Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) and fair value of RM21.60/share based on a higher SOP valuation. We trim our net profit estimate for FY19 by 1.5% after lowering our projection for non-interest income as well as adjusting of credit cost assumption.

• HLFG reported a higher core net profit of RM464mil (+7.0%QoQ) in 2QFY19 after stripping out a further oneoff gain of RM17.8mil from the divestment of HLBB’s 37.0% stake in a JV company, Sichuan Jincheng Consumer Finance Limited, which cut HLBB’s stake in the JV co to 12%. Recall in 1QFY19, gains from the disposal of RM72.2mil have already been booked. HLBB is HLFG’s 64.4%-owned subsidiary.

• 6MFY19 normalised earnings were slightly below expectations, making up 44.0% of our and 44.3% of consensus estimates respectively.

• HLBB reported a muted PBT growth of RM1.58bil (- 1.8%YoY) for 6MFY19, excluding the one-off gain from divestment in the JV totalling RM90.1mil. The share of profits from HLBB’s associates, which include Bank of Chengdu, were stable at RM305mil.

• Asset quality of HLBB remained strong with a low GIL ratio of 0.80% against the industry’s 1.5%. HLBB’s net credit cost was -0.06% in 6MFY19 due to recoveries. Its loan impairment coverage including regulatory reserves remained strong at 201.0%.

• HLA Holdings, the group's insurance division achieved a pre-tax profit of RM140.9mil (-7.6%YoY) for 6MFY19. This was contributed by lower revenue of RM8.7mil, higher operating expenses of RM17.8mil, partially offset by lower impairment losses on securities, higher life fund surplus and share of profit from associates. HLA's management expense ratio stayed low at 6.1%. 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 stable PBT of RM37.5mil for 6MFY19. Lower earnings from IB and stock broking were offset by stronger contribution from the fund management and unit trust business.

• The privatization of Guoco which owns a 25.4% stake in HLFG, did not materialize. Hence, the liquidity of the stock will remain intact.

• The stock remains a lower cost of entry to gain exposure to HLBB. This based on HLFG’s market cap of RM23.1bil which is a 17.8% discount to HLBB’s RM28.1bil for its 64.4% stake in the latter.

• HLFG’s consolidated CET1 ratio, Tier 1 and total capital capital of 10.13%, 10.94% and 13.11% remained above the regulatory requirements of 7.0%, 8.5% and 10.5% respectively for 2019.

Source: AmInvest Research - 27 Feb 2019