Hong Leong Finance (HLF SP) - DBS Research 2018-02-28: Momentum Continues

Hong Leong Finance (HLF SP) - DBS Vickers 2018-02-28: Momentum Continues HONG LEONG FINANCE LIMITED S41.SI

Hong Leong Finance (HLF SP) - Momentum Continues

  • Hong Leong Finance ends the year with 61% increase in net profit, exceeding our expectations.
  • Higher loan yields offset lower interest expense.
  • Final dividend of 9 Scts/share declared, full year dividend of 13 Scts represents c. 5% dividend yield. 
  • Maintain BUY, Target Price of S$3.20.

What’s New 

Exceeded expectations with 61.5% y-o-y increase in net profit. 

  • Hong Leong Finance (HLF) earnings growth momentum continues to be strong, recording S$24.8m net profit in 4Q17 (+68.7% y-o-y; +5.3% q-o-q), bringing full year net profit to S$85.7m (+61.5% y-o-y), exceeding our expectations. The strong growth from hiring charges and fee income had offset a slight decline in interest income.
  • Loan yields continued to be improved while Hong Leong Finance recorded lower cost of funding that was partially offset by a lower average loan base.

Loan growth of 3.8% encouraging. 

  • In 2Q17, Hong Leong Finance reversed the trend of negative loan growth and registered 3 consecutive quarters of loan growth as at 4Q17. We continue to look forward to c.3% loan growth in FY18F on better economic conditions with encouraging signs of an improving property market and GDP outlook.

Lower provisions y-o-y. 

  • In FY17, Hong Leong Finance’s total provisions stood at S$3.7m (FY16: S$4.1m) despite a larger loan book. We remain confident in Hong Leong Finance’s asset quality as demonstrated by its low provision and NPL levels historically. 
  • What remains a wildcard is the effect of the implementation of IFRS9/SFRS109.


Financing car rental business is new. 

  • Hong Leong Finance has deep expertise in auto-financing and has now started financing car rental businesses in a bid to “keep up with market needs”. We believe this new segment will further help cement Hong Leong Finance’s position in the auto-financing sector.

Various digital initiatives. 

  • Hong Leong Finance has partnered Infocomm Media Development Authority (IMDA) with the aim to pilot technology solutions for SMEs to improve productivity and competitiveness and help SMEs “go digital”. 
  • Hong Leong Finance is also actively identifying suitable FinTech companies which are able to help Hong Leong Finance with data management and other operational requirements. We believe Hong Leong Finance has room to improve its cost-to-income ratio with such initiatives if a suitable partner is found.

Further lending opportunities. 

  • The Monetary Authority of Singapore (MAS) has gazetted some of the initiatives granted to Finance Companies on 1 Dec 2017. We continue to monitor this space and believe that higher unsecured lending limits present further lending opportunities to Hong Leong Finance for SMEs.

Valuation & Recommendation

Stock now offers dividend yield of c.5%. 

  • Hong Leong Finance declared a final dividend of 9 Scts/share, bringing full year dividend for FY17 to 13 Scts (+44.4% y-o-y) which is in line with our expectations, representing c. 5% dividend yield.

Maintain BUY, Target Price at S$3.20. 

  • Our Target Price of S$3.20 is derived from the Gordon Growth Model with 5% ROE, 2% longterm growth and 6% cost of equity, implying c.0.8x FY17F BV. 
  • The current dividend yield level of c.5% is attractive.

Singapore Research Team DBS Vickers | Sue Lin LIM DBS Vickers | http://www.dbsvickers.com/ 2018-02-28
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.200 Same 3.200