Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with a revised fair value of RM19.00/share (previously RM17.20/share) based on a higher derived SOP valuation (Exhibit 1). No changes to our earnings estimates. HLFG remains a cheaper entry for gaining exposure to Hong Leong Bank (HLBB).

• HLFG reported an improved core net profit of RM587mil (+19.8% YoY) in 4Q20 with stronger contributions from all divisions (commercial, investment banking and insurance).

• Underlying 1Q21 earnings were within our expectations, accounting for 28.6% and 29.8% of our and consensus estimate respectively.

• Its key subsidiary, HLBB, reported a stronger PBT of RM890.2mil (+5.2% YoY) for 1Q21. The improved earnings were underpinned by higher revenue, lower opex and higher share of profit from associates, partially offset by higher provisions with the booking of RM238mil of preemptive provision buffers in the quarter.

• HLBB’s asset quality remained sound with a GIL ratio of 0.48% against the industry’s 1.4% while loan loss cover, including regulatory reserves of RM587.8mil, was high at 295.0%. Credit cost of HLBB stood at 0.28% in 1Q21.

• HLA Holdings Group (HLAH) recorded a higher PBT of RM65.6mil (+6.5% YoY) in 1Q21 on the back of higher unrealized gains on revaluation of equity of RM14.1mil and higher share of profit from associates of RM8.1mil, partially offset by higher opex and lower life fund surplus.

• HLA, the key insurance subsidiary, showed an improved traction in premiums. In 1Q21, gross premiums grew by a strong 15.4% YoY to RM718.4mil while the new business regular premiums (NBRP) expanded by 54.9% YoY to RM194.5mil.

• HLA’s low expense ratio continued to be sustained at 6.0% in 1Q21.

• The outlook for premium growth remains challenging due to the Covid-19 outbreak. The industry recorded a decline in total premiums by 12.6% in 6MCY20.

• Its investment banking division under Hong Leong Capital (HLC) reported a higher PBT of RM52.7mil (+115.1% YoY) for 1Q21. The improved earnings were driven by higher contribution from the investment banking and stockbroking businesses.

• HLFG’s consolidated CET1, Tier 1 and total capital ratios were 11.0%, 12.0% and 15.0% respectively in 1Q21 compared to 11.2%, 12.2% and 15.2% respectively in 4Q20. The ratios stayed above the regulatory requirements of 7.0%, 8.5% and 10.5% respectively.

Source: AmInvest Research - 30 Nov 2020