Initiate coverage with Overweight, Dec-11 price target Rmb31.5:Given its low P/B multiple relative to high ROE, we expect the stock tore-rate on an improving macro environment and benign property marketoutlook in China. On the back of its higher-than-industry average volumegrowth, better profitability and superior asset quality, we expect IndustrialBank to deliver 20%/18% EPS growth in 2011/2012. Investment positives: 1) Higher-than-industry average loan yield andbanking spread thanks to its innovative and practical management, whichled to lending consistent with the macro outlook. It is also a pioneer inniche markets, such as “green finance”. 2) Strong interbank and treasurybusinesses make the bank potentially well-prepared for future interest ratederegulation. 3) Highly efficient operations (very low CIR and cost toasset ratios). 4) Superior asset quality metrics, reflecting consistent goodrisk management. Issues and challenges: 1) Higher-than-industry average exposure to realestatemakes the shares more sensitive to news on the property sector,although the asset quality of their property-related loan is high amonglocal-listed peers. 2) Credit costs could rise over the next few years asCBRC pushes for 2.5% LLR/Loan. (JPM estimates the bank to haveLLR/Loan of 1.5%/1.8%/2.0% for 2010/11/12E). 3) Liability businessneeds to be further improved to reduce LD ratio to below 75%. 4) LGFVloans remain an overhang. Valuation, price target, risks: Although we are confident in the bank’searnings ability, our assumptions in fair valuation are conservativeconsidering potentially higher provision and capital requirements. We useda normalized P/B of 1.4x and ROE of 14.1% (vs. FY11E ROE of 22.3%)to derive our Dec-11 PT of Rmb31.5, suggesting 30% upside potential,implying 1.4x 2012E P/B and 7.1x 2012E P/E. Key risks to our pricetarget are shorter-than-expected grace period to reach 2.5% LLR/Loan,severe credit tightening, and a deterioration in the Chinese propertymarkets.