Spot  on  result.  1HFY13  revenue  and  net  profit  grew  by  33.7%  and  41.1%  y-o-y,  in tandem with the 40% growth in overall transaction volume. All segmental revenues were largely  within  47%-53%  of  our  full  year  segmental  forecasts.  The  credit  card  segment finally saw a rebound on q-o-q growth to a positive 6.6%, due to i) the expanded credit card  base  (1HFY13:162k  vs  FY12:  160k),  and  ii)  improved  customer  sentiment,  as highlighted  in  our  earnings  preview.  General  easy  payment  (GEP,  y-o-y:  +14.8%)  was supported  by  increased  merchant  network  from  4,535  in  FY12  to  5,356  currently  and 20% y-o-y boost in GEP transaction volume. Motorcycle easy payment (MEP, +25.7%) was  boosted  by  67%  y-o-y  growth  in  transaction  volume,  partly  attributed  to  the significant increase of transaction volume in used car easy payment.

Capital  ratios  still  comfortable.  Capital  ratios  saw  general  compression  due  to  the aggressive  41%  y-o-y  growth  in  receivables  to  RM1,887m,  with  capital  adequacy  ratio (CAR)  compressed  to  19.4%  (FY12:  21.8%)  and  risk-weighted  capital  ratio  (RWCR) compressed to 20.5% (FY12: 23.0%). However, they are still within a comfortable level above the minimum regulatory CAR requirements of 16.0%.

Asset quality resilient. The latest non-performing loans (NPLs) ratio improved 15bps to 1.53%  this  quarter  (1QFY13:  1.68%),  due  to  strong  growth  in  receivables  and  prudent risk management policy. This is further supported by the improvement in net credit costs (minus bad debts recovery) from 3.29% in 1QFY13 to 2.98% in the current quarter. Loan loss reserve ratio remained around 125%.

Maintain  NEUTRAL.  We  have  pegged  our  FV  at  a  11x  forward  12-month  EPS.  Our assumptions for the forward PER is based on a discount on the mother company Aeon Credit Service Co Ltd's FY13f PER of 17x. Maintain Neutral with FV at RM11.47. Given the  compression  in  CAR  ratios,  we  have  trimmed  down  our  dividend  forecasts  to  a payout ratio of 34% for FY14. We believe management is still able to  maintain the 37% payout ratio for this financial year.

NIMs compression to be expected. The next stage of AEON Credit's loans business mainly focuses on bigger ticket items, which tends to command lower interest margins. Hence, we expect to see some degree of NIMs compression likely coming from the MEP and personal financing segments coupled with increasing competition  from  bank-backed  institutions,  though  management  has  indicated  that  gross  yields  should reach a comfortable level ~20%. 

Fee income may see new growth drivers. The 44% y-o-y growth in other income in 1HFY13 was mainly attributed  to  impressive  increases  in  collection  agency  businesses  (126%  y-o-y  growth  vs  2QFY12), especially  from  external  clients,  and  insurance  businesses  (57%  y-o-y  growth  vs  2QFY12).  These segments are expected to continue their expansion. As part of its diversification strategy, management has also indicated that it desires to tap into their tenants and shoppers as a potential new customer base for its insurance  business.  On  a  longer  term,  AEON  Credit  is  looking  to  venture  into  prepaid  and  internet businesses, similar to those carried out by AEON Credit Japan.

Platinum credit cards' role in asset  quality  enhancement.  AEON Credit's plan to offer  platinum credit cards  to  higher-income customers is expected to further enhance the company's asset quality as these customers are deemed to have better credit profiles, thus improving its NPL ratio moving forward. We view this  as  a  positive  move,  as  credit  cards  tend  to  contribute  more  to  NPLs  due  to  their  non-collateralized nature and consumers' spending habits. This also should help AEON Credit improve its current credit cards revolvers ratio, which is as high as 80%, closer to the industry average.
 
Renegotiated/restructured  receivables  not  a  major  concern.  Recall  from  our  previous  note  that  the restructured  receivables  were  at  a  manageable  1.8%-2.1%  of  overall  receivables  for  FY11  and  FY12. Management has indicated that the relapse tendency for these loans is very minimal and  is unlikely to be reclassified  back  into  NPL.  Moreover,  these  loans  will  be  deemed  performing  once  the  first  payment  has been  made  after  restructuring.  Note  that  AEON  Credit  usually  classifies  these  receivables  in  the restructuring/renegotiated status upon the third month of non-repayment, but there were pre-emptive cases where the restructuring was done even before the three-month period.

Source: OSK