AmWatch - Hong Leong Bank : Shielded from asset quality uncertainty BUY, 5 Feb 2015

STOCK FOCUS OF THE DAY

Hong Leong Bank : Shielded from asset quality uncertainty          BUY

We maintain BUY on Hong Leong Bank Bhd (HLBB) with an unchanged fair value of RM17.00/share. This is based on an ROE of 14.1% for FY15F and a fair P/BV of 1.9x. From our recent company visit, we expect HLBB’s asset quality to remain excellent, given that it has been relatively cautious in selected commodity and real estate segments. We also expect good recoveries, which should lead to low credit costs overall in the short term.

Otherwise, we have revisited our rights issue assumption in view of greater uncertainty in the macro environment. We now expect minimum comfortable level of fully-loaded CET1 ratio to be likely higher at 10.5%, instead of our earlier estimated 10.0%. This is due mainly to the higher-than-expected counter-cyclical buffer being proposed by regional countries, ranging from 2.0% to 2.5%. This is higher than market expectations of 1.0% to 1.5%. Thus, all in, we now estimate HLBB’s potential rights issue to be RM3.1bil, which is higher than our last assumption of RM1.6bil three months ago; this is closer our original forecast in early 2014, when we projected a rights issue of RM3bil.

This means a potential rights issue of 269mil new shares, on a 1-for-7 share basis, if assuming the rights is priced at a 20% discount to current market price, or about RM11.20/share. Under this scenario, ROE is likely to be diluted downwards by only 1ppt to 13.1%, from our current estimate of 14.1% for FY15F. This takes our fair P/BV for the stock to 1.7x, from 1.9x, leading to fully diluted fair value of RM15.00/share. Notwithstanding this, we still think there is the excellent hidden capital buffer of RM1.1bil in its treasury shares, which may reduce its rights issue requirement eventually. HLBB offers one of the safest exposure to the banking sector given its excellent asset quality.

Others :

Eco World Development :  To co-develop Bukit Bintang City Centre          BUY

Tan Chong Motor : Still bumpy ride, but valuations reaching bottom        HOLD

QUICK TAKES

Genting Malaysia : To sell Wisma Genting?           HOLD

Plantation Sector : Indonesia proposes to raise biodiesel subsidy              NEUTRAL

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Petronas Chemicals Group : Successor for top job at Petronas to be announced soon

Press Metal : Sees up to 15% higher aluminium production by year-end

Sunway : Gets nod for construction unit listing

DISCLAIMER:

The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice.