Lim & Tan 01/03/2006

HONG LEONG FINANCE
An Overlooked Yield Story S$3.80-HLF.SI

HLF has declared final dividend of 12 cents per share,
and a special of 5 cents, bringing the total for the full year
to 33 cents, less tax, or 26.4 cents net. (HLF had paid 10
cents special in Q1 and 6 cents normal interim in Q2. In
2004, it paid 18 cents per share: 6 cents interim and 12
cents final.)

The “normal” dividend bill for 2005 of $62.61 mln would
have represented just over 75% of net profit of $82.38
mln, including the increased fair value of cash flow hedges.
This is as per MAS requirement. The special dividend bill
of $52.15 mln would have used up $13 mln of the
remaining S44 tax credits (actual not disclosed).

Profit declined 9.3% y-o-y in Q4 to $20.19 mln, and 8.8%
for the year to $79.05 mln, partly reflecting increased
expenses, especially on depreciation, and partly
provisions as loan books continued to grow.

Indeed, loan assets rose an impressive 5% sequentially,
or 10.9% y-o-y, to $6,054 mln, as HLF’s focus on the
HDB loan and the SME markets starts to bear fruits.

The key point is that HLF is in a position to at
least maintain the same dividend payout in 2006
and 2007, before the deadline for utilizing S44
credits at end’07.

Accounting rule change, specifically FRS 39, has resulted
in Retained Earnings surging to $178.64 mln at end
end’05 from $94.3 mln a year ago, thus being in a position
to be generous even after the Dec’07 deadline.

At $3.78, yield for 2005 would be 8.7% gross and 7%
net, making HLF the highest yielding quality stock here.

HLF shares have done well in the last 4 years, hitting a
high of $4.10 last August, and are expected to continue
to do so.

Maintain BUY.