Investment Highlights

• We maintain our BUY call on Hong Leong Financial Group (HLFG) with a revised fair value (FV) of RM22.70/share (previously RM22.10/share) based on a higher SOP valuation after rolling forward our valuation for Hong Leong Bank (HLBB) to FY24F. Our FV reflects a neutral 3-star ESG rating.

• We raised our FY23F/24F/25F earnings by 4%/5.3%11.2% after increasing our estimates for the share of profit from associates.

• 6MFY23 core earnings were within expectation, accounting for 52.6% of our FY23F net profit and 52.4% of consensus forecast.

• 6MFY23 underlying earnings came in at RM1.45bil (+5.3%YoY), underpinned by higher profits from the commercial banking division while net profits of the insurance and investment banking divisions declined.

• HLBB reported a stronger PAT of RM2bil in 6MQ23 contributed by an improved top line, lower allowance for loan losses and stronger earnings contribution from associates.

• HLFG reported an improved 2QFY23 core net profit of RM771mil (+13.1% QoQ), contributed by stronger earnings of its commercial banking, Hong Leong Bank (HLBB) and insurance division.

• HLBB’s loans growth tapered to 7.6% YoY in 2QFY23 from 8.8% YoY in 1Q23 with a domestic loan expansion of 6.5% YoY still outpacing the industry which grew by 5.7% YoY.
   
• CI Ratio of HLBB in 6MFY23 Improved Slightly to 36.4%, Supported by Positive JAWs of 2% YoY.
   
• The banking subsidiary’s asset quality remained stable with GIL ratio holding up at 0.49% while loan loss cover of 210% was significantly above the industry’s 98%. Net credit cost of HLBB stayed low at 7bps (annualised) in 6MFY23.

• For 6MFY23, HLA Holdings recorded a lower PAT by 6.3% YoY to RM169mil. Earnings were impacted by higher net claims, decrease in share of profit from associates, partially offset by marked-to-market gains on investments.

• The key insurance subsidiary, HLA’s 6MFY23 profit was flattish at RM140.5mil (+1% YoY) due to lower topline. The gross premium of HLA of RM1.6bil slipped by 4% YoY in 6MFY23 while new business regular premiums fell by 16.2% YoY to RM275mil with a shift of consumer demand towards smaller ticket-sized protection policies.

• The mix of HLA’s premium contribution between regular vs. single was 93:7. Premiums for investment-linked (IL) policies rose modestly by 3% YoY with the share of gross premiums by IL raised to 80%. In terms of new business regular premiums (NBRP), HLA maintained its IL market position at 4 with a market share of 10.7%. It also sustained its 8 th ranking position for ordinary life insurance with a market share of 4.6%.

• Owing to the rise in inflation and global economic slowdown, we continue to expect consumers to remain cautious in acquiring new life insurance products.

• Elsewhere, gross contribution of its family takaful operating subsidiary, Hong Leong MSIG Takaful (HLMT) registered a strong growth of 61% YoY.

• The investment banking division under Hong Leong Capital (HLC) reported a lower PAT of RM28.6mil (-35.4% YoY) in 6MFY23, attributed largely to lower earnings contributions from its investment banking (IB), stockbroking and fund management businesses. The stockbroking business was impacted by lower market activity with a decline in trading value while HLC’s asset management business recorded a decrease in PAT of 58.2% YoY, contributed by lower management fees due to redemptions of funds after the removal of the retail money tax exemption for nonindividual unit holders.

• Moving ahead, the outlook for IB and stockbroking business remains challenging with the market continuing to be volatile amidst elevated inflation, uncertainties in the US Fed rate direction and ongoing geopolitical tensions. HLFG’s consolidated CET1 ratio/tier 1/total capital stayed above the regulatory limits at 11.5%/12.6%/15.5%.

• An interim dividend of 17 sen/share has been declared in the 6MFY22, slightly higher than 15 sen/share in 6MFY21.
   
• The Stock Is Currently Trading at a Low FY24F PE of 7x and P/BV of 0.7x.

Source: AmInvest Research - 1 Mar 2023