Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with a revised fair value to RM19.00/share (from RM19.30/share) based on a lower SOP valuation. We finetune our net profit estimates for FY20/21/22 by 0.2%/-1.9%/ -2.2% to RM2.01bil/RM2.13bil/RM2.29bil by adjusting our net interest income estimates.

• HLFG reported a core net profit of RM490mil (+13.1% YoY) in 1QFY20. Core earnings were within our expectations accounting for 23.3% of our forecast and 23.9% of consensus estimates.

• HLBB reported a PBT of RM847mil, up 8.7% YoY for 1QFY20 after excluding one-off gains of RM72mil from a partial divestment of its stake in its JV, Sichuan Jincheng Consumer Finance Limited Company in 1QFY19. The improvement was on the back on higher core total income and write-backs in allowances for loan impairment vs. provisions for loans losses in 1Q19. HLBB’s domestic loans expanded by 6.6% YoY which outpaced the industry’s 3.8% YoY growth.

• The asset quality of HLBB continues to be benign with a low GIL ratio of 0.81%. HLBB’s provisions remained low with a net credit cost of -0.03% in 1QFY20. Loan loss coverage including regulatory reserves remained high at 195.9% while its LD ratio stayed healthy at 84.8%.

• On the insurance business, HLA Holdings Group recorded a lower PBT of RM61.5mil (-25.0%YoY) in 1QFY20 due to lower revenue and life fund surplus.

• HLA, the key insurance operating subsidiary, recorded a softer net profit of RM43.3mil. Its management expenses stayed low at 7.0% in 1QFY20.

• HLA made positive changes by acquiring longer term bonds to insulate itself from the impact of lower interest rates. This was evidenced by the higher financial assets at fair value than before through profit & loss on the group’s balance sheet. Hence for any decline in interest rates, a positive marked-to-market impact on securities will offset the increase in contractual liabilities.

• HLA is staying focused on driving the growth of embedded value (EV) for its insurance business. This will be through changing the product mix by increasing the non-par/par ratio. In general, non-par/investment-linked policies have higher EV margins than ordinary life policies.

Source: AmInvest Research - 28 Nov 2019