

187

CAGR: 14%

CAGR: 12%

a2810045d5314637bdba4864b34fcf51

Note: bank sales only includes life bancassurance while fintech sales includes both life and P&C

76

85

95

107

120

2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

9%

77%

76%

Banks

71%

66%

68%

68%

67%

66%

65%

64%

-9ppt

-2ppt

14%

Unit: Rmb bn

2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E

Note: bank sales only includes life bancassurance while fintech sales includes both life and P&C

Note: bank sales only includes life bancassurance while fintech sales includes both life and P&C

Source: CBIRC, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

Source: CBIRC, Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

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Exhibit 125: Total Addressable Market (TAM) methodology and assumptions Business segment Business segment

Revenue Revenue

Market Ma Market rket size s i ze

Market Ma Market rket share share

Take rrate Take at e

Payments Pa Payments yments

TPV x Take Rate

Bank Card/Fintech TPV: ~7%/12% CAGR 20-25E

Based on growth projections

~4/5 bps Take Rate for Bank Card/Fintech TPV based on company disclosures; expect take rate to be flat in 20-25E

Retail Lending Retail Lending

Loan Balance x Interest Rate (banks)/Take Rate (fintech)

Bank Retail Loans: ~10% CAGR 20-25E; Fintech Retail Loans: ~13% CAGR 20-25E

Based on growth projections

7% Interest Rate for Bank Consumer Loans; 3% Facilitation rate for Fintech Loans

Wealth Wea Wealth lth Management Management

AUM x Channel Market Share x Take Rate

Bank WMP/Mutual Funds/Private Funds/Brokers Trust: ~12%/13%/14%/6%/4% CAGR 20-25E

Share of Bank/Fintech/Broker & other channels based on market share of leading institutions; we expect fintech to steadily gain share from banks and brokers

Take Rate = Average Management Fee Rate x estimated share paid to sales channels

Insurance Sales Insurance Sales

Premium Sales x Channel Market Share x Take Rate

Insurance Premium: ~9% CAGR 20-25E

Share of Bank/Fintech and Agency channels based on CBIRC data and our channel checks; we expect fintech and banks to capture share from agents

~6%/20% Take Rate for banks/fintech based on company disclosures and our estimates

a2810045d5314637bdba4864b34fcf51

Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research

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Appendix

a2810045d5314637bdba4864b34fcf51

Exhibit 126: Key events in China’s payment industry

Source: PBOC, Caixin, Sina, Goldman Sachs Global Investment Research, Gao Hua Securities Research

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Main Ma Main in areas a r ea s

Network Ne Network twork payment payment

Time Time

Key p Key points oints

The Administrative Measures on Network Payments by Nonbank Payment Institutions

Payment Pa Payment yment industry industry regulations regulations

Dec-15

A real-name management system shall apply when the payment institutions provide the network payment services

Notice on the Transfer of the Network Payment Business of Non-bank Payment Institutions from the Direct-Connection Mode to the NetsUnion Platform

Jun-18

Starting from June 30, 2018, all the non-bank payment institutions’ network payment business involving bank accounts shall be processed through the NetsUnion

Notice on Further Strengthening the Rectification of Unlicensed Operation of Payment Business

Nov-17

The PBOC would impose greater penalties to the unlicensed entities engaging in the payment business, and would cut off the payment business channels used by such unlicensed entities

The Administrative Measures on Depository of Client Reserve of Payment Institutions

Jun-13

Payment institutions shall deposit the full monetary capital (client Reserve) received in advance to handle the payment business on behalf of the client to the special deposit account opened by payment institutions with the depository bank

The Notice on the Implementation of Centralized Deposit of Client Reserve of the Payment Institution

Jan-17

Payment institutions shall deposit the client Reserve with a certain proportion to the special deposit account of the appointed authority; interest shall not be paid on the client Reserve

Guidelines for Deposit of Part of the Client Reserve in the PBOC by Payment Institutions

Mar-17

The branch of the PBOC at the place of the depository bank shall open a special savings account to handle the deposit of client Reserve.

Notice on Adjustment of Centralized Deposit Proportion of Client Reserve by Payment Institution

Dec-17

The centralized deposit proportion shall be increased from 0% to ~40% from February to April 2018

Notice on 100% Centralized Deposit of Client Reserve by Payment Institution

Jun-18

The centralized deposit proportion shall be increased to 100% by Jan. 2019

Media reports (Caixin etc.)

Dec-19

PBOC started paying annual interest rate of 0.35% on client reserve

The Administrative Measures on Depository of Client Reserve of Payment Institutions (draft)

Apr-20

An update of the 2013 regulation based on centralized deposit of client reserve

The Administrative Measures on Payment Insitution Industry Security Fund(draft)

Oct-20

9.5%-12% of interest paid to payment institutions by PBOC will be deposited in the Industry Security Fund (Rmb 1bn maximum)

Notice on the Improvement of Pricing Mechanism of Bankcard Transaction Fee

Mar-16

The original rules that the acquiring processing fees were shared among issuing banks, bankcard acquirers and UnionPay in the proportion of approximately 70%, 20% and 10% respectively were cancelled; Issuing bank’s service fees, the rate level of which shall be no more than 0.35% of the transaction amount by debit cards and no more than 0.45% of the transaction amount by credit cards; The interchange fee rates charged by bankcard clearing institutions to bankcard acquirers shall not be higher than 0.0325% (not more than RMB3.25 for a single charge amount)

Notice on the Management of Bankcard Acquiring Outsourcing

Jun-15

The verification of merchant qualification, execution of acceptance agreement, transaction processing of acquiring services, fund settlement, risk monitoring, the acceptance of generation and management of terminal secret keys, and error and disputes settlement, shall not be outsourced

The Administrative Measures on Bankcard Acquiring Services

Jul-13

Relevant business compliance requirements for non-bank payment institutions to engage in bankcard acquiring business, including setting up and sending acquiring transaction information according to the regulations

The Implementation Measures of the PBOC for Protecting Rights and Interests of Financial Consumers

Dec-16

Non-bank payment institutions must protect the personal financial information of consumers

Rules for the QR Payment Business Standard

Dec-17

A non-bank payment institution which conducts QR payment business shall obtain the relevant license as required and conduct the business in a standard manner

FinTech Development Plan (2019-2021)

Sep-19

QR Code Interconnection is promoted in 2019-2021

The Measures for Anti-Money Laundering and Anti-Terrorism Financing of Payment Institutions

Mar-12

Payment institutions which have obtained the Payment License shall carry out the obligations of anti-money laundering and anti-terrorism financing in accordance with the law

Management Measure on Large and Suspicious Transactions Reporting for Financial Institutions

Dec-16

Payment institutions shall fulfill their obligations of reporting large transactions and suspicious transactions and formulate internal management systems and operational regulations and procedures for reporting large transactions and suspicious transactions

Management Ma Management nagement of client rreserve client eserve

Bank card Bank ca rd transaction transaction pricing pricing

Bank card Bank ca rd acquiring acquiring

Consumers Consumers protection protection

a2810045d5314637bdba4864b34fcf51

Exhibit 127: Key regulations for China’s payment industry

QR p payment a ymen t

Anti-money Anti-money laundering a laundering and nd anti-terrorism anti-terrorism financing financing

Source: PBOC, Xinhua, Caixin

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Acronyms AML: Anti Money Laundering BIS: Bank of International Settlements CBDC: Central Bank Digital Currency CFT: Counter Financing of Terrorism DC/EP: Digital Currency/Electronic Payment ETC: Electronic Toll Collection IMF: International Monetary Fund KYC: Know Your Customer NBS: National Bureau of Statistics NDRC: National Development and Reform Commission NetsUnion: China Nets Union Clearing Corporation NFC: Near Field Communication P2P: Peer-To-Peer PBOC: People’s Bank of China QR Code: Quick Response Code TPV: Total Payment Value

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WMP: Wealth Management Product

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References 1. Zhou Xiaochuan, Talk on Central Bank Digital Currency in Caixin Summit (in Chinese), October 2019. 2. Fan Yifei, Policy implication of digital Renminbi’s positioning as M0 (in Chinese), September 2020. 3. Fan Yifei, Theoretical foundation and framework choice of China’s Central Bank Digital Currency (in Chinese), September 2020. 4. Yao Qian, Study on the application of digital fiat currency in peer-to-peer investment and lending (in Chinese), 2018. 5. Yao Qian, Central bank digital currency prototype system experiment (in Chinese), 2018. 6. Yao Qian, Digital Currency and Bank Accounts (in Chinese), April 2017. 7. Yao Qian, Blockchain and Central Bank Digital Currency (in Chinese), April 2018. 8. Yao Qian, Optimization of monetary policy based on Central Bank Digital Currency (in Chinese), April 2020. 9. Mu Changchun, Digital Currency and Libra (online course, in Chinese), September 2019. 10. Mu Changchun, Talk on DC/EP in CF40 Forum in Yichun (in Chinese), August 2019. 11. BIS, Impending arrival – a sequel to the survey on central bank digital currency, January 2020. 12. Bank of England, Central bank digital currency: opportunities, challenges and design, March 2020.

a2810045d5314637bdba4864b34fcf51

13. Kenneth Rogoff, Costs and benefits to phasing out paper currency, May 2014. 14. Federal Reserve, Comparing Means of Payment: What Role for a Central Bank Digital Currency?, August 2020. 15. IMF, The Rise of Digital Money, July 2019. 16. BIS, Central bank digital currencies, March 2008. 17. FSB, Enhancing Cross-border Payments, April 2020. 18. BIS, World Bank, Payment aspects of financial inclusion in the fintech era, April 2020.

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a2810045d5314637bdba4864b34fcf51

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Investment Banking Relationships

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Rating Distribution Buy

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China Financial Services

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