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Aeon Credit Service (Asia) Overlooked consumer finance gem

Mar 26, 2025

Offering a dividend yield of 8% and trading at just 0.6x tangible book value, Aeon Credit Service (Asia) fits the bill as an overlooked consumer finance gem. It has a 30-year record of uninterrupted profitability, and its ROA ranks amongst the highest of global consumer finance peers. Hong Kong’s economic malaise has led to an increase in problem assets and full-year 02/2025 results will likely show an earnings decline. The company has navigated multiple downturns and is primed for an earnings turnaround in 02/2026. HK$ 10/share is a reasonable price target, suggesting nearly 70% upside.

Ticker: 900 HK

Share Price: HK$ 6.04

Market Cap: US$ 325 million

History

Aeon Credit Service (Asia) was established in the late 1980s as a subsidiary of a leading Japanese card issuer. It listed its shares in Hong Kong in 1995. Since then, the company has stuck to organic growth in the Hong Kong market and experienced multiple credit cycles. It dipped its toes into the mainland China market several years ago, only to find out there was no easy money to be made. Most activities in China have since been unwound.

Operations

Aeon is a Hong Kong consumer finance firm. It also has a small operation in Shenzhen, China (contributing <2% of revenue) providing micro-credit.

Operations by segment:

· Credit cards – this is the core business, representing 76% of receivables. It has a wide range of cards, partnering with a range of merchants, in the major networks of Visa, Mastercard, JCB, and UnionPay. Most recently, users of revolving credit pay an average of 22%.

· Personal loans – this division accounts for 24% of receivables. It has multiple products targeting a range of potential borrowers, from civil servants/professionals to those seeking ‘no doc’ loans. Better quality borrowers can obtain a loan up to HK$1m or 1Y salary, whichever is lower, and pay an effective rate of 2-23%. Those with lower credit scores may pay as high as 48%. Tenors can range to several years. In the 6M ending August, the average effective rate was 21%.

· Insurance brokerage – contributes ~2% of revenue.

Funding is a mix of bank borrowings and borrowings from its parent.

It operates 16 physical branches in Hong Kong in addition to digital efforts.

The customer base is heavily weighted in favor of the 40–60-year-old demographic (~45% of cardholders) and females (~70%). Customers are probably lower income than those using cards issued by HSBC and other leading banks.

Measured by credit card receivables, its market share is ~4%. Bank issuers are the major competition – HSBC & Hang Seng, Standard Chartered, BOCHK, etc.

In personal loans, it competes not only with large banks but with a slew of non-bank lenders. Its market share may be <1%.

Business Quality

Average ROE has been 16% since the company IPOed in the mid-1990s. In the last 5Y ROE has been a more mundane 10%. The ROE misses an important consideration – for a financial institution Aeon has little leverage and gearing has trended lower in recent years. Last FY the ratio of equity-assets was 54%, which compares to <40% prior to 2015. ROA, which ignores leverage, has been 5% since the mid-1990s and 6% in 5Y.

Comparing ROA, Aeon sits near the top of global peers.

What makes Aeon a good business? Customer captivity. Yes, churn is an issue - some cardholders will always look for the most attractive promotions and will gladly switch to a new card offering greater benefits or low introductory rates. But some can’t be bothered. There are switching costs in the form of inconvenience (filling in new applications, updating autopay instructions) and lost loyalty points.

There are opportunities for card issuers to enjoy cost economies of scale, though it isn’t clear that Aeon has achieved this. Its cost-assets ratio is not materially better than it was 20 years ago. Marketing and promotion costs are high.

In consumer finance, the key driver of financial performance is to price credit risk effectively. Aeon has a long-term track record for doing this. Looking at 30 years of data, the average credit charge has been 5.2% of assets. With a net interest margin of 16-18% and additional fee income, this level of credit cost supports high ROA.

Fintech and new payment methods may be threats. But to date the impact has been muted. Credit cards were 51% of Hong Kong retail transactions (measured by value) in 2022 compared to 39% in 2017. E-wallets and other new methods are taking share from cash and bank transfers.

Recent Trends

The post-covid earnings recovery came to a halt in 9M 11/2024. Earnings declined 2% YoY in the period. Credit quality has been the problem. The cost of risk increased to an annualized 5.5%. Personal loans are the main problem area, though it has also seen weakness in credit cards.

The direction is largely in line with the Hong Kong industry. For all issuers, card charge-offs have increased. Overdue mortgages have increased as well, though remain insanely low.

Outlook

The big question – is credit quality going to improve or is the worst ahead?

Perhaps past downturns offer a clue. Delinquent accounts also spiked after the Lehman bankruptcy and emergence of Covid. The main takeaway – credit weakness has typically lasted only 12-18 months. Consumer finance portfolios quickly season, and management adjusts underwriting and collection efforts when overdue accounts spike. Measured by charge-offs, the current credit downturn looks very similar to the period from 02/2019 to 08/2020.

Indicators to watch include retail sales (negative in January) and the residential property price index (January was a new low, with prices now 28% lower compared to the September 2021 peak).

Management & Corporate Governance

The corporate culture feels very Japanese, reflecting the ~70% ownership by the Japan parent. Of 9 directors, 5 are non-independent (3 executives, 2 non-executives) and 4 are independent.

The MD appears to be a Japan-educated Chinese man, who has been with the company since 2006, though mostly in China. He has been in the position since March 2024.

Alignment is poor, as is typically the case with Japanese companies. The MD appears to hold no shares. One of the executive directors is listed as owning 20k shares, equal to two months of rent for a Mid-Levels condo.

The payout ratio has been ~50% in recent years – a saving grace.

Valuation

The shares trade at a large discount to historical multiples and international peers. To tangible book value, the multiple is 0.6x. The dividend yield is 8.6% and P/E ratio ~6x using a normalized estimate. If the stock can trade back to historical median multiples, the share price would be HK$10. Versus other consumer finance firms the shares are attractively priced.

Disclaimer: The information contained in this report is for general informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities or other financial products. The opinions expressed in this report are those of the publisher and are subject to change without notice. Readers are advised to conduct their own research. The publisher does not guarantee the accuracy, completeness, or reliability of any information in this report, and disclaims any liability for any losses or damages arising from the contents of this report. The publisher of the report often invests in companies about which it writes.

Leahi Capital Recommend Leahi Capital to your readers I write about value investing opportunities in small, under-researched companies from Honolulu. Discussion about this post Write a comment... Leahi CapitalLeahi Capital 10h

Are you referring to Hong Kong household leverage in general or Aeon balance sheet?

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Anything about the increasing debt?

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