Hong Leong Finance

[weijian]

I think you may be somewhat abusing the phrase "asymmetric bet" here. I believe what Nassim Taleb was referring to something like you structure your "bet" such that if you win the bet, you make a small amount, if you lose the bet, you lose a large amount. The probability of a win being much greater than a lose". This is the classic description of the tail risk seen in the GFC. e.g. AIG insured a pile of AAA rated mortgage securities and received nice premiums for a few years until it all blew up.

In this case, I believe HLF does not have the growth potential of its big brothers. But neither (I hope) does it have the potential for a big loss event either. So its fairly symmetric and less risky (read volatile asset price). Since 2005, DBS max price was about $23 and min price $7.5 (at the depth of the GFC). HLF ranged from $4.2 to $1.7. The shapes of the charts are not dissimilar but the DBS variation in percentage terms is greater, not considering dividends yet (which I believe HLF is slightly better). Also, as I mentioned before, in terms of monitoring HLF, I mainly would have to look at the risk of an extreme property market and/or an extreme credit market - anything less, I would shrug off as "business cycle". I don't have to worry that HLF has done some risky bet, over exposed to some O&G company, has sold structured notes that it would get censured on, engaged in an over optimistic M&A, has exposure to some other country's credit bubble etc.

https://sg.finance.yahoo.com/q/bc?s=D05....&z=l&q=l&c=
https://sg.finance.yahoo.com/q/bc?s=S41.SI&t=my

@tanjm,
I have to admit I did not follow strictly the definition of "asymmetric bet" by NT. Maybe i shouldn't have typed out his name at all, since his name does seem to generate much "controversy on VB". Nonetheless, i apologize for using the wrong references, and hence delivering the wrong message across on an online forum that only communicates itself through words.

My usage of the word "asymmetric bet" was used in reference if i were to invest in HLF, versus investing in DBS. So, DBS has a larger capacity to ride the upturn than HLF due to it larger operating leverage from lower cost of funds. The bigger variation you observe or price gains, might be a manifestation of that. On the downside, while HLF is supported by a tycoon, it cannot be compared to that of the support by the Gov, of DBS. (d.o.g had kindly once listed out his past observations of the Gov's support for DBS in the last 20years during each crisis). So my asymmetry simply refers to the differences when i observe between HLF and DBS as a pair.

[tanjm]

@tanjm,
I have to admit I did not follow strictly the definition of "asymmetric bet" by NT. Maybe i shouldn't have typed out his name at all, since his name does seem to generate much "controversy on VB". Nonetheless, i apologize for using the wrong references, and hence delivering the wrong message across on an online forum that only communicates itself through words.

My usage of the word "asymmetric bet" was used in reference if i were to invest in HLF, versus investing in DBS. So, DBS has a larger capacity to ride the upturn than HLF due to it larger operating leverage from lower cost of funds. The bigger variation you observe or price gains, might be a manifestation of that. On the downside, while HLF is supported by a tycoon, it cannot be compared to that of the support by the Gov, of DBS. (d.o.g had kindly once listed out his past observations of the Gov's support for DBS in the last 20years during each crisis). So my asymmetry simply refers to the differences when i observe between HLF and DBS as a pair.

I have a slight propensity to be pedantic, so forgive me too for my remark 8-). Having said that, this forum has a high signal to noise ratio (predominantly conveyed by words as you said), so I'd like to keep it that way.

I have DBS as I said - both directly and indirectly. So the question is not whether I like DBS or not. The question is whether, given a reluctance to spend too much on DBS, and a shortage of relatively safe targets in SGD, is HLF a fair diversification choice? Literally, a buy and sleep type choice without excessive homework or monitoring. I tend to think it is, especially at the current price points.

If you are talking about relative value, I note that DBS started its current run from a low of $13 in early 2016 (I bought my DBS at that time). It is now almost $19. HLF is still languishing near its lows and may be lagging DBS fundamentals. I realize someone said HLF sounds like a "value trap" 8-), and it may well be, but I think a $2.2 price point is a decent price for someone who (A) doesn't watch for significant share price growth (though he doesn't mind if it does haha), (B) watches his downside carefully, © needs a diversifier from the STI, (D) doesn't want to do a lot of homework, and (E) appreciates dividends. HLFs dividends have been decent in the last 10 years except for the GFC blip in 2009.

[YMPL]

Wonderful posts on the topic. Thank you.

@ tanjm, I looked further into the HLF, here are the 5 years data

Cost-to-income (2011-2015):  46% 48% 50% 52% 53%
EPS (2011-2015)               :  22.7 17.6 15.9 14.2 16.4
DPS (2011-2015)              :  12.0 12.0 12.0 10.0 11.0

Cost is getting higher, EPS is dropping (a slight rebound in 2015?), and DPS is probably going in the same trend. It is definitely not my choice for diversification, especially so after DBS. It is not a stock which will make you sleepless at night, but definitely not a buy-and-ignore type to me. It is more so, with "technology disruption" looming.

Probably you have insight that I don't have.

(not vested, but learning actively on banking sector)

[tanjm]

Wonderful posts on the topic. Thank you.

@ tanjm, I looked further into the HLF, here are the 5 years data

Cost-to-income (2011-2015):  46% 48% 50% 52% 53%
EPS (2011-2015)               :  22.7 17.6 15.9 14.2 16.4
DPS (2011-2015)              :  12.0 12.0 12.0 10.0 11.0

Cost is getting higher, EPS is dropping (a slight rebound in 2015?), and DPS is probably going in the same trend. It is definitely not my choice for diversification, especially so after DBS. It is not a stock which will make you sleepless at night, but definitely not a buy-and-ignore type to me. It is more so, with "technology disruption" looming.

Probably you have insight that I don't have.

(not vested, but learning actively on banking sector)

I don't claim to know it well - hence my coming to this forum in the first place!

In 2011, HLF wrote back $26.8 million of its NPL write off it made in previous years - that's about 6 cents per share, and made a fresh additional NPL provision of $9.3 million in 2012. Unfortunately, the accounting of the NPL provisions tend to make noise in the P&L.

In any case, I already stipulated that DBS is "better" than HLF (price considerations pending).

But you did bring up one fresh point. "Technology Disruption". By that, I suppose is meant that the FinTech revolution would allow ultimate sources of capital (e.g. savers) to lend directly to capital consumers (i.e. home owners, SMEs etc). I actually am of the personal opinion that this kind of disintermediation will be much later coming than other kinds of disintermediation (for example automation of trade finance, peer to peer payments etc - all the things that big banks like DBS are into). I think you can view HLFs core competency as "Know your customer". If there is one thing that the global financial crisis has taught us : there is no substitute for knowing your customer as a core risk management skill.

But yes, technology will change the Finance industry and potential laggards like HLF may well be impacted in some ways.

[YMPL]

I don't claim to know it well - hence my coming to this forum in the first place!

In 2011, HLF wrote back $26.8 million of its NPL write off it made in previous years - that's about 6 cents per share, and made a fresh additional NPL provision of $9.3 million in 2012. Unfortunately, the accounting of the NPL provisions tend to make noise in the P&L.

In any case, I already stipulated that DBS is "better" than HLF (price considerations pending).

But you did bring up one fresh point. "Technology Disruption". By that, I suppose is meant that the FinTech revolution would allow ultimate sources of capital (e.g. savers) to lend directly to capital consumers (i.e. home owners, SMEs etc). I actually am of the personal opinion that this kind of disintermediation will be much later coming than other kinds of disintermediation (for example automation of trade finance, peer to peer payments etc - all the things that big banks like DBS are into). I think you can view HLFs core competency as "Know your customer". If there is one thing that the global financial crisis has taught us : there is no substitute for knowing your customer as a core risk management skill.

But yes, technology will change the Finance industry and potential laggards like HLF may well be impacted in some ways.

Thank for sharing.

If I am in your shoes, what will I do instead? I am sharing it, as an alternative view in this thread.

I will pick UOB instead for diversification, for the following reasons
- UOB was more risk-averse among the big-3. I believe it will remain so after the new successor. The loan distribution by industrial makes OUB a good candidate to diversify, after DBS. HFL isn't considered because of the relatively much smaller size.
- I have noted HFL's strength in "know your customer". I usually take note on similar "claim" and find out how it will benefit investors. I noticed that the NPL of HLF is around 0.7% vs. 1+% of peers but with a higher cost-in-income ratio 53% vs 45%+-.  The ROE is also much lower at 4% vs. 10%+ of peers. I don't take it as "strength" from a perspective of an investor (i.e. me)

Fintech is an enabler to know your customer better, with much lower cost. It is using unconventional approach and probably not the same as HFL's. It is not there yet but coming. I don't know when, and the final form of delivery, but I am sure it will make a significant difference in next few years. Fintech is also focusing on reducing back-office expenses, which will reduce further on the cost-to-income ratio.

I am observing the trend. Bigger banks are actively patenting on Fintech. It will further marginalize smaller player like HLF as far as Fintech is concerned in the near future.

(not vested in any bank, nor HLF)

[tanjm]

Thank for sharing.

hIf I am in your shoes, what will I do instead? I am sharing it, as an alternative view in this thread.

I will pick UOB instead for diversification, for the following reasons
- UOB was more risk-averse among the big-3. I believe it will remain so after the new successor. The loan distribution by industrial makes OUB a good candidate to diversify, after DBS. HFL isn't considered because of the relatively much smaller size.
- I have noted HFL's strength in "know your customer". I usually take note on similar "claim" and find out how it will benefit investors. I noticed that the NPL of HLF is around 0.7% vs. 1+% of peers but with a higher cost-in-income ratio 53% vs 45%+-.  The ROE is also much lower at 4% vs. 10%+ of peers. I don't take it as "strength" from a perspective of an investor (i.e. me)

Fintech is an enabler to know your customer better, with much lower cost. It is using unconventional approach and probably not the same as HFL's. It is not there yet but coming. I don't know when, and the final form of delivery, but I am sure it will make a significant difference in next few years. Fintech is also focusing on reducing back-office expenses, which will reduce further on the cost-to-income ratio.

I am observing the trend. Bigger banks are actively patenting on Fintech. It will further marginalize smaller player like HLF as far as Fintech is concerned in the near future.

(not vested in any bank, nor HLF)

I have no answers yet to this issue of tech disruption. For UOB, I also have STI ETF and that of course includes UOB.

[Stephen]

1)Is there are reason why someone would go to HLF to deposit cash instead of any of the major banks?

I feel its weird as the interest rates of HLF isnt as great as the major banks. Besides, its inconvenient too as HLF doesnt have ATMs or branches or ibanking. I can only attribute it to the older generation who are not internet savvy and do not have information at hand.


2) Why would anyone borrow from HLF instead of the other major banks?

Is it possible that HLF are more lax in their lending criteria. But as pointed out above, their NPL is better.


I can't wrap my head around the above 2 issues . I actually stationed myself at HLF and Singapura Finance branches for many times just to check it out and the flow isnt there and somehow, they always seem to be close!

[BlueKelah]

1)Is there are reason why someone would go to HLF to deposit cash instead of any of the major banks?

I feel its weird as the interest rates of HLF isnt as great as the major banks. Besides, its inconvenient too as HLF doesnt have ATMs or branches or ibanking. I can only attribute it to the older generation who are not internet savvy and do not have information at hand.


2) Why would anyone borrow from HLF instead of the other major banks?

Is it possible that HLF are more lax in their lending criteria. But as pointed out above, their NPL is better.


I can't wrap my head around the above 2 issues . I actually stationed myself at HLF and Singapura Finance branches for many times just to check it out and the flow isnt there and somehow, they always seem to be close!

Good observations and groundwork. So just dun buy HLF loh.

To me local big banks is just like local big telcos. Market good all go up, market bad all go down. No need to waste time try to decide which to pick. Can't decide just buy all loh in equal allocation make it own banking index, hehe..

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[specuvestor]

In the property boom time of 1993-1996 HLF went up 142% vs DBS 6%
2001-2007, HLF went up 392% vs DBS 32%
2008-2014 HLF up 58% vs DBS 206%

HLF fixed deposit rate is higher than DBS. Finance Companies market segment is different from Banks. Just like why people trade with POEMS rather than DBS Vickers. Their main focus is mortgage because they are major owned by Kwek

[cyclone]

Changes to Finance Company Regulations to Enhance their Ability to Finance SMEs
...
3. The limit on a finance company’s aggregate uncollateralised business loans will be raised to up to 25% of its capital funds, from the current 10%. The limit on uncollateralised business loans to a single borrower will also be raised to up to 0.5% of capital funds, from the current S$5,000. These changes will better enable finance companies to serve their SME customers, many of whom require unsecured credit for working capital needs.

4. Finance companies will be allowed to offer current account and chequing services to their business customers. They will also be allowed to join electronic payment networks, including Inter-bank GIRO, Fast and Secure Transfers (FAST) and Electronic Funds Transfer at Point of Sale (EFTPOS). These changes will enable finance companies to provide more comprehensive credit and deposit services to SMEs.
...
8. MAS will liberalise its existing policy of not allowing a foreign takeover of a finance company. This will accord finance companies greater flexibility to explore strategic partnerships and innovative business models that can strengthen their SME financing business.

9. Specifically, MAS is prepared to consider an application for a merger or acquisition if the prospective merger partner or acquirer commits to maintaining SME financing as a core business of the finance company. In addition, the merger partner or acquirer must be able to demonstrate expertise in SME financing and present proposals to enhance the finance company’s SME lending activities with new technologies, methodologies or business models.

More details in http://infopub.sgx.com/FileOpen/MAS-Chan...eID=439042