• Expect sharp increase in PATMI as NIM improves on rising rates and provisioning normalises
• Regulatory changes a multi-year driver to expand margins and volume
• Potential to tap on E-commerce sales channel to originate loans in the low and middle markets
• Initiate with “Accumulate” rating with a target price of S$1.67, implying an upside of 18.58% (including FY17e dividends).

Investment Highlights

1. We expect FY17e to be a strong year for SIF, as it benefits from the twin tailwinds of rising interest rates and regulatory changes to the finance business. SIF is expected to grow PATMI by 40% in FY17e because of pass through of higher customer loan rates, the roll-out of lower cost current account services and normalisation of bad loans provisioning as NPL stabilises.
2. Regulatory changes announced on 14 Feb 2017 will be a multi-year driver to earnings. After years of constraint, the authorities have finally unshackled the finance companies. We expect volume upside as SIF enters the uncollateralised loans business and penetrate deeper into SME business. We also expect margins to improve as SIF can now source lower cost current account deposits from its existing client base.
3. Visible and rapid developments in SEA E-commerce scene and regulatory changes to uncollateralised business loans present clear opportunities to originate loans in the low and middle markets. We expect E-commerce players to aggressively develop credit financing capabilities in SEA after having invested heavily in logistics and e-payments. However, we believe E-commerce players will seek partnerships with credit finance companies to take on and manage the credit risks. Credit finance companies can also leverage on E-commerce data analytics to better assess credit risks of sellers in the low and middle market segment. Together with the regulatory changes to uncollateralised business loans, credit finance companies can then confidently extend loans to the low and middle market customers.
4. Compared to its peers, SIF ranks best in cost to income and other efficiency metrics. The de-regulation opportunity and SIF higher efficiency, justifies higher P/BV valuation, in our opinion. We believe SIF’s price-to-book valuation is conservative considering its ROE performance. In addition to the industry tailwinds, we expect SIF’s operating efficiency and pricing flexibility to further support the improvement in SIF’s ROE of 4.33% in FY16 to 5.7% in FY17e.

Investment Actions

We initiate coverage on Sing Investments & Finance Limited with an “Accumulate” rating and a target price of S$1.67. Our valuation is based on 0.8x P/BV. This implies an upside of 18.58% (including FY17e dividends) from its last traded price of S$1.48.

Company Overview

Sing Investments & Finance Limited (“SIF”) is a finance company listed on the Singapore Stock Exchange with more than 50 years of lending experience.

SIF’s activities cover the acceptance of Fixed and Saving deposits from the public and the provision of loans and credit facilities to individuals and corporations. SIF actively participates in events organized by SPRING Singapore and SCCCI to promote local entrepreneurs.

SIF’s Loan Products and Credit Facilities include:

• Residential and Commercial Property Loans
• Land and Construction Loans
• Machinery Loans under the Local Enterprise Finance Scheme
• Motor Vehicle Loans (End user consumer auto loans)
• Block Discounting Facility (Secured by receivables of Auto dealers)
• Floor Stock Facility (Revolving credit inventory financing for Auto dealers)
• Share Financing (Singapore listed equities)
• Shipping Loan
• Invoice Factoring/ Account Receivables

SIF’s income is derived from:

• Net interest income from loans and deposits
• Interest income from Singapore Government Securities and Cash
• Fees and commissions from loans and deposits business
• Dividends from quoted equity securities
• Rental income from investment properties

Figure 1: SIF’s FY16 Customer Loans Breakdown (S$mn)

Source: Company, PSR

Figure 2: SIF’s 1Q17 Income Generating Assets (S$mn)

Source: Company, PSR

Figure 3: SIF’s FY16 Income Breakdown (S$’000)

Source: Company, PSR

Investment Thesis

1. Singapore’s credit finance companies have greater potential to improve their Net Interest Margins (“NIMs”) because of regulatory changes and rising interest rates.
2. We believe banks will not compete intensely with credit finance companies for low and middle market loans in the near term.
3. Partnering E-commerce operators to finance their supply chain is an untapped potential
4. The loans origination growth potential in South East Asian’s (SEA) E-commerce space is enormous.
5. Singapore’s finance companies are in a propitious position to benefit from the E-commerce ecosystem not only because of government initiatives but also as part of the next stage of E-commerce development in SEA.

Investment Merits

1. The regulatory changes could catalyse a meaningful increase in SIF’s net profit.
2. Higher NIM and normalising of bad loans provisioning expense this year will also boost ROE and PATMI significantly.
3. High double digit percent net profit growth in FY17e could lead to an increase in dividends.
4. Strong financials.
5. SIF has the best operating efficiency and maintains pricing flexibility on loans and deposits.

Investment Risks

1. Credit Risk is the risk of financial loss to SIF if a borrower or counter party to a credit exposure fails to meet its contractual obligations. Credit exposures also include the debt securities held whose valuations will be negatively impacted by volatility in the global financial markets. Credit risk could increase if deterioration in loans quality outweighs the benefits of higher customer loan rates in a rising interest rates environment.

2. Liquidity Risk is the risk that SIF is unable to service its cash obligations in the present and future (both anticipated and unanticipated) without incurring substantial cost or damage to its reputation. SIF’s principal source of funds is from deposit collections in Singapore which is mainly utilised for funding loans and maintenance of reserves in compliance with statutory requirements. SIF’s liquidity risk is also mitigated by a large number of customers in the Company’s diverse loans and deposits bases which is reflected in its relatively lower LDR.

3. Interest Rate Risk. SIF may be exposed to a loss in earnings due to effects of fixed and floating interest rates of its assets and liabilities. As such, the interest rate spread between these two activities is monitored closely on an on-going basis to optimise its yields and manage its risk within the risk tolerance levels set by the Risk Management Committee (“RMC”) and the Board. The Interest Rate Working Committee (“IRWC”) is tasked to track market interest rate trends, plan and manage product mix, product pricing and re-pricing The RMC meets periodically to review the interest rate repricing gap report and interest rate sensitivity analysis to ensure that they are within risk tolerance and limits set, and to make decisions on appropriate mitigation actions to be taken in anticipation of changes in market trends.

4. Market Risk. Market risk is the risk that the value of a portfolio will decrease due to the change in the value of the market risk factors. The market risk factors are credit spreads, interest rates, equity prices, foreign exchange rates, commodity prices and their associated volatility. SIF primarily adopts Value-at-Risk (“VaR”) and scenario based stress testing methodologies to measure market risk for its SGS and equity investments to ensure that they are within set risk tolerance levels. However, SIF does not participate in foreign exchange trading, and all foreign exchange contracted with bank counterparties are on behalf of borrowers and are on secured basis, therefore, reducing its market risk factors. SIF’s investment portfolio comprises mainly Singapore Government securities and securities listed on the Singapore Exchange Securities Trading Limited (SGX).