Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with an unchanged fair value of RM21.90/share based on SOP valuation.

• HLA Holdings, the group's insurance division is expected to report a flattish net profit growth for the full FY19 underpinned by lower premium growth. Recall that for 9MFY19, the division reported a drop in pre-tax profit by 9.4% YoY to RM224.7mil contributed by higher operating expenses of RM23.1mil and a decline in share of profits from associates of RM7.5mil.

• The 10-year MGS yield has been trending lower, reaching an average of 3.67% in June 2019 compared with 3.78% and 3.79% in May and April 2019 respectively. With the trade war ongoing, the possibility of a US Fed rate cut is increasing as seen from Bloomberg’s WIRP measure. In the event of a cut in the US interest rate, yield for the 10- year MGS could ease further. With that, we expect the key insurance operating subsidiary Hong Leong Assurance’s (HLA) provisions for contractual liabilities to rise. This is in view of the fact that the contract liabilities will be discounted by lower interest rate.

• Nevertheless, this is expected to be mitigated by markedto-market gains on HLA’s financial assets benefiting from the lower interest rate. As at the end of Dec 2018, 96.4% of HLA’s financial assets were fair value through P&L (FVTPL) securities. HLA has been reducing the duration gap (sensitivity to interest rate risk) by increasing its investments in bonds of longer maturities (20 to 30 years) to be closer to the tenure of its liabilities (insurance contracts).

• We understand that HLFG could be disclosing its embedded value (EV) of its insurance business for the first time, coinciding with the release of its 4QFY19 results. Should this materialize, the EV will be a more realistic valuation of its life insurance business taking into account future profits from all policies in force.

Source: AmInvest Research - 27 Jun 2019