Hong Leong Finance - DBS Research 2018-08-13: Strong 1H18, But Cautious In 2H

Hong Leong Finance - DBS Group Research 2018-08-13: Strong 1h18, But Cautious In 2h HONG LEONG FINANCE LIMITED SGX:S41

Hong Leong Finance - Strong 1H18, But Cautious In 2H

  • Hong Leong Finance’s net profit rose 41% y-o-y/14% q-o-q on higher interest income, offsetting higher interest expense.
  • Loan book grew by c. 2% q-o-q.
  • Higher dividends declared as expected, 5 Scts for 2Q18 (2Q17: 4 Scts).
  • Maintain BUY, Target Price maintained at S$3.20/share after rolling forward valuation base.



What’s New


Strong growth momentum.

  • Hong Leong Finance (HLF) continued to record strong growth momentum for the 8th quarter in a row, with S$29.6m net profit in 2Q18 (+41% y-o-y, +14% q-o-q), ahead of our expectations.
  • Total interest income was strong (+19% y-o-y, +9% q-o-q) led by higher loan base (+2% q-o-q) and higher loan yields, offsetting higher interest expense (slightly lower interest rates on a higher deposit base).
  • Fee and commission income was lower due to lower fees from lending and non-lending products. Staff costs increased c.7% y-o-y on higher provisions for bonus.


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Topping up provisions.

  • Hong Leong Finance topped up provisions by S$0.8m as it continues to maintain adequate loss allowances in its loan book (1Q18: S$0.8m, 2Q17: S$0.7m). 
  • As Hong Leong Finance mostly lends on a secured basis, we remain confident of Hong Leong Finance’s asset quality, demonstrated by its low provision and NPL levels historically.

Loan-to-deposit (LDR) ratio at c.95%.

  • Hong Leong Finance’s LDR ratio notched up slightly to 95% (1Q18: 93%) as loans grew by c.2% q-o-q while deposits were unchanged.

Adding alternative channels.

  • Hong Leong Finance announced that it has collaborated with AXS to allow its customers to have another payment channel as it seeks to strengthen its franchise, while continuing to engage FinTechs for possible collaboration.


Outlook


Short-term funding costs rising, no impact on HLF for now against rising loan yield environment.

  • Notably, SGD fixed deposits rates are starting to inch up as other alternatives like Singapore Savings Bond compete for SGD liquidity. 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 of up to one year. 
  • We believe there should be minimal impact on Hong Leong Finance in FY18 in the current rising loan yield environment. However, Hong Leong Finance’s profitability may be impacted if loan yields fail to catch up with rising deposit costs in FY19F.

HLF comments on more cautious outlook as Singapore 2Q18 GDP missed estimates.

  • Hong Leong Finance has noted that Singapore’s economic growth slowed to 3.8% in 2Q18, missing median forecast of 4.0% (1Q18: 4.3%). Previously, there were indications that the construction sector would start to bottom out and see more activities in 2H18 but this could change with the introduction of property cooling measures announced in July 2018.
  • SMEs in manufacturing could also be affected by the ongoing trade conflict between the United States and China.

HLF’s property-related portfolio.

  • Based on our understanding, Hong Leong Finance has a larger HDB mortgage loan book compared to private properties, which do not typically have a big loan quantum. As of Dec 2017, mortgages accounted for c.14% of its loan book. Hong Leong Finance also expects slower property activities for both developers and end buyers.
  • Approximately 66% of Hong Leong Finance’s portfolio relates to other property loans as of Dec 2017, where Hong Leong Finance finances developers, typically in syndicates where Hong Leong Finance takes up a small exposure.


Valuation & Recommendation


Higher dividends declared in 2Q18.

  • Hong Leong Finance declared a higher dividend of 5 Scts for the quarter (2Q17: 4 Scts), as expected. We believe that Hong Leong Finance will pay at least 13 Scts per share as dividends in FY18F, representing c.5% dividend yield at current price. 
  • We believe the dividend yield remains attractive against lower volatility in Hong Leong Finance’s share price compared to other financial stocks.

Maintain BUY, Target Price at S$3.20.

  • We maintain our Target Price of S$3.20, derived from the Gordon Growth Model assuming 5% ROE, 2% long-term growth and 6% cost of equity, implying c.0.7x FY19F BV, after rolling forward our valuation base to FY19F.
  • Positive catalysts include stronger-than-expected GDP growth, which bode well for SMEs.





Rui Wen LIM DBS Group Research | Sue Lin LIM DBS Research | https://www.dbsvickers.com/ 2018-08-13
SGX Stock Analyst Report BUY Maintain BUY 3.200 Same 3.200



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