Hong Leong Financial Group : Stable dividends with strong asset quality of banking group BUY

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Hong Leong Financial Group : Stable dividends with strong asset quality of banking group             BUY

Hong Leong Financial Group (HLFG) is a well diversified financial services provider. The Group is involved in commercial banking through Hong Leong Bank (HLB), insurance via Hong Leong Assurance (HLA) as the key entity as well as investment banking and asset management business through Hong Leong Capital (HLC). 

Our basis for investment in HLFG: (1) Stable core earnings of HLB. HLB has a track record of resilient earnings backed by strong asset quality with a low gross impaired loan (GIL) ratio of 0.79%, 2nd lowest after Public Bank as well as healthy capital levels. (2) HLB's liquid balance sheet with loan to deposit (LD) ratio of 81.2% lower than industry. (3) Strong growth of +17.2%YoY in New Business Regular Premiums (NBRP) for HLA in FY16. In 2015, based on NBRP, HLA was ranked 4th among  insurers for traditional life (TL) and investment linked (IL) insurance. (4) HLA has a strong agency force of 11,886 agents. Strong strategic partnership formed with Mitsui Sumitomo in insurance business, a leading global insurer. HLA targets to continue to focus on higher margin, investment linked policies which are non-participating in nature. HLA aims to raise its non-participating/participating product mix to 55:45 in FY17 from 50:50 in FY16. This will be positive on its earnings. (5) Cost efficiency of HLA with low management expense ratio. HLA is of one of the lowest in terms management expense ratio in the industry at 5.3% in FY16. (6) Stable net dividend per share for HLFG of 38.0 sen for FY14, FY15 and FY16 which translated into dividend yield of 2.4%. (7) Potential divestment of HLA and HLMSIG Takaful. Negotiations are taking place and the potential divestment of HLA Holding's (HLAH) 70.0% stake in HLA and 65.0% in HLMSIG Takaful could result in a possibility of Group restructuring and payment of special dividends to shareholders is in the cards. We value HLFG at RM18.10 based on sum-of-parts valuation. We initiate coverage on HLFG with a BUY call.

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