Sunday, September 09, 2007

Finance Companies: Hong Leong Finance, Singapura Finance, Sing Investments & Finance

Introduction

Previously, I did a comparative analysis of the 3 big banks, DBS, UOB and OCBC. In this note, I compare the three savings and loans companies, Hong Leong Finance, Singapura Finance and Sing Investments & Finance.

The finance companies are similar to the big banks in the sense that like the banks, they take in savings deposits on the liabilities side and make mortgage, auto and other loans on the assets side. Meanwhile, they earn the spread between the two interest rates.

However, finance companies are much smaller than the big banks and do not provide many of the other fee-based services that the banks provide. As a comparison, DBS had $2b in net interest income for HY07 while Hong Leong Finance only had $85m in net interest income for the same period. In other words, DBS had 23.5x the net interest income of Hong Leong Finance. At the same time, fee-based services are virtually non-existent for Sing Inv and Singapura Finance compared to the big banks.

The small size of the finance companies can make it difficult for them to compete against the big boys. They have much smaller networks and retail outlets and fewer services to cross sell to their clients. In addition, they have a much weaker marketing power (and budget) than their bank counterparts.

However, what they lack in size they make up in other ways. For instance, Hong Leong Finance is part of the larger Hong Leong group which includes City Developments, a major real estate developer. Hong Leong Finance is able to market its mortgage services through CDL when the latter launches real estate projects. As for the other smaller finance firms, they would have to compete based on the better and more personalized service that they offer to small customers than the big banks normally would.

Financial & Profitability Analysis

The table below helps to crystallize the comparison between the finance companies.

Non-recurring and non-core items such as gain on sale of investments/PPE and rental income have been shifted below the operating income line in order to make comparison of core activities more accurate.

As we can see, HL Fin is the largest of the three, by quite a stretch. Meanwhile, S’pura is the smallest. HL Fin has quite a significant portion of income coming from fee and commission income, such as corporate finance and wealth management, while the other companies have little.

In terms of interest margin, Sing Inv appears to have the worst margin of 38.67%. This is very small compared to the others which average about 51%. If Sing Inv can manage its balance sheet so that its interest margin is comparable to its peers, then it will be able to see a significant surge in profit.

In terms of balance sheet management we can see that S’pura Fin has a much smaller liabilities/assets than its counterparts. This means that there is still significant space on its balance sheet to make more loans to increase its interest margin.

In terms of ROA we see that HL Fin is the best performer. This is due to the fact that it has a much greater fee income that does not tie down the balance sheet. In the meantime, Sing Inv has the lowest ROA, and is probably because it has the lowest interest margins, as mentioned above. However, Sing Inv could see marked improvements in its profitability if it can manage its interest margin to match its peer group.

Valuation

Valuation-wise there seems to be nothing suspicious if you expect the HY07 performance of the three companies to perpetuate into the future. A case can be made, however, that Sing Inv is undervalued if it is able to manage its balance sheet and improve its interest margins. For more information on this idea, check out this post on KLEER’s blog.

I will investigate the idea in more detail in a later research note.

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