Hong Leong Finance

[weijian]

Post covid-19, HLF is even trading below its pre covid price baseline, while NIM/loan book has recovered somehow to pre-covid levels.

Dividend yield is now ~6%, while discount to book has widen from 60% of NAV to 50% of NAV, mainly because of increasing profitability/retained equity without a share price movement.

Since this discussion started on VB.com, there has been suggestions of a possible M&A and on hindsight, the consensus (there wouldn't be a M&A) was right.

For contrast, the 3 local banks have also enjoyed similar NIM improvements over the last few years and together with a much bigger growth in loan book and re-rating by the market above book value, the 3 local banks (>100% increase in share price) have outperformed HLF (+20% increase in share price, and most of the gains was in early 2017 due to the regulation change) over the last decade.

More often than not, cheap gets cheaper. Expensive gets more expensive. When looking for value, the outliers make money and the baseline doesn't. When looking for growth, the baseline makes you money but the outliers doesn't.

[Shiyi]

Post covid-19, HLF is even trading below its pre covid price baseline, while NIM/loan book has recovered somehow to pre-covid levels.

Dividend yield is now ~6%, while discount to book has widen from 60% of NAV to 50% of NAV, mainly because of increasing profitability/retained equity without a share price movement.

Since this discussion started on VB.com, there has been suggestions of a possible M&A and on hindsight, the consensus (there wouldn't be a M&A) was right.

For contrast, the 3 local banks have also enjoyed similar NIM improvements over the last few years and together with a much bigger growth in loan book and re-rating by the market above book value, the 3 local banks (>100% increase in share price) have outperformed HLF (+20% increase in share price, and most of the gains was in early 2017 due to the regulation change) over the last decade.

More often than not, cheap gets cheaper. Expensive gets more expensive. When looking for value, the outliers make money and the baseline doesn't. When looking for growth, the baseline makes you money but the outliers doesn't.

Weijian,
Can you explain in plain language what you meant for the following:

When looking for value, the outliers make money and the baseline doesn't. When looking for growth, the baseline makes you money but the outliers doesn't.

[weijian]

Weijian,
Can you explain in plain language what you meant for the following:

When looking for value, the outliers make money and the baseline doesn't. When looking for growth, the baseline makes you money but the outliers doesn't.

hi Shiyi,

When looking for value stocks, most are actually value traps ("the baseline") as validated by Mr Market. These value traps either break even barely or lose money. The ones that make real money are the infrequent companies ("the outlier") that are depressed due to temporarily bad news/performance/forced selling, or a successful turnaround, or a change in structure, and many other events that VBs have witnessed over the years. There are more value traps than value buys.

When looking for growth stocks, most growth stocks, especially the market leaders in their own sectors ("the baseline") have already been validated by Mr Market in terms of their moats and management quality. They generally go on to be more successful and make money for the investor. But sometimes when valuation becomes the dominant factor used to look at growth, one often focuses on a "cheaper alternative", ie. the unloved smaller competitor/s to the market leader or the one where valuation hasn't caught up to fundamentals ("the outlier"). More often than not, they continue to lose to the market leader or Mr Market's skepticism is proven right.

For those who are more numerically inclined, I thought this Morgan Stanley's article is pretty good. Just look at exhibit 9 and exhibit 10:

https://www.morganstanley.com/im/publica...rocess.pdf

[ghchua]

Hi weijian,

I think we couldn't just look at outperformance of the 3 local banks over HLF over a period of time and then conclude that the banks are better investments. Ultimately, it depends on each individual and how they have paced their investments into those companies.

The maximum draw down for banks are higher than HLF. DBS for example, can trade between 1x book to 1.5x book or even 2x book when market is bullish. What if one bought DBS at 2x book for growth? Will he be able to do better than a HLF investor who consistently bought the share at 0.5x to 0.6x book for value, while banking in 6%pa yield along the way?

Each investor is wired differently and there are no good or bad stocks. Only good and lousy investors. A good investor can make money on a bad stock, while a lousy investor can also lose money on a good stock.

[weijian]

hi ghchua,

The average 3 local bank investor (eg. buy and hold, or DCA) probably is better off than the outlier HLF investor (who timed his entries nicely). Of course, the outlier 3 local bank investor (ie. the one buying at 2x P/B without position sizing) is probably worst off than the average HLF investor (buy and hold for dividends, or DCA).

I agree each individual is wired differently. But just because been wired differently, doesn't mean we shouldn't modify ourselves in the face of conflicting evidence. It is obvious to me where the better odds are what I am trying to do - see how/where I can make better money by been average.

Of course, nobody knows if/when the 3 local banks will be re-rated below P/B one day. Similarly, the P/B discount for HLF could further widen, just like how Mr Market has re-rated Great Eastern over the last half decade. But if a financial crisis hits and all 3 local banks go below P/B while HLF further increases its P/B discount, no surprises which set of investors lose more money holding on. But when one decides to buy in anticipation of a future bull market, no surprises who has a higher probability of gain too.

[Shiyi]

hi ghchua,

The average 3 local bank investor (eg. buy and hold, or DCA) probably is better off than the outlier HLF investor (who timed his entries nicely). Of course, the outlier 3 local bank investor (ie. the one buying at 2x P/B without position sizing) is probably worst off than the average HLF investor (buy and hold for dividends, or DCA).

I agree each individual is wired differently. But just because been wired differently, doesn't mean we shouldn't modify ourselves in the face of conflicting evidence. It is obvious to me where the better odds are what I am trying to do - see how/where I can make better money by been average.

Of course, nobody knows if/when the 3 local banks will be re-rated below P/B one day. Similarly, the P/B discount for HLF could further widen, just like how Mr Market has re-rated Great Eastern over the last half decade. But if a financial crisis hits and all 3 local banks go below P/B while HLF further increases its P/B discount, no surprises which set of investors lose more money holding on. But when one decides to buy in anticipation of a future bull market, no surprises who has a higher probability of gain too.

Empirically, I agree with ghchua. Bought HLF some 15 years ago @2.98. Have never seen the price back to that level since.  It's been a long wait for the controlling shareholder to unlock the value, if it ever comes.