Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with an unchanged fair value (FV) of RM22.30/share based on SOP valuation. Our FV reflects a neutral 3-star ESG rating.

• We make no changes to our earnings estimates.

• Moving forward for the insurance division in FY24, the focus will be on growing non-par, traditional life and regular premium life insurance products.

• Emphasis of the insurance division will continue to be on growing premiums from higher margin (non-par and investment linked) products. The ratio of investment-linked (IL) & non-par over par products has been stable at 95:5 as at end-FY23 (FY22: 96:4).

• We expect demand for life insurance to continue to be skewed towards smaller ticket size protection policies. This is due to the slowdown of the global economy with a higher debt burden on consumers impacting consumption spending as well as businesses from the sharp rise in interest rates in developed markets. Also, China’s economic recovery remains fragile.

• Hong Leong Assurance (HLA), the key insurance subsidiary, aims to extend the product range to grow its embedded value (EV) and new business embedded value (NBEV). Recall in FY23, HLA’s EV grew by 16% YoY to RM3.8bil while NBEV slipped 11% YoY to RM178mil, attributed to lower new business regular premium (NBRP) from Agency and Banca channels.

• To capture a larger share of the younger segment’s protection needs, the insurance division targets to introduce an insurtech proposition with new products to be rolled out in Dec 2023. We believe that this will compete with potential product offerings of the 5 digital insurers which are likely to be issued licenses in 2H23.

• The persistency ratio of HLA remained fairly stable at 87.5% as at end-FY23 (FY22: 88.2%). It has consistently stayed above 85% in the past 5 years.

• HLA will adopt MFRS 17 on 1 July 2023 (1QFY24). The day 1 impact from adoption of the new accounting standard will be minimal at just 1% to the group’s equity. 
  This is in view of the significantly higher share of premiums from non-par and IL products to HLA’s total gross premiums compared to credit life products. HLA’s premiums from IL make up a sizeable 79% of its total gross premiums.

• As of end-FY23, HLA and Hong Leong MSIG Takaful Berhad (HLMT), a family takaful operator have total agents of 13,950. In FY24, the agency force size is envisaged to further increase to drive new business and NBEV.

• In FY24, challenges continue to be seen for the investment banking division under Hong Leong Capital (HLC). Markets business is likely to continue remaining volatile amidst headwinds from slower economic growth of major economies and recovery in China. Meanwhile, the recent hawkish stance of the Federal Reserve on interest rates will see monetary policy in the US remaining tight in the near term. This is likely to cause trading on the exchange (Bursa Malaysia) to be cautious on softer market sentiments.

• Moving forward, HLC will focus on digitalisation to improve customer experience and increase its foreign stock product range to grow fee income through stock broking and asset management business. Additionally, the group intends to grow IB business through innovative deal structures and by expanding customer reach.

• On ESG, HLA has launched a global ESG fund which only invests in companies with strong ESG scoring. Meanwhile, HLC has been increasing its investments in green bonds and expanded the reporting and measurement of GHG emissions to cover the commuting of their employees under Scope 3.

• The stock continues to trade at an undemanding FY24F P/E of 7x and P/BV of 0.7x, below its 5-year historical average P/E of 9x and P/BV of 0.9x.

Source: AmInvest Research - 26 Sept 2023