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Saturday, December 17, 2016

Dr Yu nibbles on banking stocks

Saturday, 17 December 2016

He has been accumulating shares of HLFG and other stocks in the sector in recent weeks

JUST when you thought that Datuk Dr Yu Kuan Chon was taking a break from his active investment manoeuvres, more so after his failed attempt at securing control over niche stockbbroker PM Securities, he’s back at it. He is now nibbling at banking stocks – a sector that has been battered and still suffers from an unnerving level of volatility.

According to sources, Yu has been accumulating shares of Hong Leong Financial Group Bhd (HLFG) and other stocks in the sector in recent weeks. Of the banking stocks, the low-profile savvy investor is said to have a particular interest in HLFG, which is the parent company of Hong Leong Capital Bhd (HL Cap), where Yu gained prominence in 2013 for thwarting the attempt to privatise the latter.

Yu, sources say, started accumulating shares in HLFG from around September and is looking to buy a block. The shares were then trading at around the RM15 level. Besides this, the medical doctor-turned-entrepreneur is also believed to have accumulated shares of CIMB Group Holdings Bhd, Malayan Banking Bhd (Maybank) and Public Bank Bhd.

However, industry players reckon that it is unlikely that he could do “a HL Cap on HLFG” in the event of any corporate exercise involving the latter, given its huge market capitalisation of RM17.1bil.

Recall that in early 2013, Yu aggressively bought into HL Cap and accumulated more than 8% of the stock, putting him in a strong bargaining position in relation to the planned buyout of the stock that is ultimately controlled by tycoon Tan Sri Quek Leng Chan of the Hong Leong group.

Bloomberg data shows that Yu still holds 3.61% in HL Cap after paring down his stake periodically.

He reportedly made a tidy sum of RM70mil as HL Cap’s stock price soared from RM1.42 prior to Quek’s takeover.

The stock has been suspended from trading on Bursa Malaysia after failing to meet the regulators’s public shareholding spread.

The businessman, whose flagship is Perak-based YNH Property Bhd, has said that he is prepared to stay invested in HL Cap for the long haul.

Sources familiar with the businessman say he sees value in banking stocks, many of which are trading below their five-year average price-to-earnings in calendar year 2017 forecast.

“While prospects of the banking stocks may not look rosy in the near term, they remain relevant and safe in the long term and are proxies to an economic recovery,” says a dealer.

CIMB Research in a report notes that Malaysian banks’ net profit advanced 9.2% year-on-year (y-o-y) in the recently concluded third-quarter results season – the first instance of y-o-y growth in nine quarters.

“We envisage a rebound in banks’ net profit growth from 0.3% in 2016 to 11.2% in 2017, mainly due to a smaller increase of 4.1% in loan loss provisioning (LLP) versus the 65.9% in 2016. Another catalyst could be the absence of an impairment loss of RM452mil incurred by Maybank and RHB Bank Bhd in 2016 for their exposure to Swiber bonds,” the research house says.

The downside risks to its 2017 earnings forecast are a wider increase in LLP and more chunky impairment losses for corporate bonds of oil and gas companies, it adds.

As for HLFG, it is seen as a stock that is poised for a privatisation under Quek’s ultimate plan to consolidate his banking and financial business under the banking group.

HLFG controls 64.4% of Hong Leong Bank Bhd (HLBB), which is also listed, besides 81.33% of HL Cap. It also owns 70% of Hong Leong Assurance (HLA) and 30% of MSIG Insurance. HLFG, in turn, is 65% controlled by Quek through Hong Kong-listed Guoco Group.

HLFG generates less trading interest as compared to its banking arm, which contributes over 90% to the formers’s group pre-tax profits and whose market cap at RM28.96bil surpasses that of its parent company.

The trend going forward is for financial holding companies to reorganise and list their main operating banking units, as in the case of RHB group last year and more recently, Alliance Financial Group Bhd (AFG).

Its recent attempt to sell its insurance business would have unlocked value for HLFG and possibly led to a corporate restructuring if it had not fallen through reportedly because of pricing issues. The deal would have generated funds that would have provided support to the group’s capital base, with HLFG’s Common Equity Tier 1 or CET1 ratio at just over 8% currently, say analysts.

The group’s insurance business saw pre-tax profit decline 27% y-o-y in the first quarter of financial year 2017 due mainly to higher actuarial reserve provisioning at HLA and higher operating expenses and lower profit contributions from MSIG Insurance.

On the other hand, HL Cap saw its pre-tax profit jump 43% y-o-y to RM18mil due to higher investment banking and stockbroking earnings, while at HLBB, core net profit expanded 8% y-o-y for the same period.

In recent years, Yu has made a name for himself by taking up strategic stakes in little-known companies. In March last year, he emerged in little-known-but-cash-rich Imaspro Corp Bhd with slightly more than 5%. He subsequently raised his stake in the pesticide and fertiliser maker, now owning 17.48% based on Bloomberg data.

He is also a substantial shareholder of semiconductor firm Rapid Synergy Bhd with 28.05% direct and indirect stakes.

Although the acquisition of Pan Malaysia Holdings Bhd from the Malayan United Industries group did not materialise, Yu is said to be neutral on it.

“He is happy being an investor rather than buying into a company to manage it,” says a person familiar with his investing style.

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