Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with a revised FV to RM17.90 from RM19.00/share based on a lower SOP valuation. We finetune our net profit estimate for FY20/21/22 by -2.9%/- 1.3%/-1.4% to RM1.96bil/RM2.10bil/RM2.26bil after imputing another OPR cut of 25bps in 1H 2020 in addition to the 25bps reduction in the benchmark interest rate on 22 Jan 2020.

• HLFG reported a core net profit of RM503mil (+2.6% YoY) in 2Q20. Core earnings for 6M20 grew 7.0% YoY to RM993mil after excluding the one-off gain of RM90mil from its subsidiary, Hong Leong Bank’s (HLBB) divestment of its stake in a JV entity (Sichuan Jincheng Consumer Finance Company Ltd) in 6M19, were within our expectations accounting for 49.4% of our forecast and 51.0% of consensus estimates.

• HLBB reported a core net profit after tax of RM1.39bil, up 6.6% YoY for 6M20. The improvement was on the back on higher core total income, controlled growth in operating expenses and low provisions (net credit cost of 2bps). HLBB’s domestic loans expanded by 6.8% YoY which outpaced the industry’s 3.9% YoY growth while its NIM improved 5bps YoY to 2.03% for 6M20.

• Asset quality of HLBB continues to be benign with a low GIL ratio of 0.84%.

• On the insurance business, HLA Holdings Group recorded a lower PBT of RM126.2mil (-10.4% YoY) in 6M20 due to lower life fund surplus. This was despite an improvement in revenue of RM10.1mil, lower operating expenses of RM0.9mil and a rise in share of profit from associates of RM11.3mil.

• HLA, the key insurance operating subsidiary, posted a net profit of RM73.5mil (-21.7%YoY) for 6M20. Profits were affected by lower interest rates which raised the contractual liabilities though mitigated partially by higher fair value gains from securities as well as the impact of the minimum allocation rate regulation which took effect on 1 July 2019. HLA recorded a modest growth in gross premiums by 3.9% YoY in 6M20 while its management expenses stayed low at 6.0% in 6M20.

• 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

• Its investment banking division under Hong Leong Capital (HLC) reported a higher PBT of RM47.5mil (+26.7% YoY) for 6M20. Stronger PBT was driven by higher earnings contribution from the fund management unit trust and stock broking business.

• No dividends have been declared in 2Q20.

• HLFG’s consolidated CET1 ratio, Tier 1 and total capital ratios improved to 10.9%, 11.9% and 15.0% in 2Q20 compared to 10.5%, 11.5% and 14.6% respectively in 1Q20. The ratios were above the regulatory requirements of 7.0%, 8.5% and 10.5% respectively for 2019.

Source: AmInvest Research - 27 Feb 2020