Bullbear Buffett

Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

Friday, 12 December 2025

Hong Leong Bank - high-quality, conservatively run bank

Hong Leong Bank: Strategic Financial Analysis for the Sophisticated Investor

1. Investment Thesis: A Hybrid Banking Model with Superior ROE

Hong Leong Bank (HLB) operates a profitable hybrid model combining a domestic commercial bank with a strategic venture capital-like stake in high-growth affiliates (notably Bank of Chengdu). This structure drives its consistently high Return on Equity (~11-12%) and exceptional net margins (~37%), atypical for a pure-play commercial bank.

2. Core Banking: Efficient, Deposit-Funded Growth

Balance Sheet Dynamics: Assets have grown at a ~7% CAGR (FY21-FY25), primarily fueled by loan growth (~8% CAGR). The loan book is commercial-focused (~70% C&I), providing stable risk-weighting.
Funding & Liquidity: The Loan-to-Deposit Ratio (LDR) is healthy and improving, funded by a strong, low-cost retail deposit franchise. Recent liability management shows a strategic lengthening of debt maturity (surge in LT debt in 2025), prudently locking in funding amid a rising rate environment.
Capital Strength: CET1 / Total Capital ratios are robust and stable (~12.5% Equity/Assets). The bank generates sufficient retained earnings to fund growth while paying out rising dividends.

3. Earnings Quality & Drivers: Decoding the High Margins

Net Interest Income (NII): Grew to MYR 5.2B in FY25, though Net Interest Margin (NIM) is reported at a modest 1.90%. The disconnect between headline NIM and soaring net income highlights the critical role of non-interest lines.
Credit Cost Advantage: LLP reversals (MYR 383M in FY25) are a significant current earnings booster, reflecting conservative prior overlays and a benign credit cycle. This is a key, but non-recurring, tailwind.
The Affiliate Engine: Equity in Affiliates (MYR 1.06B in FY25) contributes ~25% of pre-tax income. This provides earnings diversification and exposure to faster-growing regional markets, but introduces volatility and non-control.
Operating Leverage: Cost growth has been managed well, with Operating Income growing ~57% over 5 years vs. asset growth of ~33%, demonstrating positive jaws.

4. Cash Flow & Capital Allocation

Cash Flow Profile: Exhibits the classic banking model: Operating Cash Flow (volatile but positive) funds massive Investing Outflows (loan growth & portfolio churn), with the gap filled by Financing Cash Inflows (deposit growth).
Capital Allocation Priorities:
1. Reinvestment: Primarily into loan book expansion and investment securities.
2. Shareholder Returns: Dividends have grown at a ~20% CAGR (FY21-FY25), with a payout ratio that appears sustainable.
3. Strategic Flexibility: Active portfolio management (large Purchase/Sale of Investments) suggests tactical balance sheet optimization.

5. Key Financial Ratios & Valuation Implication

Profitability: ROAA: 1.40%, ROAE: 11.16% (FY25). These are strong metrics, lifted by the affiliate income.
Asset Quality: LLP Reversals signal pristine current credit conditions. The Coverage Ratio (Loan Loss Allowances vs. NPLs) is strong but should be monitored for normalization.
Efficiency: High net margin points to exceptional operating efficiency and favorable revenue mix, not just cost control.
Implied Valuation Support: The combination of high profitability, stable deposit funding, and a valuable equity stake supports a premium valuation relative to peers lacking the affiliate income stream.

6. Risk Factors & Investor Checklist

Normalization of Credit Costs: The single largest near-term earnings risk is the reversal of LLP tailwinds.
NIM Compression Risk: Funding cost pressures could persist, challenging core NII growth if not offset by loan yield improvements.
Affiliate Earnings Volatility: Income from Bank of Chengdu is subject to China's economic and regulatory climate.
Capital Allocation Discipline: Large quarterly swings in securities portfolios require scrutiny to ensure they are hedging/optimizing, not speculative.

Final Synthesis for the Knowledgeable Investor

Hong Leong Bank is not a typical bank. It is, in effect, a "Bank + Venture Capital" hybrid. Its stellar reported margins and ROE are structurally supported by a valuable, non-controlling portfolio of financial affiliates.

Bull Case: The premium is justified by a sustainable dual-engine model, superior deposit franchise, and prudent capital management. The current credit cost cycle can extend, and affiliate valuations can rise.

Bear Case: The market overvalues the non-recurring credit boost and misprices the volatility of affiliate earnings. A recession in Malaysia or China exposes the cyclicality of both engines simultaneously.

Investor Verdict: HLB is a high-quality, compounder-style holding for investors who understand and want exposure to its unique hybrid model. It is less suited for those seeking a pure, predictable commercial banking beta. The key to future performance lies in the sustainability of its affiliate returns and its ability to manage the coming credit cost cycle transition.

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Hong Leong Bank: Simple Investor Snapshot

Here’s the essential financial story of Hong Leong Bank (HLB) for an investor, stripped of complex jargon.

1. The Big Picture: Strong & Steady Performer

HLB is a profitable, growing, and financially solid bank. Over the past five years, it has consistently increased its size (assets), profits, and dividends. It's like a well-oiled machine that's getting bigger and more efficient.

2. How It Makes Money: A Powerful Dual Engine

HLB's high profits come from two main sources:

Engine 1 (Traditional Banking): Takes in customer deposits and lends money to businesses and individuals. This core business is growing steadily.
Engine 2 (Strategic Investments): Holds a valuable stake in other banks (like Bank of Chengdu). This investment provides a huge, stable bonus to profits every year, making HLB's overall earnings exceptionally strong.

3. Financial Health Check: Very Robust

Strong Foundation: The bank is funded primarily by stable customer deposits, not risky short-term debt. This is a sign of safety.
Healthy Cushion: It maintains a strong capital base (equity), well above regulatory requirements, to absorb potential losses.
Good Quality Loans: Recently, it has been setting aside less money for bad loans, indicating confidence in its borrowers' ability to repay.

4. Returns to You (The Investor)

Growing Earnings: Earnings per share (EPS) have risen consistently.
Reliable Income: Dividends have increased significantly over the past five years, providing a solid income stream for shareholders.

5. What to Watch (Potential Risks)

Interest Rate Squeeze: The cost of deposits has risen. The bank must continue to manage this to protect its core lending profit margin.
Credit Cycle Turn: The current very low level of provisions for bad loans is a tailwind. This will eventually normalize, which could slow profit growth.
Investment Volatility: A portion of its earnings (from affiliates and securities) can be unpredictable from quarter to quarter.

Bottom Line for Investors:

Hong Leong Bank is a high-quality, conservatively-run bank with a unique profit advantage from its investments. It offers a compelling mix of growth, income (via dividends), and financial stability. It is best suited for investors seeking a reliable, long-term holding in the financial sector, not for those looking for speculative, short-term gains.

Think of it as a "blue-chip" bank with a growth kicker from its savvy investments.

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My 18 points guide to Successfully compounding your money in Stocks

Be a good stock picker.
Think as a business owner.
Always look at value rather than the price. Do the homework.
Buy and hold is alright for selected stocks.
Compounding is your friend, get this to work its magic.
Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.
Always buy a lot when the price is low.
Never buy when the stock is overpriced.
It is alright to buy when the selected stock is at a fair price.
Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.
Do not time the market for such or any stocks.
By keeping to the above strategy, the returns will be delivered through the growth of the company's business.
So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.
The downside risk is protected through only buying when the price is low or fairly priced.
Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.
Sell urgently when the company business fundamental has deteriorated irreversibly.
You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.
In conclusion, a critical key to successful investing is in your stock picking ability.

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.
2. Never invest in any idea you can’t illustrate with a crayon.
3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.
4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.
5. Time is on your side when you own shares of superior companies.
6. Owning stock is like having children. Don’t get involved with more than you can handle.
7. When the insiders are buying, it’s a good sign.
8. Unless you’re a short seller, it never pays to be pessimistic.
9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.
10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.
11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:
- fixed assets such as equipment, property, or industrial buildings
- fixing problems with an asset
- preparing an asset to be used in business
- restoring property
- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

Less is better.

Benjamin Graham's 113 Wise Words

The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

Philip Fisher's Wise Words

"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

Ideally a stock you plan to purchase should have all of the following charateristics:

• A rising trend of earnings dividends and book value per share.
• A balance sheet with less debt than other companies in its particular industry.
• A P/E ratio no higher than average.
• A dividend yield that suits your particular needs.
• A below-average dividend pay-out ratio.
• A history of earnings and dividends not pockmarked by erratic ups and downs.
• Companies whose ROE is 15 or better.
• A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?