Malaysian Rating Corporation Berhad (MARC) has upgraded the long-term rating of Hong Leong Credit Berhad’s (HLC) RM500 million redeemable unsecured bonds to A- (single A minus) from BBB+ (triple B plus) previously.

The rating upgrade reflects the reasonably high conversion rate of the company’s warrants which, coupled with its rights issue completed in August 2001, were instrumental in lowering its gearing levels to more comfortable levels. HLC’s debt-equity ratio fell to 0.52x and double leverage has also moderated to 145% upon the completion of both capitalization exercises.

The HLC group’s exposure to the financial sector, property and stock markets had over the years subjected earnings to wide fluctuations. For FY2001, HLC’s consolidated pre-tax profit registered a decline of 15% to RM575.5 million due to the weakened operating environment in the stockbroking industry and poorer contribution from the insurance division which was affected by write-downs on investment valuations. Latest available figures for the first half financial year ended 31 December 2001 showed consolidated pre-tax profit rebounding by 24% to RM377.4 million on the back of improved earnings at the bank and insurance subsidiaries being counterbalanced by reduced losses at the stockbroking division as well as the loss registered by the property arm amidst slower take up of its launches.

The share of net dividends declared by Hong Leong Bank (HLB) attributable to HLC more than doubled to RM92.2 million in FY2001, accounting for 86% of total net dividends attributable to HLC. This follows the completion of the bank’s acquisition of Wah Tat Bank Berhad and Credit Corporation (Malaysia) Berhad in January 2001 and their maiden dividend contribution to the bank. Although non-performing loans have crept up in the last financial year to 7.5% on a three-month classification basis, HLB’s credit quality remains superior to the commercial banking industry as reflected by the lower than industry NPL ratio. However, the loan loss reserves coverage has been trending downwards, and at 44% sits amongst the lowest compared to its peers. While the bank’s loan portfolio remains broadly diversified, it has over the years built up a significant portfolio of SMI customers. With growth in the manufacturing sector slowing considerably in the near term, HLB may face increasing credit pressures from this segment of its portfolio.

Hong Leong Properties returned to the black in FY2001 with pre-tax profit of RM11.3 million, attributed to the one-time gain on disposal of subsidiary companies and higher profit contribution from its joint ventures. The group’s activities are expected to centre on its property development and investment divisions. Its first quarter performance showed the group’s susceptibility to the current soft property market conditions which resulted in slower sale launches. On the property investment front, HLPB’s properties are not expected to experience major declines in occupancy rates, given that they are partly occupied by related companies as well as HLPB’s success at retaining a portfolio of quality tenants. Nevertheless, the significant oversupply of office space in the market is expected to exert downward pressure on office rentals/prices. The group’s strategy going forward is to restructure the asset portfolio by disposing of its low yielding assets thus freeing up cashflow for new investment opportunities. The division is in the midst of finalizing its divestment of Wisma Hong Leong to Hong Leong Assurance for RM180 million, which is expected to result in a RM60 million gain for the division.

The weak stock market conditions took a heavy toll on HLG Securities’ (HLGS) earnings with the company reverting to a loss of RM13.3 million in FY2001. Gross brokerage plunged 80% attributed to the sharp contraction in overall trading volume on the KLSE, which was exacerbated by the partial liberalization of commission rates effective September 2000. With trading volumes recovering in the six months to 31 December 2001 and lower operating costs, the division’s loss has correspondingly reduced. However, a further round of commission liberalization in July 2002 will continue to exert downward pressure on margins.

Hong Leong Assurance Bhd (HLA) registered a 66% rise in combined gross premium to RM1.16 billion for FY2001, largely attributed to the sharp increase in life division premiums arising from the launch of the EPF annuity scheme. With the scheme’s termination in May 2001, life premiums are expected to shrink dramatically in FY2002. Owing to weak investment returns in the past few years, HLA had to revise the bonuses of certain of its products. In addition, the company assigned RM70 million of shareholders’ funds assets to meet the required solvency margin of the life fund. During the interim period to 31 December 2001, the division’s profit improved significantly as a result of the write back of investment losses arising from the gradual recovery of the stock market.

The total amount of Bonds that remained outstanding as at 31 December 2001 was RM480 million, which will mature on 27 June 2002. Meanwhile, the total amount in the sinking fund for the purposes of redemption of the Bonds total RM256.5 million from the warrant conversion proceeds. HLC plans to refinance the balance of RM223.5 million with a CP/MTN programme.