Hong Leong Finance - DBS Research 2018-05-03: Another Stellar Quarter

Hong Leong Finance - DBS Vickers 2018-05-03: Another Stellar Quarter HONG LEONG FINANCE LIMITED SGX: S41

Hong Leong Finance - Another Stellar Quarter

  • Hong Leong Finance net profit rose 57% y-o-y/4.3% q-o-q on higher interest and non-interest income against lower interest cost. 
  • Loan growth momentum continues to be strong at c.5% q-o-q. 
  • Stock now offers c.5% dividend yield. 
  • Maintain BUY, Target Price S$3.20. 

What’s New

Exceeding expectations again.

  • Hong Leong Finance (HLF) continues its earnings growth momentum, recording S$25.9m net profit in 1Q18 (+57% y-o-y; +4% q-o-q), ahead of our expectations.
  • Interest income saw a strong 12% growth y-o-y/2% growth q-o-q on higher interest on loans, hiring charges and other interest incomes, as loan book built up with higher loan yields against lower cost of funding. 
  • Fee and commission income increased 10% y-o- y/86% q-o-q with higher fee income from selected lending products partially offset by a decrease in non-lending fee income.

Beneficiary of growth in Singapore economy.

  • Hong Leong Finance’s loan book grew for the fourth consecutive quarter since 2Q17, registering 5.6% q-o-q loan growth in 1Q18. 
  • According to MAS, growth in the Singapore economy should continue at a broadly steady pace in the quarters ahead and we believe that Hong Leong Finance will be one of the beneficiaries as loan growth demand continues in Singapore. We posit that Hong Leong Finance’s loan book will grow at 5-6% p.a. over FY18-19F, compared to our previous forecasts of 3-4% p.a..

Top-up provisions of < S$1m.

  • During 1Q18, Hong Leong Finance topped up provisions of S$0.8m (1Q17: S$0.9m writeback) as it continued to maintain adequate loss allowances in respect of its enlarged loan portfolio. We remain confident in Hong Leong Finance’s asset quality as demonstrated by its low provision and NPL levels historically.

Implementation of SFRS(I)9 on 1 January 2018 had minimal impact. 

  • According to Hong Leong Finance, there is no material impact in the area of classification and measurement under SFRS(I)9. As allowances under SFRS(I) 9 fall below the minimum regulatory loss allowance, Hong Leong Finance has set up a non-distributable regulatory loss allowance reserve account. 
  • At initial adoption on 1 January 2018, Hong Leong Finance’s expected credit loss provisioning reserve account amounted to S$16.9m (c.1.6% of loan book).


SME programmes well received.

  • Having a niche in SME financing continues to bode well for Hong Leong Finance. Particularly, Hong Leong Finance has partnered Infocomm Media Development Authority in the SMEs Go Digital programme and has continued to partner SPRING Singapore (now Enterprise Singapore) to promote the Government-Assisted SME loans and capability development grants programme. 
  • Separately, Hong Leong Finance has also launched an SME appreciation Loans programme to help SMEs in their cash flow needs and operations, which are their most known pressing needs.

Short-term funding costs may rise, no impact to Hong Leong Finance for now against rising loan yield environment.

  • Notably, short-term funding costs may rise against the backdrop of rising short-term interest rates for SGD. Hong Leong Finance has locked in its funding requirements for at least a year in advance as its deposit base is mainly made up of fixed deposits. 
  • We believe there should be minimal impact on Hong Leong Finance for FY18 in the current rising loan yield environment. However, should loan yields fail to catch up with rising deposit costs, Hong Leong Finance’s profitability may be impacted.

Valuation & recommendation

Dividend yield of c.5% remains attractive.

  • We believe that Hong Leong Finance (HLF) will pay at least 13 Scts per share as dividends in FY18F, representing c.5% dividend yield at current Hong Leong Finance share price. We believe the dividend yield remains attractive against lesser volatility in share prices compared to other financial stocks.

Maintain BUY, Target Price at S$3.20.

  • We have increased our net profit forecast by c.2% for FY18-19F after accounting for additional disclosures in Hong Leong Finance’s Annual Report 2017. Our Target Price of S$3.20 is derived from the Gordon Growth Model with 5% ROE, 2% long-term growth and 6% cost of equity, implying c.0.8x FY17F BV. 
  • Positive catalysts include higher- than-expected loan growth in coming quarters. 
  • Hong Leong Finance should remain as one of the beneficiaries of Singapore's economic growth in FY18.

Rui Wen LIM DBS Vickers | Sue Lin LIM DBS Vickers | https://www.dbsvickers.com/ 2018-05-03
SGX Stock Analyst Report BUY Maintain BUY 3.200 Same 3.200