Hong Leong Finance

Thread Rating:
  • 0 Vote(s) - 0 Average
  • 1
  • 2
  • 3
  • 4
  • 5
#1
Hey there guys, I just posted a presentation on Hong Leong Finance.

Can't seem to embed the code from scribd though. Check it out at my blog here.

Main gist of my investing thesis:

Current Price: $2.10
Book Value Per Share (Sep 2011): $3.57

Selling @ 58% Discount to Intrinsic Value

I go into greater detail in my post. Do let me know what you think.


Reply
#2
(20-12-2011, 12:36 AM)juno.tay Wrote: I go into greater detail in my post. Do let me know what you think.

What is the Company's main business? How does it derive its revenue, and what constitutes the largest portion of it? You did not mention this in your analysis. In the event of a downturn, what is the likelihood of maintaining its revenue/profit since it is in the lending business?

Earnings do not seem very stable from the 5-year history, with fluctuations during 2008. Though dividend has been rising, you did not provide cash flow analysis numbers to support the conclusion of a "hefty" 5% dividend. Can this be maintained and where is the cash coming from?

Book value can be very deceptive and should not be taken as "intrinsic value". I note that these two terms are used somewhat interchangeably in the analysis. Discount to book may not necessarily indicate a bargain, and market price may or may not rise to bridge the "gap". It would depend on how assets are valued on the Balance Sheet in the first place, and one should also check for potential impairments to asset values which may have been recorded on a historical cost basis.

I also think P/B ratio can be misleading, since book value itself is not an accurate measure. For myself, I prefer the use of either PER (for companies with more stable/predictable earnings) or dividend yield (if cash flows are stable and consistent).

Just my 2-cents.
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
Reply
#3
Hey there. Unfortunately my analysis already assumes you're familiar with looking at banks and how they generate income so I skipped out certain sections.

But to answer your questions, HLF is very traditional in terms of how it generates revenue i.e. through traditional services such as servicing loans to SMEs, car loans etc. This makes up the bulk of their services. If you look at it over the years, the type of loans that they service have not changed much and they have not deviated from their core competency.

To generalize it simply, there is an old saying regarding banks involving the 3 - 6 - 3 rule. Take money at 3%, lend it out at 6%, and be at the golf course at 3pm. Obviously this has changed in the recent years but the core idea is the same. Banks traditionally take money from you at low interest rates (just look at how much you get per FD) and loan it out at much higher interest rates. So that gives you an idea of how a bank generates its income.

Bear in mind this is simplification of the process and you should read up further if you find it interesting.

I like the traditional banking business simply because its so resilient and profitable. Banking is going to be around in the next 1, 3, 5 years as its a necessary service that people need to tap into. We look into values like growth in deposits and the growth in the loan book to see whether the banks are able to sustain this growth.

While book value does not necessarily equate to intrinsic value, in this case we use it as a rough approximation to see how a financial institution has performed over time. Of course it goes without saying that looking at book value alone is a sure way to disaster.

With regards to banks, earnings have been roughly stable in light of the past 5 years. Banks have a slightly cyclical nature to them, and they don't function like normal companies. You will see banks taking on loans of lesser quality (2006 - 2007) during boom times and than writing off these non-performing loans (2008 - 2010) when things turn sour. So in that sense, investing in a bank requires an understanding of how they work.

With regards to the dividend yield, I covered in it one of my slides. The gist is that HLF earns far more than it pays out in dividends giving it a good buffer region. I also look at its financial performance over 2008 - 2009 to give me a good gauge.

Finally, while I use book value as an approximation for the benefits of illustration, the ability of the bank to generate cash is the most important aspect. In that sense, the ability of a bank to generate cash is tied closely to its assets.

Historically, banks shouldn't have a problem at least generating a 1% Return on Assets so that gives you a rough idea of the earnings power.

I guess what I like about HLF most is that its very conservatively financed. Looking at their history, they have't deviated much from their core competency in terms of loans. They took the write-downs to their bad loans in 2008 - 2010 and you can see charge offs for bad loans decreasing quarter by quarter. So in my view, there's no rationale reason for HLF to be trading at least liquidation value i.e. book value.

(20-12-2011, 07:30 AM)Musicwhiz Wrote:
(20-12-2011, 12:36 AM)juno.tay Wrote: I go into greater detail in my post. Do let me know what you think.

What is the Company's main business? How does it derive its revenue, and what constitutes the largest portion of it? You did not mention this in your analysis. In the event of a downturn, what is the likelihood of maintaining its revenue/profit since it is in the lending business?

Earnings do not seem very stable from the 5-year history, with fluctuations during 2008. Though dividend has been rising, you did not provide cash flow analysis numbers to support the conclusion of a "hefty" 5% dividend. Can this be maintained and where is the cash coming from?

Book value can be very deceptive and should not be taken as "intrinsic value". I note that these two terms are used somewhat interchangeably in the analysis. Discount to book may not necessarily indicate a bargain, and market price may or may not rise to bridge the "gap". It would depend on how assets are valued on the Balance Sheet in the first place, and one should also check for potential impairments to asset values which may have been recorded on a historical cost basis.

I also think P/B ratio can be misleading, since book value itself is not an accurate measure. For myself, I prefer the use of either PER (for companies with more stable/predictable earnings) or dividend yield (if cash flows are stable and consistent).

Just my 2-cents.

Reply
#4
(20-12-2011, 07:30 AM)Musicwhiz Wrote: Book value can be very deceptive and should not be taken as "intrinsic value". I note that these two terms are used somewhat interchangeably in the analysis. Discount to book may not necessarily indicate a bargain, and market price may or may not rise to bridge the "gap". It would depend on how assets are valued on the Balance Sheet in the first place, and one should also check for potential impairments to asset values which may have been recorded on a historical cost basis.

I also think P/B ratio can be misleading, since book value itself is not an accurate measure.


I believe MAS requires banks and finance companies to present their lending as realistically as possible. There are general provisioning for the entire loan portfolio and specific provisioning for those loans that may become problematic.
During turbulent times, finance companies should fare better than banks as their loans are predominately secured.
That said, finance companies are facing headwinds; they can't lead in foreign currencies and SMEs (which are their traditional clients) are turning to banks as they venture overseas.
Not sure the loan portfolio and branch network of a finance company are of value to the likes of Hong Leong Bank, MayBank or Standard Chartered Bank. There are recurring talks of banks interesting in Hong Leong Finance.
Reply
#5
Thanks for the explanation!

Just a few items to clarify - what is the net interest margin for HL Finance? Can this be sustained in a downturn?

Also, what is their % of NPL during bad years? Do you forsee this increasing as a result of (possible) bad loans relating to the property sector because of the recent cooling measures?

Finally, what is the P/B and discount to NAV for HL Finance's competitors? If larger and more established competitors also trade at a significant discount to book value (defined as probably >30%), then it stands to reason that there may be a reason for such a discount.

Regards Smile
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
Reply
#6
Hey there!

Well, their NPL Loans Ratio (%) has been relatively low over the years (2.5-3%) expect in 2009 where it spiked up to 3.1%. However, that's back to 1.5% as bad loans get written off and credit quality improves.

Net interest margin has tracked pretty close in the region of 2 - 2.5% over the years. I don't foresee this to be much of a problem. Also bear in mind that interest rates are artificially low for a multitude of reasons.

Regarding the the possible bad loans to the property sector, its anyone's guess on whats going to happen. I am neutral to bearish on the current property sector in Singapore. I view the cooling measures in both Singapore and China in a good light as the relevant authorities took a potential problem and pricked it before it got much worst.. Just look at the USA and UK to see what happens when free markets take over.

However, with that in mind, its impossible to say whether property prices are simply going to meander over the years (lost decade for properties?) or trend downward in a significant measure.

However, back to the main point, if the global economy deteriorates and Singapore goes down with in, there's no doubt that there will be write offs in the coming years. Invariably, that's part of the banking cycle that one has to come to terms with when one invests in banks. To me, what's more important is that the bank is not over-leveraged and has the capital to absorb the losses. My advice when looking at banks would be to see how they performed as a whole during 2008 - 2010.

Paradoxically, such write offs often lead to higher credit quality over the coming years as lending standards become stricter, which eventually leads to banks becoming more profitable again. So in a way, it balances out over the years.

Historically, the large Singapore banks have traded at a premium to book value (1.5x - 2.0x) though they are trading at around book value. However, they are different breeds of banks so it's hard to draw a meaningful comparison. The closest type of financial institution is SING INVESTMENTS & FINANCE LTD which trades quite closely. However, in my opinion, the quality of HLF far exceeds that of Sing Invs.


Reply
#7
Juno.Tay

Do you happen to know the factors contributing to the loan growth by HLF:

As at Loans ($ billion)
31 Dec 2010 6.4
31 Mar 2011 6.6
30 Jun 2011 6.8
30 Sep 2011 7.2

The company did not explain at all.

The loan books of the other two finance companies, Sing Investment and Singapura Finance, are stagnant.
Thanks.
Reply
#8
if you back tracked to 1997, 2000, 2003, 2005, you would realize that after every crisis, HL Fin only becomes stronger and more profitable.

The Kweks are really good businessmen.
Reply
#9
You can find it under the Analysis of Gross loan Portfolio in the footnotes under the annual reports. They provide a breakdown of the % of loans they make. Loan growth was essentially driven by housing loans secured by property under finance.

More information on NPLs can also be found in the footnotes there.

Quote:Juno.Tay

Do you happen to know the factors contributing to the loan growth by HLF:

As at Loans ($ billion)
31 Dec 2010 6.4
31 Mar 2011 6.6
30 Jun 2011 6.8
30 Sep 2011 7.2

The company did not explain at all.

The loan books of the other two finance companies, Sing Investment and Singapura Finance, are stagnant.
Thanks.
Reply
#10
if it breaks down property loan by individual and corporate, it would be much better.
Reply


Forum Jump:


Users browsing this thread: 2 Guest(s)