Is HLBANK/HLFG Really That Giam Siap?

I always like to ask my friends which bank stocks they would buy in Malaysia. Most of the time, the answers are the same: Maybank, Public Bank, CIMB, or RHB.

Then I ask, “Eh, how about Hong Leong Bank (HLBANK)?” Straight away, the comments come:

• Aiya, the boss too giam siap lah (means stingy in Hokkien dialect).
• Wah, price so high somemore — around RM19+. One biji (1 biji = 100 shares) already nearly RM1,900 leh! (typical retail mindset).

So I push further: “Then would you consider Hong Leong Financial Group (HLFG)?”

They just laugh and say: “HLFG? Even more giam siap than HLBANK!”

I believe most retail investors share the same mindset as my friends à HLBANK and HLFG are never on their list of investment choices. The typical reasons? Low dividend payout ratio and low dividend yield.

For retail investors (and even some fund managers), the priority is securing a steady, high-dividend income stream. That’s why when it comes to banking stocks, they naturally prefer banks with higher dividend yields, while bank asset quality often becomes a secondary concern.

 

But has anyone stopped to wonder why HLBANK/HLFG pays out relatively lower dividends compared to other banks? Is it really because the boss is stingy and doesn’t want to share profits with minority shareholders as my friends like to claim? If that’s true, then why does the very same boss, who controls HLBANK/HLFG, allow such high dividends in other of his/her companies like Hong Leong Industries (HLIND)? For reference, HLIND’s dividend payout was above 56 % since FY 2020 (reaching 87% in FY2024, including the special dividend).

 

To understand why HLBANK gives a relatively low dividend, perhaps it is good to look at a key capital ratio in banking industry, i.e. the CET-1 ratio, defined as:

 

CET-1 ratio = CET-1 capital / Risk-Weighted Assets (RWA)

 

Simply put, a higher CET-1 ratio means the bank has a stronger capital buffer and better ability to withstand an economic crisis. Retained earnings form part of CET-1 capital, and these are calculated after deducting dividends from net profit.

 

Now, what about Risk-Weighted Assets (RWA)? In simple terms, they represent the loans disbursed to customers, adjusted for their riskiness. Since lending always carries the risk of default, banks must hold sufficient capital against these loans.

 

In Malaysia, banks are required by BNM to maintain a minimum CET-1 ratio of 7.0% (4.5% minimum + 2.5% Capital Conservation Buffer). Put another way, a higher CET-1 ratio means the bank has more cushion, either by keeping more capital on hand or by controlling the size of its RWA (lending less).

 

Good news: All Malaysia banks are well above the regulatory requirement of BNM as shown in Table 1 below. Our banks are indeed well capitalized.

 

But how exactly does dividend payout tie in with the CET-1 ratio? Well, BNM requires banks to maintain at least 7%. If a bank is currently sitting at, say, 15% (almost double the requirement), it means the bank can afford to pay out more dividends. Of course, that reduces retained earnings → lowers CET-1 capital → and brings down the CET-1 ratio. But even then, the ratio would still be comfortably above BNM’s minimum, right?

 

Let us have a look in the CET-1 ratio on several banks in Malaysia (extracted from their 2024/2025 Annual Report) shown in Table 1 below:

Table 1: Key metrics for Malaysian banks (2024/2025)

RHB Bank has the highest CET-1 ratio and hence it could afford to declare a dividend payout of 60%, which is amazing. Meanwhile, Alliance Bank has the lowest CET-1 ratio, which could be attributed to the double-digit loan growth of 12% in 2024. Still, it declared a dividend payout of 40%, which is quite impressive. However, to preserve the CET-1 ratio at a comfortable level, Alliance Bank would need additional capital. This may be the reason why the Bank recently offered a rights issue to its shareholders.

 

How about Hong Leong Bank (HLBANK)? Its loan growth looks solid at 7.3% in FY2024, and yet its bad loans (GIL ratio) are among the lowest in the industry. The only catch is its CET-1 ratio — at 13.3%, which is slightly below the bigger banks.

 

Why lower? Mainly because HLBANK grew loans faster (which increases RWA) than its larger peers, plus it injected capital into its associate, i.e., Bank of Chengdu (BoCD) in China (note: HLBANK holds 17.8% stake in BoCD). To keep its CET-1 ratio at a relatively comfortable level, the bank has to retain more earnings, rather than paying more dividends from the net profit. That’s why its dividend payout is only around 33%, much lower than its peers.

 

The good news is, under the new Basel rules, the capital ratios of certain banks are expected to look stronger, and HLBANK’s management has hinted they may raise dividend payout closer to peers in the future. The new Basel rules would concentrate on the calculation of RWA, as the Basel Committee highlighted a worrying degree of variability in banks’ calculation of their RWA. The new Basel framework aims to restore credibility in those calculations by constraining banks’ use of internal risk models à some internal risk models give banks the most freedom to estimate their credit risk of RWA, often yielding a much lower risk (hence CET-1 ratio rises) than the regulator’s standard model. Hence, some banks that rely heavily on “internal models” to calculate their credit risk may see changes to their capital ratios once the new rules kick in, and that could affect their future dividends payout.

 

How about Hong Leong Financial Group (HLFG)? HLFG is essentially a holding company — it owns shares in Hong Leong Bank (HLBANK), Hong Leong Capital (HLCAP), and HLA Holdings (insurance arm). Naturally, its dividend payout depends on what it receives from these subsidiaries.

Table 2: Total dividends contributed by HLFG subsidiaries in FY 2024 (in RM)

Looking at FY2024 (see Table 2), HLFG declared total dividends of about RM620 million, which means it distributed almost 65% of the dividends it received to shareholders. The tricky part is HLA Holdings, which is unlisted, so its dividend contribution isn’t publicly available. But if we assume HLA Holdings paid out 50% of its FY2024 profit after tax (RM511m) as dividends to HLFG, then the effective payout to HLFG shareholders still comes up to around 51% of total dividends received from its subsidiaries.

 

So, is HLFG really “giam siap” and unwilling to share profits with minority shareholders?

Honestly, it depends on how you look at it. Some investors might only consider HLFG generous if it paid out 100% of what it receives. But in practice, retaining part of the earnings/dividends gives the group more flexibility to reinvest, support subsidiaries, and preserve capital buffers.

Magni Tech Has a Bullish Breakout

Background
Few weeks back, I have made some quick analysis on MAGNI (please refer to my previous post in June 2012), a manufacturer of sportswear and it has a business partnership with one of the great companies in sportswear, NIKE.

Technical Analysis
As seen from the chart below (till 14 June 2012), we are able to spot several bullish patterns on the share price. There is a bullish breakout on its Bollinger Band. Also, other indicators such as MACD and RSI are turning bullish.

Figure 1: Trading price of MAGNI (souce: www.tradesignum.com).

It is worth to mention here that one of the major shareholders is accumulating MAGNI shares since early of 2012.


Conclusion
Based on the positive views from both the technical & fundamental analysis on MAGNI, this stock is worth for us to have a closer look.

Magni Tech - Another Undervalued Stock

Introduction
Magni-Tech is principally involved in manufacturing of garments. With more than 34 years of experience in the apparel industry, Magni has built a good reputation in this industry and manufactured high-quality and sophisticated woven sportswear. The customers are mainly from USA, Europe, Singapore, Canada, Australia and China.


Fundamental Analysis
You may refer to their financial highlights in this webpage:
http://www.magni-tech.com.my/?mod=pages&function=show_page&page_id=71

Net profit has increased from year to year since 2007. On year 2011, this company has no borrowings and stood at a cash position of RM 57mil on Jan 2012. Undoubedly, its finacial position is very healthy.

Conclusion
Its divident yield is ~5%, a relatively attractive figure. Therefore, this company is very attractive for long term investment.

Coastal Contracts Berhad - A Fundamentally Strong Counter- Is It a Good Buy?

Introduction:
I am sure most of you aware on this counter, a relatively low profile but fundamentally strong company, which is principally involved in shipbuilding.

Fundamental Analysis:
Since year 2007, Coastal managed to achieve a ROE of more than 30%, which is a remarkable figure. Profit margin of more than 23% is maintained, showing that their management is very competent in controlling the expenses to ensure maximum return to the shareholders. Also, it is worth to mention here that Coastal is able to achieve uninterrupted increasing trend of net profit from year 2002 to year 2010.

On the other hand, Coastal has just announced its 1Q 2012 result and it is simply a BIG disappointment for  investors. Profit margin has dropped signficiantly to 13%, owing to relatively low margin derived from the sales to certain "repeat" customers. Would it imply, in other words, Coastal is unable to get new customers and the management has to offer discounts in order to retain their old customers?

Let us have a look on the advance payments received by Coastal :

2011 (320 mil),
2010 (422 mil),
2009 (524 mil),
2008 (429 mil),
2007 (199mil),
2006 (91 mil).

As seen, since year 2009, the advance payments has been depleting, signifying that its order book is depleting, an unhealthy sign for sure.

Technical Analysis:

Coastal has been traded below L1 line and it is showing that Coastal share price has entered into the bearish mode.

The question is: shall we catch the falling knife?


Conclusion:

By considering its current EPS which is merely 6.37 cts (annualise estimated EPS of 25.6 cts), the current price (RM1.74, closing price at 1st June 2012)  is indeed attractive (PER = 6.8). However, this counter has been traded to a historically low PER of 3 - 4 (a very undemanding yet fundamentally strong counter). Based on this, it is not a wise decision to purchase this counter for the time being. Alternatively, you may buy in stages and keep it for long term.

Willowglen May Have a Bullish Breakout - Can It be True?

Introduction:

Willowglen is primarily involved in developing SCADA system in the transportation, oil and gas, water and waste-water industries, security of buidings/high-end condominiums. The Group's revenue is principally contributed by its Singapore operation (80%), while the balance is coming from Malaysia. Currently the Group is exploring business oppurtunity in Indonesia. On the 22nd of May 2012, the Group has secured a contract amount RM 18mil which is expected to contribute positively to the EPS on FY2012 to FY2014.

Technical Analysis:

Indeed, prior to the announcement of the award of new contract, Willowglen share price has undergone a Bollinger breakup on the 21st of May 2012. From the volume plot, we are able to observe that the number of transactions has been increasing few days ago, which has surpassed its 40 day MA line. This is indeed a buying signal for this stock.

Figure 1: Share price history of Willow (source: www.tradesignum.com)

Fundamental Analysis:

The financial position of the Group is very healthy, with its current ratio stood at 10.25 at FY2011 and no borrowings.

Let's us have a look on the Group's history in terms of revenue from Table 1:

Table 1: Group earning history.

	2011	2010	2009
Revenue (mil)	52.2	54.5	62.0
Net Profit (mil)	8.5	9.3	12.6
Profit Margin(%)	16.3	17.1	20.3
Inventory (mil)	1.3	1.2
EPS (RM)	0.034	0.038
PER	8.7	9.3

As seen, the Group's revenue started to decline from FY2009 to FY2011. Furthermore, its profit margin is downtrending which translates into declining of net profit. The declination of profit is mainly due to lower turnover from Malaysia operation and higher R&D costs. Its PER is consistent throughout all the years (i.e. ~ 9.0).

Willow has published its 4Q2011 result in past few months. The EPS is RM0.0151, which is quite a promising quarter for Willow. If we assume that Willow can make consistent profit in FY2012, the anticipated EPS throughout the year would be RM0.06 (2x EPS in FY2011). However, is Willow able to sustain this attractive EPS on 4Q2011 with its current project in hand?

Willow is going to publish its quarter result 1Q2012 soon. Let's us have a close look on it.

Muar Ban Lee Berhad - an attractive and undervalued counter

Introduction:

Muar Ban Lee Group (MBL) is a manufacturer of oil seed crushing machinery. MBL has successfully completed many oil seed crushing plants for major plantations and oil mills throughout the world. For further details, one may visit its webpage: www.mbl.com.


Fundamental Analysis:

Table 1: Income data of MBL.

	2011	2010	2009	2008	2007	2006	2005
Revenue (mil)	55.1	44.1	25.4	41.4	40.9	34.2	24.1
Net Profit (mil)	12.2	7.2	8.6	8.0	8.0	6.7	4.1
Profitability (%)	22.2	16.4	33.9	19.3	19.5	19.6	17.2
PER	4.7	7.8	6.7
Total Borrowings (mil)	0	0	0.2

From Table 1, MBL can be considered as a fundamentally sound company that deserve further attention. Its net profit has been increasing steadily from 2005 to 2011, albeit experiencing a slight drop in year 2010. Furthermore, the profit margin of about 20%-30% and zero borrowings are another attractive features that deserve serious attention into this stock.

Technical Analysis:

Figure 1: Historical price of MBL (source: www.tradesignum.com)

The stock is currently traded above its 20day MA line. Currently, the width of the Bollinger Band is experiencing marginal changes, indicating that the stock is experiencing a consolidation mode. Its immediate support is ~ RM 0.85.

Recommendation:

MBL is going to release its 1Q 2012 result soon. Considering its current PER (~7.0), this stock is very attractive for long term investment. However, by considering the current outlook of the global financial market, we should not trade heavily on this stock unless its PER has reached to its historially low value (<5). Let's wait for its 1Q 2012 result and we shall come to a more solid conclusion on the investment plan on this counter.

Plenitude Berhad posts a weak 3Q 2012 report

Company Background:
Plenitude Berhad is primarily involved in property development and listed in KLSE on year 2003.

Fundamental Analysis:
Since its listing on year 2003, its net profit has increased steadily from RM27.8mil (FY 2003) to RM 89.6mil (FY 2011). Even during the economic downturn on year 2008, Plenitude is able to record a profit of RM 80mil in FY2009, marginally higher than that in FY 2008 (RM 79mil) although the revenue drops from RM 348mil to RM 283mil.

Its trend of net profit attributed to shareholder can be seen from Figure 1:

 Figure 1: Net profit attributed to shareholder of Plenitude Berhad from year 1999 to year 2011.

As illustrated from Figure 1, Plenitude Berhad has demonstrated its capability in generating an uptrending trend of net profit from FY2003 to FY2011. Its relatively defensive business strategy as compared to other property developers in ensuring low level of borrowings (Interest / Operating Profit < 0.5% since its listing) is perhaps one of the key factors in keeping its profitability (Net Profit/Revenue) at a comfortable level (from 22% to 28%).

On the other hand, it is worth to have a look on its trend of revenue, as reported in Figure 2:

Figure 2: Total revenue of Plenitude Berhad from year 2004 to year 2011.

It can be observed that after the economic crisis happened in year 2008, Plenitude has been experiencing a wiggling trend of revenue generation. Although Plenitude is able to maintain its uptrending trend of net profit (see Figure 1) while experiencing an uneven trend of revenue, this is not a good sign and we shall be cautious on it. Let us have a look on its inventory level on year 2003 - 2011 in Figure 3:

Figure 3: Inventory level of Plenitude Berhad from year 2004 to year 2011.

Plenitude has a maximum inventory level of 18 mil (FY 2008), and it is deteriorating since then. This is not a healthy sign in maintaining its growing momentum of net profit. As quoted from its latest quarterly report (3Q 2012), the management has highlighted that no further revenue to be recognized arising from the completion of Batu Ferringhi Condominium and Phase 14 Double Storey Terrace Houses in Taman Desa Tebrau. Furthermore, the management anticipates a cautious outlook ahead due to the uncertainty in global economy.

Considering its PER on yearly basis, it can be summarised in the following table, Table 1. The PER is derived based on the closing share price at the end of the year.

Table 1: PER of Plenitude Berhad

	Year	2011	2010	2009	2008	2007	2006	2005	2004
	PER	5.9	6.9	4.5	3.1	6.3	3.9	3.4	3.9

As seen from Table 1, the share of Plenitude seems to be undermanding all the while, with its maximum PER is only 6.9 on year 2010. By assuming its net profit on 4Q 2012 to be comparable of that on 3Q 2012, its net profit on year 2012 would be around RM 64 mil which translates into EPS of RM0.23. By assuming that Plenitude is able to enjoy its maximum historical PER (i.e. 6.9) on year 2012, the share price of Plenitude would be RM 1.59.


Technical Analysis
As seen from Figure 4, the share price has been traded below its moving average line and meanwhile the width of the Bollinger Band is widening. This indicates that there is a big possibility of weakening of share price in the near future.

Figure 4: Bollinger band of Plenitude's share price. (source: www.tradesignum.com)

Suggestion
Undoubtedly, Plenitude Berhad is a fundamentally sound company proven by its strong balance sheet. However, by considering its possible weakening of net profit in the near future and bad technical outlook, we shall take a cautious outlook on this stock.