Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with a revised fair value to RM19.30/share (from RM21.90/share) based on a lower SOP valuation. We tweak our net profit estimate for FY20/21 by 2.6%/1.5% to RM2.01bil/RM2.17bil by adjusting our CI ratio assumption higher and imputing another OPR cut of 25bps in 2H2019 into our estimates.

• HLFG reported a core net profit of RM469mil (+1.1% QoQ) in 4Q19. Excluding total gains from the disposal of HLBB’s 37.0% stake in the JV company, Sichuan Jincheng Consumer Finance Limited of RM90.1mil and from the sale of visa shares of RM25.0mil, HLFG’s 12M19 core earnings of RM1.8bil (-5.4% YoY) were within our expectations, accounting for 96.1% of our forecast and making up 94.2% of consensus estimates.

• HLBB reported a PBT of RM3.2bil (-1.9%YoY) for 12M19 attributed to a lower revenue and higher operating expenses partially offset by lower provisions. The share of profits from HLBB’s associates, which included Bank of Chengdu, rose by 4.9% YoY to RM563.1mil.

• Asset quality of HLBB continues to be strong with a low GIL ratio of 0.78% against the industry’s 1.6%. HLBB’s net credit cost was low at 0.01% in 12M19. Loan loss coverage including regulatory reserves remained high at 197.9% while its LD ratio stayed healthy at 84.4%.

• HLA, the group's key insurance subsidiary achieved a net profit of RM221.0mil (+4.5%YoY) for 12M19. Stripping out the impact of interest rates, HLA’s operating profit grew 3.0% YoY to RM240.0mil in 12M19. Its management expense ratio stayed low at 6.3%.

• HLA has made positive changes by acquiring longer term bonds to insulate itself from the impact of lower interest rates. This has been evidenced by the increase in financial assets at fair value through profit and loss on the group’s balance sheet. Hence, any decline in interest rate will result in a slight positive impact on HLA as marked-tomarket impact on securities will offset the increase in contractual liabilities.

• The group has revealed the embedded value (EV) for HLA which stood at RM2.45bil (+6.4% YoY) as at the end of FY19. We gather that HLA’s new business EV grew by 14.7% YoY to RM200.3mil in FY19. HLA continues to focus on the higher margins non-par and investment-linked insurance products. FY19 saw HLA’s non-par/par ratio improving to 93:7 from 89:11 in FY18.

• HLA was ranked 7th in the ordinary life segment in terms of new business regular premium (NBRP) while it maintained its No. 4 ranking in the investment-linked space in 6M19. It was ranked 6th in non-agency (mainly bancassurance) NBRP.

• As at the end of FY19, HLA has 8,260 agents who continue to be the main channel driving the growth of insurance premiums. In addition, it will leverage HLBB’s 254 branches to grow its bancassurance business.

• FY19 saw gross premiums of HLA declining by 5.1% YoY to RM2.8bil contributed by lower persistency ratio of 85.8% (FY18: 87.8%). Nevertheless, it managed to achieve a marginally higher growth in the new business regular premiums by 1.7% YoY to RM546mil in FY19.

• Its investment banking (IB) division under Hong Leong Capital (HLC) reported a drop in net profit to RM67.7mil (-5.1%YoY) for 12M19. Lower earnings from IB and stockbroking were partially offset by stronger contributions from the fund management and unit trust businesses. Assets under management rose by 4.0% YoY to RM15.8bil in FY19.

• The stock remains a lower cost of entry to gain exposure to HLBB. This is based on HLFG’s market cap of RM18.4bil which is a 18.9% discount to HLBB’s RM22.7bil for a 64.4% stake in the latter.

• HLFG’s consolidated CET1 ratio, Tier 1 and Total capital improved to 10.9%, 11.9% and 14.9% respectively in 4Q19 (3Q19: 9.83%, 10.93% and 13.1%). The ratios remained above the regulatory requirements of 7.0%, 8.5% and 10.5% respectively for 2019.

Source: AmInvest Research - 29 Aug 2019