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.

[weijian]

So, HLF cannot do value accretive moves like SBB on its highly discount-to-NAV shares. It also cannot replicate what the banks are doing in terms of wealth mgt to improve ROE. I will borrow the late Munger's quirky words here - HLF reminds me of a 1 legged man who signed up for an ass-kicking competition. Maybe that is why there are only 3 participants?

In addition, a quick check on HLF Digital on Google Play store- 5k+ downloads with 20 ratings, where 12 of them gave a "1". This isn't off to a good start. 

Let's just hope Kwek Senior reveals his value accretive moves soon, although based on painful experience, I have to say that "hope" in investing is painful (emotionally and financially)

Minutes of the 65th Annual General Meeting held on 24 April 2025

In line with this strategy, the Company has embarked on a digital transformation roadmap, with Phase 1 of HLF Digital successfully launched in 2024. HLF was encouraged by the strong customer adoption of this digital channel

Shareholder B shared Shareholder A’s concerns on the lackluster performance of HLF’s share price, in spite of the Company’s sterling results for FY 2024. He noted that with a net asset value of $4.70, HLF’s share price had underperformed, trading around $2.50 for the past three years. As the Company was restricted under the FCA to implement a share buyback scheme, he hoped that the Board could explore alternative measures to enhance shareholder value, including the possibility of a bonus issue to shareholders, while maintaining the current dividend rate

In addressing the shareholder’s concern, the Chairman said that whilst the Company’s scope of activities was restricted under the FCA, he reassured shareholders that the Board and Management would do their best to bring the Company forward and enhance shareholder value. He said that currently, there were only three finance companies in Singapore including the Company. He believed that it would take some time for the FCA to be amended. In the meantime, he said that Management would continue to explore various ideas and plans to unlock shareholder value, which plans were currently under review and could not be shared with shareholders at this point.

MoM: https://links.sgx.com/FileOpen/HLF_AGM_2...eID=844962

HLF Digital review on Google Play Store: https://play.google.com/store/apps/detai...tail&hl=en

[Big Toe]

The possibility of Kwek Senior doing value accretive moves under shareholder requests or on his own accord is extremely low.
Their initial attempt and low ratings at digital transformation is expected.

Also, 3 participants in a one legged race is not that bad. All will get a podium finish. HL is undervalued for sure but when and how will in unfold in the future is anyone's guess. Looking back in history, the chances of a good outcome is very high but the waiting time is unknown, likely very very long.