Investment Highlights

• We maintain BUY call on Hong Leong Financial Group (HLFG) with a lower fair value (FV) of RM22.10/share from RM22.40/share based on revised SOP valuation after prescribing lower PB multiple for its stake in MSIG, the general insurance arm. Our FV reflects a neutral 3-star ESG rating.

• We fine-tune our FY23F/24F earnings by -1%/-4% after adjusting our estimates for loan impairment allowances.

• FY22 underlying earnings grew 17% YoY to RM2.7bil attributed to higher total income, lower provisions and higher share of profits from associates and JV.

• Cumulative core earnings were within our expectations at 5% above estimate. Meanwhile, it beat consensus at 10% above street’s forecast.

• HLBB reported a strong PBT of RM4.4bil (+26% YoY) in FY22, contributed by an improved top line, lower provisions for potential credit losses while the earnings contribution from its associate, Bank of Chengdu, remained robust.

• HLBB’s loans growth picked up momentum to 8% YoY with domestic loan expansion of 6.7% YoY outpacing the industry’s 5.6% YoY.

• HLBB’s CI ratio for FY22 improved slightly to 37.5% supported by positive JAW of 1.4% YoY.

• The banking subsidiary’s asset quality remained sound with a GIL ratio of 0.49% while loan loss cover of 212% was significantly above the industry’s 109%. Net credit cost of HLBB was low at 10bps for FY22.

• FY22 normalised earnings of HLA Holdings slipped by 3% YoY, impacted by fair value losses of RM60mil on equity due to the volatile market. Also, profit was impacted by RM32mil due to the revaluation of bonds from the movement in interest rates.

• The key insurance subsidiary, HLA’s FY22 profit was flattish at -0.9% YoY.

• HLFG reported a higher 4QFY22 core net profit of RM731mil (+16.9% QoQ), after excluding the one-off impact of Cukai Makmur. This was contributed by stronger earnings of its commercial banking division, Hong Leong Bank (HLBB), which partially offset the lower profit contribution from the insurance and investment banking divisions.

• HLA’s gross premiums grew modestly by 1% YoY while its new business regular premiums (NBRP) fell 13% YoY as sales from the agency channel declined. Consumers remained cautious in acquiring new life insurance amid the rise in inflation and global economic slowdown. FY22 saw a marginal decrease in HLA’s persistency ratio to 88.2% vs. 89.9% the previous year.

• The embedded value (EV) of HLA rose by 14% YoY. This was supported by the increase in new business embedded value (NBEV) of 13% YoY. The improvement in EV and NBEV was both driven by higher long-term MGS rates and a one-off refinement in actuarial methodology. We gather that the discount rate used to derive the EV and NBEV was 8.5%.

• HLA retained its 4th position in the market in terms of investment-linked (IL) new business regular premiums (NBRP) and the 8th largest in terms of NBPR for ordinary life policies. The mix of IL & non-par / par ratio for new business was sustained at 96:4. The ratio of regular/singular premiums for HLA stood at 94:6.

• Aside from lower new sales of its agency force, NBRP from the banca channel also decreased slightly YoY. Management expense ratio of HLA was stable at 6%, still the lowest in the industry.

• On the performance of the other insurance subsidiary, Hong Leong MSIG Takaful recorded an FY22 loss of RM2.8mil. This was attributed to fair value losses on investments which were not offset by changes in actuarial reserve despite reporting a strong gross contribution growth from an expanded agency channel. This subsidiary provided insurance coverage to 200,000 B40 customers with Perlindungan Tenang vouchers.

• Elsewhere, the PBT of HL Assurance remained small at RM1.5mil while that of Hong Leong Assurance (Asia) in Hong Kong decreased by 71% YoY, impacted by weaker travel insurance demand following the country’s zero-Covid policy and movement restrictions.

• The investment banking division under Hong Leong Capital (HLC) recorded a lower FY22 PBT of RM97mil (-45% YoY), dampened by declined contributions from its investment banking (IB) and stockbroking business. This more than offset marginally higher earnings of the fund and unit trust management business. Hong Leong’s asset management’s AUM slipped to RM16.7bil in FY22 from RM16.9bil in the preceding year. The stockbroking business recorded lower trading volume from a drop in retail participation.

• The outlook for IB and stockbroking business remains challenging in the near term with the market continuing to be volatile amid heightened headwinds from an economic slowdown of developed markets, higher inflation and ongoing geopolitical tensions. HLFG’s consolidated CET1 ratio/tier 1/total capital stayed above the regulatory limits at 11.8%/12.9%/15.9%.

• A final dividend of 31 sen/share has been declared, bringing FY22 total dividends to 46 sen/share (payout: 20% based on normalized earnings). This was in line with our forecast.

• The stock is trading at a low FY23F PE of 7x. We continue to like HLFG as a cheaper entry for exposure to HLBB with resilient earnings and strong asset quality.

Source: AmInvest Research - 1 Sept 2022