Hong Leong Finance

[tanjm]

The banking sector is one of my focus sectors. Instead of looking at only PB and NPL, I suggest a more comprehensive view.

HLF's ROE is about 4%. A P/B of 0.6 means an expected yield of 6-7%. I would say, a fair priced based on your description, with low NPL, and simple business model.

HLF is small comparing with major banks e.g. DBS. HLF's total asset is about 3% of DBS's. Size matter for the banking sector. We can see from the cost-to-income ratio of 52% for HLF, vs. DBS's 42%. It might be the reason for lower ROE. It will become more matter in near future, due to higher compliance and regulatory costs. Economic-of-scale is one of the solutions IMHO.

All comments are welcomed.

Yes, economy of scale does matter. 

Simple can mean less risk. Think DBS in the OG sector, reg risk (structured notes, libor fixings, in digital banking/fintec) or one of the big 3 doing a risky M&A (like acquiring someone). The reg cost you are talking about is, I would guess, not significantly more for HLF with its simple product mix that has not changed (the one significant addition being liquidity risk reporting - which is relatively simple to implement with a simple product mix).

I like HLF because I think it is potentially lower business risk than the big 3, good dividend, and a potential to rerate if NIM go up (i know that NIM argument applies to the big 3 as well). I feel I only need to watch the property sector, and interest rates.

Anyway, just bought a small amount for starters.

btw, I have some DBS and indirect exposure via ETF.

[karlmarx]

The very competitive banking environment has kept HLF's NIM & ROE lower than its peers; the big 3 banks is able to attract deposits with lower rates, and is able to earn more with riskier loans such as credit cards.

HLF has to offer higher rates to attract deposits, but yet competes in the mass market segment of financing; namely home loans and car loans. The problem is the rates for home and car loans are very competitive and the bigger banks can price it low due to their economies of scale. HLF will then have to price their loans as low to stay in the game, which hurts their NIM. The saving grace is that they are conservative in the loans they make.

Although HLF is heavily discounted, i think it is fair given the very low ROE and also the lack of any catalyst for growth. Will it get a full banking license? That doesn't seem to be the case any time soon.

HLF is very likely to continue paying stable dividends over the long term so I'd expect its value to remain likewise. I wouldn't be expecting capital appreciation.

[tanjm]

I'm basically willing to have a core portfolio that sacrifices growth for more certainty. I also need some diversification. So HLF looks like it fits for me.

From a price point of view, it's fairly near its 5 year low

[weijian]

I'm basically willing to have a core portfolio that sacrifices growth for more certainty. I also need some diversification. So HLF looks like it fits for me.

From a price point of view, it's fairly near its 5 year low

hi tanjm,
There is a very popular question in the investment arena that people like to ask and goes like this "If you have to choose between 2 bets - (1) One is a 99% chance of winning 100dollars and 1% chance of not winning anything. (2) 2nd is a 80% chance of winning 200dollars and 20% chance of not winning anything......which ONE would you choose?"

What is the answer that feels right? What is the answer that is right? I have to admit that my only knowledge of HLF is reading the last 8pages of this HLF thread in VB  But it does seem to me that HLF cannot milk the benefits during the upturn as much as the other local full banks, while it will be just as much exposed in the downturn. In Nassim Taleb's words, it feels like an asymmetric bet, but the asymmetry is against the investor. Taking about diversification, didn't you already reveal that you are exposed to financials through your vesting in DBS already? Do you want, or do you need some diversification?

In investing, there are 2 ways to learn. One is through one's own mistakes (ouch~). The other cheaper way would be through other's mistakes. I thought forummer Jacmar's sharing in 2011 was apt.
https://www.valuebuddies.com/thread-1688...l#pid17031

[chialc88]

@TJM, 
had not read HLF in VB.com yet but I'm pretty sure I'm going to put small % into HLF in coming weeks.
will post when my order is done.

i don't think it's betting but *intelligent* investing.

---

@WJ,
So, is (1) better for you or (2) better?

After you make your choice, then continue to next Q:

Bet one:
(1) 99% loss $100 and 1% loss nothing
or
(2) 80% loss $200 and 20% loss nothing.

Love Compassion

[weijian]

---

@WJ,
So, is (1) better for you or (2) better?

After you make your choice, then continue to next Q:

Bet one:
(1) 99% loss $100 and 1% loss nothing
or
(2) 80% loss $200 and 20% loss nothing.

Love Compassion

hi chialc88,
it's hard to choose between (1) and (2)  Deep down, my OPMI-oriented heart tells me to choose (1)...
Now, i continue to the next question (bet). I will choose (1) instinctively, because I have learnt it the hard way through S-chips : After scribbling out the calculations on my notes, i noticed i am rational!

[tanjm]

I'm basically willing to have a core portfolio that sacrifices growth for more certainty. I also need some diversification. So HLF looks like it fits for me.

From a price point of view, it's fairly near its 5 year low

hi tanjm,
There is a very popular question in the investment arena that people like to ask and goes like this "If you have to choose between 2 bets - (1) One is a 99% chance of winning 100dollars and 1% chance of not winning anything. (2) 2nd is a 80% chance of winning 200dollars and 20% chance of not winning anything......which ONE would you choose?"

What is the answer that feels right? What is the answer that is right? I have to admit that my only knowledge of HLF is reading the last 8pages of this HLF thread in VB  But it does seem to me that HLF cannot milk the benefits during the upturn as much as the other local full banks, while it will be just as much exposed in the downturn. In Nassim Taleb's words, it feels like an asymmetric bet, but the asymmetry is against the investor. Taking about diversification, didn't you already reveal that you are exposed to financials through your vesting in DBS already? Do you want, or do you need some diversification?

In investing, there are 2 ways to learn. One is through one's own mistakes (ouch~). The other cheaper way would be through other's mistakes. I thought forummer Jacmar's sharing in 2011 was apt.
https://www.valuebuddies.com/thread-1688...l#pid17031

Let's put it this way. I have about 50% of my portfolio directly or indirectly exposed to USD, JPY and AUD right now, with a small sprinkling in Emerging markets. In SGD, especially with the lack of retail bond choices, my universe looks rather limited. In lieu of anything better, I have a big fraction of the SGD exposure in local yield plays and the STI index. HLF is not in the STI index and looks decently safe - I may only have to fear a *sustained* credit and/or property downtown (in which case, I have better things to worry about).

Unlike many Singaporeans, I do not own a second property or even an expensive primary residence (which is fully paid up). So my exposure to property is not excessive IMO. i.e. HLF will not be correlated to a non-existent investment property, so even better for me.

[tanjm]

What is the answer that feels right? What is the answer that is right? I have to admit that my only knowledge of HLF is reading the last 8pages of this HLF thread in VB  But it does seem to me that HLF cannot milk the benefits during the upturn as much as the other local full banks, while it will be just as much exposed in the downturn. In Nassim Taleb's words, it feels like an asymmetric bet, but the asymmetry is against the investor.

I think you may be somewhat abusing the phrase "asymmetric bet" here. I believe what Nassim Taleb was referring to something like you structure your "bet" such that if you win the bet, you make a small amount, if you lose the bet, you lose a large amount. The probability of a win being much greater than a lose". This is the classic description of the tail risk seen in the GFC. e.g. AIG insured a pile of AAA rated mortgage securities and received nice premiums for a few years until it all blew up.

In this case, I believe HLF does not have the growth potential of its big brothers. But neither (I hope) does it have the potential for a big loss event either. So its fairly symmetric and less risky (read volatile asset price). Since 2005, DBS max price was about $23 and min price $7.5 (at the depth of the GFC). HLF ranged from $4.2 to $1.7. The shapes of the charts are not dissimilar but the DBS variation in percentage terms is greater, not considering dividends yet (which I believe HLF is slightly better). Also, as I mentioned before, in terms of monitoring HLF, I mainly would have to look at the risk of an extreme property market and/or an extreme credit market - anything less, I would shrug off as "business cycle". I don't have to worry that HLF has done some risky bet, over exposed to some O&G company, has sold structured notes that it would get censured on, engaged in an over optimistic M&A, has exposure to some other country's credit bubble etc.

https://sg.finance.yahoo.com/q/bc?s=D05....&z=l&q=l&c=
https://sg.finance.yahoo.com/q/bc?s=S41.SI&t=my

[specuvestor]

I have written on Taleb's logic before and I won't reiterate it here but one of the heuristic fallacy is that we assume a binary logic (either this or that) when the possibilities are actually much more myriad and complex.

For example let's simplify but add more complexity by saying the annual return of stock price of a $5 stock is like rolling a 10 sided unbiased die. Every year we roll the die to determine the price. If the die shows 5 the return is zero; 10 the return is 100% and 1 the return is -80%. Statistically 1 will be the 10% tail end risk of losing big 80% (yes I know it's not totally symmetrical with $5 upside and $4 downside)

What would your risk/reward be if u roll a 9 or 2 this year. Is it possible to get a 1 or 10 next year? Sure but would you not be adding or cutting your exposure? I've always said that Mr Market never demand us to be binary: buy all or sell all. If we buy 50% at 2 and another 50% at 1 do we think we are foolish losing 50% principal of our first batch? Or that we kick ourselves that we should have bought 100% and not 50% when it rolled 4 the next year? What's our focus?

The trick in the real world is of course that we have to know it won't go much lower than 1 or much higher than 10. That's where value and fundamental analysis comes in. That gives one understanding and conviction; not following the wind of some tipster, rumour or even chats / forums. What is the range of HLF for the 1-10 and what kind of value and yield it has, given the A-B-S. It is certainly not a fly by night company.

We may think that obvious 1 or 10 doesn't happen that often but actually where do we think bond prices are right now for the past (3?) years?? IMHO it had been rolling 9 and 10 thrice in a row. Conversely there are some companies we don't know if there is a 1. That's why Buffett avoids Tech

NB AAA CDO was also determined by the statistical probability. Nobody actually knows the fundamental underlying except maybe Blackrock database. Systemic risk is a statistical breakdown. Live by the sword die by the sword. I have no sympathy except the carnage it wrecked on ordinary people's lives

[BlueKelah]

Afaik buffett avoided tech in the past coz he mentioned he didn't understand the business. Berkshire has since bought IBM in 2011 and started adding Apple when it was near lows(though that investment was probably done by the guys he is grooming to take over the co.)

HLF sounds like it could be a value trap though.

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