HLFin – Lim and Tan

DBS‘ 17-cent drop yesterday to $13.36, and HONG LEONG FINANCE‘s 10-cent gain in 2 days to $2.40 is interesting.

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Media on both sides of the Causeway reported that a quid pro quo arrangement is being looked into by the 2 governments.

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The general view is that DBS will at last be able to “enter” Malaysia, either on its own or via an acquisition (reason for the price drop?).

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Malaysian banks will also be able to upgrade their limited licence in Singapore. (Malayan Bank is the only Malaysian bank with a qualifying full bank licence – allowed 25 service locations.)

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Another possible candidate for some consideration, we like to believe, is HLF under Kwek Leng Beng‘s chairmanship. A merger with Hong Leong Bank Sdn Bhd, controlled by his cousin brother Tan Sri Quek Leng Chan would make eminent sense.

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HLF has severely lagged the banks (see attachment below), which we would attribute to its unsteady dividend policy. It will get a significant boost.

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We are upgrading HLF to a BUY, largely because of its underperformance. A maintained dividend at 2010’s 12 cents would give a yield of 5%.