HLFin – DMG

Trading below book value

HLF is trading at an attractively low P/B. We spoke with management recently. Management said their efforts to drive loans have led to a 4Q10 sequential loan increase. Though FY10 net interest margin is under pressure (due to competitive interest rates), we believe further squeeze is quite unlikely – we forecast continued soft SIBOR for at least the next six months, which should help to keep funding costs low. Further FY11 loan growth would drive preprovisioning earnings. Maintain BUY on HLF as valuation remains attractive. Our target price of S$3.61 is pegged to 1.0x 2011 book (7-yr historical P/B is 1.0x).

Loan growth momentum persisted in 4Q10. After the 2.9% 3Q10 QoQ loan expansion, loans grew a further 2.9% in 4Q10. For FY10, loans expanded 2.3%. Management highlighted the challenging car hire-purchase market (with vehicle units sold falling 40% in 2010), and this segment accounts for almost 25% of loan book. However, HLF saw more activities in the SME and housing loan segments.

We forecast 2011 loan growth of 8%. The car hire-purchase portfolio amortises with an average timeframe of 30 months. With unexciting COE numbers, car unit sales – and hence car loans, is seen to be lacklustre. However, the recent rise in car prices will offer some cushioning effect. HLF continues to provide housing mortgages, loans to developers and SMEs.

Expect growth in FY11 pre-provisioning profit. With the benign credit environment, HLF was able to write-back provisions in FY10. We have conservatively assumed that HLF will need to make provisions in FY11 to cater for loan growth. Consequently, our forecast of a growth in FY11 pre-provisioning operating profit will be followed by a decline in FY11 pre-tax profit.

HLFin – DMG

Trading below book value

HLF is trading at an attractively low P/B. We spoke with management recently. Management said their efforts to drive loans have led to a 4Q10 sequential loan increase. Though FY10 net interest margin is under pressure (due to competitive interest rates), we believe further squeeze is quite unlikely – we forecast continued soft SIBOR for at least the next six months, which should help to keep funding costs low. Further FY11 loan growth would drive preprovisioning earnings. Maintain BUY on HLF as valuation remains attractive. Our target price of S$3.61 is pegged to 1.0x 2011 book (7-yr historical P/B is 1.0x).

Loan growth momentum persisted in 4Q10. After the 2.9% 3Q10 QoQ loan expansion, loans grew a further 2.9% in 4Q10. For FY10, loans expanded 2.3%. Management highlighted the challenging car hire-purchase market (with vehicle units sold falling 40% in 2010), and this segment accounts for almost 25% of loan book. However, HLF saw more activities in the SME and housing loan segments.

We forecast 2011 loan growth of 8%. The car hire-purchase portfolio amortises with an average timeframe of 30 months. With unexciting COE numbers, car unit sales – and hence car loans, is seen to be lacklustre. However, the recent rise in car prices will offer some cushioning effect. HLF continues to provide housing mortgages, loans to developers and SMEs.

Expect growth in FY11 pre-provisioning profit. With the benign credit environment, HLF was able to write-back provisions in FY10. We have conservatively assumed that HLF will need to make provisions in FY11 to cater for loan growth. Consequently, our forecast of a growth in FY11 pre-provisioning operating profit will be followed by a decline in FY11 pre-tax profit.

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