1H22 performance meets profit warning
China aircraft leasing 1H22 income + 19% year on year to HK $1.89 billion, net loss after tax HK $130 million (in the upper range of performance warning-HK $1.7 to-HK $130 million) Excluding the impairment effect of two Russian-related aircraft (HK $440 million), the adjusted net profit is HK $310 million, + 2% year-on-year, and the dividend per share in the first half of the year is flat at HK $0.15 year-on-year, corresponding to 36% of the adjusted EPS, reflecting its sound main performance and sufficient liquidity on hand.
Trend of development
The size of the fleet is growing in an orderly manner and there are plenty of orders on hand. By the end of 1H22, the company had a fleet of 163aircraft, of which 138were of its own, + 11 at the beginning of the year and 25 in escrow. The company's self-organic team rental rate (100%, excluding 2 Russian-related aircraft), flight rate (> 90%), and the proportion of narrow-body aircraft (90%) are all at the industry leading level; at present, the order sheet reaches 241, ranking third in the world. We believe that it will provide effective support for its future business growth. In terms of customer distribution, 76.8% of the company's aircraft are leased to the China Aviation Department, enabling it to maintain a high occupancy rate and rent recovery rate during the epidemic; at the same time, in view of the current strong recovery in the overseas aviation market, the company plans to lease more than half of its aircraft to overseas customers by 2023, and in the long run, we expect the company's domestic and foreign markets to keep pace.
Core rental income continues to grow and interest costs rise. Revenue: 1) 1H22 rental income is + 43% to HK $1.65 billion, accounting for 87% of total revenue, mainly due to the growth of fleet size; the company plans to deliver 22 new aircraft in the second half of the year, which we expect to provide further support for rental income growth.
The rate of return on 1H22 leasing is 13.5% higher than that in 2021, mainly due to the purchase and leasing of new old aircraft. 2) aircraft trading revenue is-63% to HK $66.49 million compared with the same period last year, and the number of aircraft sold in the first half of the year dropped to 2 from 10 in the same period last year. We expect the number of aircraft sold to pick up in the second half of the year. Cost:
1) the interest expense is from + 31% to HK $760 million compared with the same period last year. On the one hand, the scale of interest payment is + 23% compared with the same period last year, and on the other hand, the increase in Libor drives the company's comprehensive cost of capital + 22bps to 4.45%. 2) the depreciation cost was + 57% to HK $590 million compared with the same period last year, mainly due to the increase in the size of operating leased aircraft from 55 to 87.
The relationship between supply and demand in the industry continues to improve, and the competitiveness of leading leasers is strengthened. Combined with the strong recovery trend of the global aviation industry (according to the 83% year-on-year growth of global passenger traffic in the first half of IATA,2022, 71% of the 19-year level), the lower-than-expected aircraft delivery process caused by manufacturers' supply chain problems, and the trend of increasing leasing penetration in the post-epidemic recovery phase of airlines, we expect the operation of leading leasing companies to enter the improvement channel. CFC will continue to strengthen its comprehensive competitiveness in new aircraft leasing, old aircraft disposal, and fleet replacement solutions.
Profit forecast and valuation
Due to the lower-than-expected aircraft sales and the impact of one-time impairment, the 22-year revenue / profit of 5 per cent was reduced by 69 per cent to HK $3.5 billion / HK $200 million, leaving the 23-year forecast basically unchanged. The company trades on 0.8x/0.7x22/23e Pamp B; maintains an outperform industry rating and reduces its target price by 17% to HK $6.2based on the valuation of Pamp B and the downside of market risk appetite (corresponding to 1.0x/0.9x 22max 23e Pamp B and 29% upside).
Risk
Geopolitical risk; global epidemic risk; demand repair is not as expected; aircraft delivery is delayed.
