MARC has affirmed the short-term and long-term ratings of Hong Leong Credit Berhad’s (HLC) commercial papers and medium term notes programme at MARC-2 and A- respectively. This reflects the strong fundamentals of HLC’s subsidiaries as well as the improved double leverage and stable debt-equity. The rating is moderated by the competitive banking and finance environment and the potential limitations on dividend upstreaming from the subsidiaries to HLC.

In an effort to become a pure financial services group, HLC underwent a capital distribution of its 49.0% owned Hong Leong Properties Bhd (HLP) shares to its shareholders. The demerger exercise was completed in July 2003 whilst the residual HLP shares held after the demerger exercise were disposed of in August 2003, making HLC Group a pure financial services holding company. With this, HLC Group is involved in three major businesses, namely banking and finance; stock and share brokerage and insurance.

HLC Group posted a marginally lower revenue of RM2,461.0 million in FY 2003, compared to RM2,554.7 million in FY 2002 (-3.7%), stemming from the lower interest income from banking and finance of RM2,174.1 million (-3.6%). Despite the lower Group revenue and the losses suffered by its securities activities, Group pre-tax profit increased to RM802.7 million from the previous year’s RM783.8 million (+2.4%), benefiting from lower selling and marketing costs (-47.6%), lower loan loss and provisions (-32.6%) as well as reduced financing costs (-29.1%).

However, HLC’s source of revenue and pre-tax profit remains dependent on its key subsidiary, HLB Group’s banking and finance operations, which contributes in excess of 90.0% to the HLC Group. Going forward, MARC anticipates revenue from the banking and finance segment to be under pressure, in light of competition in the industry; whilst brokerage could potentially see a revival in earnings. HLC’s securities segment (HLG Capital Bhd) and insurance segment (Hong Leong Assurance Bhd) also recorded significant improvement in performance, evident by the first quarter 30th September 2003 results compared to the previous corresponding quarter.

As a holding company, the primary cash generation avenue of HLC company does not arise from its cash flow from operations (CFO) generation strength, but rather from dividend receipts as well as investment income. The company’s core cash flow interest coverage remains strong at 5.5 times (FY 2002: 4.4 times), owing to the dividend income received during the year.

HLC actively manages and provides strategic direction to its subsidiaries in terms of business growth and profitability as well as dividends upstreaming.

HLC company’s debt-equity ratio in the past four years has been fairly stable. The company boosted its shareholders’ funds in FY 2002 to RM1,722.4 million (+66.1%), with the issuances of rights and replacement warrants. With this surge in shareholders’ funds, HLC’s double leverage ratio moderated lower from a four-year high of 2.3 times in FY 2001 to 1.4 times in FY 2002 and FY 2003.