1H21 performance is slightly lower than we expected.
The income of China aircraft Leasing in the first half of 2021 was-3.1 to 1.59 billion Hong Kong dollars compared with the same period last year, and the net profit was-8.7 percent to 303 million Hong Kong dollars, slightly lower than we expected, mainly due to the rhythm of government subsidy confirmation. and there are still some provisions for impairment of rental receivables under the global epidemic and in the first half of the year. Excluding the impact of subsidies, operating profit was + 57 per cent year-on-year to HK $380 million, and the main business as a whole remained robust. The company pays a dividend of-6.2ppt to 36% in the first half compared with the same period last year, corresponding to a dividend of HK $0.15.
Trend of development
Narrow-body aircraft-based fleet and domestic-based business distribution can effectively resist the impact of the epidemic. As of 1H21, the company has a fleet of 129aircraft (128at the end of vs.20), including 104of its own (103at the end of vs.20) and 25 in escrow. The company's superior fleet structure (narrow-body aircraft accounts for 89%) and customer distribution (78% leased from the organic team to the mainland Aviation Department) help it cope with the impact of the epidemic. As of 1H21, the aircraft occupancy rate is 100% and the rent recovery rate is 99.7%, which is better than that of the industry, while the suspension rate of 8M21 is 11%, which is the best in the industry (according to Cirium data). In addition, the company delivered six aircraft and sold four aircraft in the first half of the year. Looking ahead, the company expects to deliver 16 aircraft and sell 7 aircraft in the second half of the year, 30-35 aircraft and 30 aircraft in 22 years, and will focus on implementing the light asset model and upgrading the escrow aircraft, either from the organic team as a whole or to maintain stability.
The rental income is stable as a whole, and the advantage of the capital side is strengthened. 1) on the revenue side, the company's core rental income is-8.6% to 1.16 billion Hong Kong dollars (73%) compared with the same period last year, mainly due to the decline in the number of financing and operating leased aircraft; the rental yield is rising against the market, with year-on-year + 0.4ppt to 10.5%, reflecting the company's asset-side and client-side advantages; aircraft transaction income from year-on-year + 4.3% to HK $180 million 2) on the cost side, in the first half of the year, the company's overall debt was flat (slightly down 3% from the same period last year), and the interest expense was-16% to HK $580 million compared with the same period last year, corresponding to bank financing costs-1.17ppt to 2.67%. During the reporting period, the company received its first international rating (Moody's Corporation rating Ba1, outlook stable, Fitch rating BB+, outlook stable). We believe that it may enhance its financing edge, enrich financing channels and drive long-term capital cost down; 3) in terms of impairment, the company increased the impairment of rental receivables in the first half of the year by ~ 36 million Hong Kong dollars, accounting for 23% of the total receivables.
Looking forward, we believe that the company is expected to actively grasp the business opportunities in the post-epidemic era with its special all-industry chain model: 1) accelerated decommissioning of old aircraft and increased demand for aircraft disassembly / disposal after the epidemic; the company is expected to capture incremental business development opportunities by virtue of the fleet management and asset disposal capabilities of the whole industry chain. 2) the leasing penetration rate of the industry has increased to about 50% in the first half of the year, and the company is expected to rely on sufficient liquidity (HK $3.9 billion in cash on hand as of 1H21, liquidity support and continuous increase in holdings by the major shareholder Everbright Group) and an attractive fleet to achieve a steady increase in profits and share after the epidemic.
Profit forecast and valuation
Considering the risk of impairment of rental receivables under the epidemic, the profit in 2021 will be reduced by 9% to HK $750 million, and the profit will be maintained at HK $910 million in 2022. The company traded 0.9 × Phammer B in 2021, lowering its target price by 13% to HK $7.5, corresponding to 1.2 × PCompB and 38% upside space in 2021; maintaining an "outperform industry" rating.
Risk.
Global epidemic prevention and control is lower than expected; Aviation Division customer bankruptcy risk; asset impairment uncertainty.