Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with a revised fair value of RM21.60/share (from RM21.50/share) based on a higher SOP valuation. We tweaked our net profit estimates for FY20/21 by -1.1/- 1.5 after lowering our NIM assumptions.

• HLFG reported a lower core net profit of RM433mil (- 4.8%YoY) in 1QFY19 after stripping a one-off gain of RM72.2mil. HLFG's 64.4%-owned subsidiary HLBB recorded a gain of RM72.2mil from divesting its 37.0% stake in a JV company, Sichuan Jincheng Consumer Finance Limited. This has reduced HLBB’s shareholdings in the company from 49.0% to 12.0%.

• 1QFY19 core earnings were within expectations, making up 21.2% of our and 21.4% of consensus estimates.

• HLBB reported a muted growth in PBT of RM779mil (- 0.2%YoY) after excluding the one-off gain from divestment on the JV. The share of profits from HLBB’s associates which included Bank of Chengdu slipped 3.6%YoY.

• Asset quality of HLBB remained strong with a lower GIL ratio of 0.81% vs. the industry’s 1.5%. HLBB’s net credit cost remained low at 0.06% in 1QFY19. Its loan impairment coverage including regulatory reserves was strong at 200.5%. Meanwhile, its shareholders’ funds and capital ratios of HLBB were minimally impacted by the adoption of the MFRS 9.

• HLA Holdings, the group's insurance division achieved a pre-tax profit of RM82.1mil (+35.6%YoY) for 1QFY19. This was contributed by a higher life fund surplus of RM15.1mil, lower impairment losses on securities of RM0.2mil and higher revenue of RM11.5mil. HLA's management expense ratio stayed low at 6.4%. It continued to focus on growing non-participating and investment-linked policies which have higher embedded value margins than ordinary life policies.

• Its investment banking (IB) division under Hong Leong Capital (HLC) achieved a higher PBT of RM22.7mil, (+23.4%YoY) in 1QFY19. Higher earnings from its IB, stockbroking and fund management business contributed to this improvement.

• The stock remains a lower cost of entry to gain exposure to HLBB. This based on HLFG’s market cap of RM21.9bil which a 19.5% discount to HLBB’s RM27.2bil for 64.4% stake in the latter.

• HLFG’s consolidated CET1, Tier 1 and total capital ratios of 9.9%, 10.7% and 12.9% are above that of the regulatory requirements of 7.0%, 8.5% and 10.5% respectively for 2019.

• A 13 sen/share interim dividend has been proposed.

Source: AmInvest Research - 29 Nov 2018