DBSV 28/02/2006:

Hong Leong Finance
FY05 results: Better days ahead

Hong Leong Finance (HLF) reported FY05 earnings that were within our estimates,
but below market expectations. Net profit fell 8.8% y-o-y to S$79.1m, mainly due to a
surge in interest payable that outstripped increases in lending rates. However,
provision for loans and advances fell to S$14.9m (-35.1% y-o-y), due to the improving
Singapore economy. HLF proposed a gross final dividend of 17 cents per share,
bringing FY05 dividend to 33 cents per share or yield of 7%. We are positive about
the financial market, as rising mortgage rates widen net interest margins for 2006. We
upgrade our recommendation to BUY with a raised target price of S$4.22, based on
1.3x FY06 P/BV, a discount to average Singapore banks P/BV of 1.65x.

FY05 profit lower due to higher cost of funds. Interest rates continued to rise
during the year, but lending rates hikes lagged the rising cost of funds, resulting in
narrowing spreads. However, the bottom-line was helped by lower provision of S$14.9m, a
decline of 35% from the previous year.

Some good news. HLF proposed a gross final dividend of 17 cents per share, bringing
total FY05 dividend to 33 cents per share, or yield of 7%. HLF also achieved significant
loans growth of 11%, with loans outstanding crossing the S$6bn mark towards the end of
the year. This growth was largely attributed to strong demand for housing loans, particularly HDB loans. SME and share loans also achieved double-digit growth.

Brighter days ahead. The near term pain is over, and there are brighter days ahead for
HLF. This is premised on the prospects of rising mortgage rates, momentum in the property
market, and approval by the regulators to allow HLF to distribute insurance products and to
provide foreign exchange facilities for SME customers. We upgraded our recommendation
to BUY with target price of S$4.22, based on 1.3x FY06 P/BV, a discount to average
Singapore banks P/BV of 1.65x. This reflects our optimism in the financial sector.