This article first appeared in The Edge Financial Daily, on November 19, 2015.

Hong Leong Financial Group Bhd
(Nov 18, RM13.80)
Maintain buy with a lower target price (TP) of RM16.20: Hong Leong Financial Group Bhd’s (HLFG) first quarter ended Sept 30, 2015 (1QFY16) net profit of RM387 million (-1% year-on-year [y-o-y], -12% quarter-on-quarter [q-o-q]) was behind expectations, mainly due to lower-than-expected contributions from Hong Leong Bank Bhd (HLB).

HLB’s 1QFY16 net profit declined 8% y-o-y (-12% q-o-q) due to weaker contributions from Bank of Chengdu (BoC), but its other operating matrixes remained encouraging. HLA Holdings Sdn Bhd’s earnings rose y-o-y on better bond yields in 1QFY16, but declined q-o-q on higher mark-to-market losses on its investment amid increased volatility in bond prices. Hong Leong Capital Bhd saw its pre-tax profit halve q-o-q, mainly on lower stockbroking contributions.

HLFG’s share price went ex on Nov 4 for its nine-for-100 rights issue, while HLB’s share price will go ex on Nov 25 for its four-for-25 rights issue. We expect HLFG’s fully loaded common equity tier-1 ratio to be about 10% after this exercise.

Having lowered our FY16/FY17/FY18 net profit forecasts for HLB by 7%/5%/3% on lower contributions from BoC and higher tax rates, our earnings forecasts for HLFG are correspondingly trimmed by 6%/4%/2%.

Our revised net asset value-derived TP for HLFG is trimmed to RM16.20 from RM16.90, on the back of a lower price-to-book value peg of 1.4 times for HLB versus 1.5 times previously, supported by an estimated post-rights calendar year 2016 return on equity of 10.9%. With an 18% upside to HLFG versus 10% for HLB, we prefer HLFG over HLB at this stage, with the “buy” rating maintained. — Maybank IB Research, Nov 18