Hong Leong IB going regional

KUALA LUMPUR: With its foundation now firmly in place at home, Hong Leong Investment Bank Bhd (HLIB), which only became a full-fledged investment bank in 2009, is looking to expand its presence regionally.

“We want to replicate the success in new markets. This is our first full year in Malaysia... we have to be very focused on gaining momentum in our own market. Now that we have stabilised this, the next footprint we are looking at is something regional,” HLIB managing director and chief executive officer Lee Jim Leng told The Edge Financial Daily in a recent exclusive interview.

“As a start we’re looking at Singapore, Indonesia and Hong Kong. These are the markets closest to us where we see fairly good potential to cross-exploit opportunities,” she said adding that the local investment bank is “actively exploring” these markets but is not in talks with any parties and has yet to apply for an advisory licence overseas.

Lee noted that HLIB’s plans to expand regionally might not be done through the traditional acquisition route.

“A lot of people take that route. But, actually, what are they buying? They are buying people in the case of investment banking. What you may have from repetitive earnings is only the stockbroking side, which is really what you buy into. But other than that, the pure IB [investment banking] business is all about people. For us, we may look at many forms (on our regional expansion)... It depends on what we see as fit for us,” Lee said, adding that HLIB would like to strengthen its position regionally through the broking segment.

“If we have the limbs, we have the nodes ... we can cover a lot more spectrum. So, similarly that’s where we see the synergies across. We see the benefits of doing that and over the long term, we need it for us to stay relevant because at the end of the day, there is no point just being strong over here when our clients want to grow and we can’t grow with them,” she added.
Lee: HLIB's may not go the traditional acquisition route for its regional expansion.

“It’s the same principle as those days when commercial bank had to set up an investment bank ... Because if you don’t have it, that 20 dollars is going to go elsewhere,” she explained.

HLIB became a full-fledged investment bank in 2009 upon the completion of its acquisition of Southern Investment Bank from CIMB group for RM48 million. The investment bank, a subsidiary of Hong Leong Capital Bhd (formerly known as HLG Capital Bhd), was the missing link for the Hong Leong group to complete its full spectrum to be a full-fledged financial player.

But with the big boys like CIMB Investment Bank landing deals all over the place, can a new and fairly small investment banking player make it in this competitive and bloodthirsty game?

To take on this challenge, the Hong Leong group roped in Lee, a seasoned investment banker with over 20 years’ experience under her high-fashion belt in November 2009.

Lee, who hails from Penang, seems to have a knack for jump-starting investment banking businesses. She had left commercial banking to help Michael Soong build Schroders in the early 1990s and then moved on to lead a team to build UOB’s investment banking department. After that she joined HwangDBS Investment Bank Bhd when it morphed from a universal broker to a full-fledged investment bank. She left as its managing director prior to joining HLIB.
Despite rising earnings, Hong Leong Capital's stock price continues to trade at a discount to the value of its underlying assets, partly due to the perception that its earnings are cyclical.

Over at HLIB, Lee and her team has grown the “newbie” local investment bank steadily in the past one-and-a-half years and the numbers are doing the talking.

For its total nine months ended March 31, 2011 (3QFY11), HLIB’s net profit soared 119% year-on-year to RM29.3 million from RM13.4 million in 2010. Revenue was up 27% in the same period to RM84 million. Net profit had stood at RM8.7 million on the back of RM24 million revenue in its first year of operations in FY09.

Its return on equity increased to 13.5% as at March 31, 2011 from 4.9% in FY2010 while its cost to income ratio improved to 53.6% from 71.2% in the same period. Return on assets stood at 2.7% in 3QFY11 compared to 1.5% in FY09.

HLIB’s parent Hong Leong Capital, meanwhile, saw its nine-month net profit for the same period surge 172.3% to RM31.67 million, with earnings per share of 13.5 sen. Apart from HLIB, it also owns Hong Leong Asset Management and HLG Futures.

Hong Leong Financial Group Bhd, the ultimate listed holding company of the Hong Leong group’s financial businesses, holds 79.1% of Hong Leong Capital.

Despite rising earnings, Hong Leong Capital’s stock price continues to trade at a discount to the value of its underlying assets, partly due to the perception that its earnings are cyclical.

Its shares last traded at RM1.40, below their net assets of RM1.42 per share as at March 31, 2011.

Meanwhile, the team at HLIB also grew in tandem with the rise in profits. From a team of five from Southern Investment that was absorbed by HLIB, Lee has grown it to a team of 60 people today.

“We have put in the building blocks and we are gaining momentum. That has been the journey for us (thus far),” Lee said.

“A lot of first few months was putting the requisite infrastructure in place. When I came in, everything was outsourced ... audit, treasury, finance, risk management. We took them back ... you can’t be running a bank and be a serious player with everything outsourced. So we spent the first six months or so putting in the building blocks for this IB ... which was important for us. Before we start the business, I feel that the confidence level has to be there so that we are ready to take on the jobs,” she added.

Lee noted that investment banking’s contribution to HLIB’s profit has been gaining pace over the past two years. It started out contributing less than 5% to the profits of HLIB compared to stockbroking in FY09, but by 3QFY11 investment banking contributions have surpassed 60%.

Lee and her team hit the ground running from day one. Among the deals HLIB has advised since 2009 include an asset-backed securitisation MTN exercise for CapitaLand Retail and the Employees Provident Fund valued at RM1.1 billion and RM400 million, respectively. It also advised KrisAssets Holdings Bhd and Mah Sing Group Bhd on a redeemable convertible secured bond valued at RM300 million and RM325 million, respectively.

The investment bank also recently bagged an initial public offering mandate advising Hibiscus Petroluem Bhd on its upcoming listing that is expected to raise proceeds between RM150 million and RM300 million. Interestingly, Hibiscus is the first special purpose acquisition company to debut on Bursa Malaysia. And it is undertaking such deals which Lee believes is important for the investment bank to set itself apart from the rest.

“We don’t just sell our clients a product but we sell solutions ... it’s a niche that is still very relevant to us,” Lee said, adding it is important to do “something different from the rest and that stays with the client”.

“We do not want to just do plain simple vanilla deals,” she added.

While HLIB is growing steadily, Lee acknowledges that there is still room for improvement.

“Currently HLIB’s stockbroking business has been very retail-centric, so we see a lot of room to grow within that institutional market and we are putting the building blocks into that,” she said.

Looking forward, she noted: “Challenges will definitely be there, but how people will survive out of this will really show how well you grow with your clients, how you train your people to be in tune with your clients and I think that continuous path will always be there. You continuously have to reinvest with your clients and that stage cannot change, and of course at the end of the day, [it is also] talent retention”.

With a good mix of innovation and drive, it looks like this new fairly player is making headway in the midst of an aggressive competitive arena. The crucial question now is whether this growth is sustainable and if so, how far can HLIB go?

And if the growth momentum proves to be sustainable, will investors’ perception of Hong Leong Capital as a cyclical stock change?