Event: Company announces 2023 results. The company achieved revenue of HK$4.76 billion in '23, up 14.2% year on year; realized net profit of HK$220 million, up 2.1% year on year; realized net profit to mother of HK$28 million, down 61.6% year on year, mainly due to a sharp increase in perpetual bond costs. Excluding CAG impairment effects, the company's net profit in '23 was approximately HK$380 million, up 111% year on year; net profit to mother was approximately HK$180 million, up 410% year on year. The company plans to pay a year-end dividend of HK$110 million (HK$0.15 per share), plus an interim dividend for 23 years. The company will pay a total dividend of HK$220 million (HK$0.3 per share) for the full year of '23. The actual cash dividend rate (adjusted) is approximately 121%, which is the same as the dividend amount (HK$0.3 per share) for the same period last year.

The recovery in aviation demand continues to recover, and the company's fleet size continues to grow. At the end of 2023, the company's fleet size was 165 (an increase of 15 over the previous year), including 48 aircraft under financial lease agreements (1 decrease over the previous year) and 117 aircraft under operating lease contracts (an increase of 16 over the previous year). In addition, the company also managed 27 aircraft (1 increase over the previous year). In 2023, the company delivered 21 new aircraft to customers, a year-on-year decrease of 7 aircraft.

Average rental yields have declined, and rental revenue has risen sharply. The company's average rental yield in 2023 was about 11.4%, a year-on-year decrease of 0.5 pct. Among them, the average yield of financial leasing was 13.2%, a year-on-year decrease of 0.6 pct; the average yield from operating leasing was 11.7%, which was the same as the previous year. Taken together, the company achieved leasing revenue of approximately HK$4.20 billion in 2023, an increase of 18.5% over the previous year.

Net revenue from aircraft transactions declined. The company sold 5 aircraft in '23, the same as the same period last year. The company's net revenue from aircraft transactions in 2023 was HK$120 million, a year-on-year decrease of 39.9%.

The increase in interest rates in the US dollar led to an increase in financing costs. The company's operating expenses in 2023 rose 25.3% year on year, with interest expenses up 50% year on year, mainly due to the increase in the company's financing costs in the US dollar interest rate hike environment. The average real interest rate on the company's interest-bearing debt in 2023 was 6.12%, an increase of 1.92 pct over the same period last year; depreciation expenses rose 19.3% year on year. In addition, the company accrued impairment on the CAG project in '23 (affecting net profit after tax of about HK$160 million); it received compensation from a Russian aircraft (HK$185 million).

The company's future self-reliance team is likely to decline to reduce the balance to debt ratio. The company plans to deliver 17 aircraft in 2024, and plans to sell 30 aircraft, with a total net reduction of 13 aircraft, mainly to reduce the company's interest-bearing debt and pole ratio, thereby helping the company improve its international credit rating and reduce future financing costs.

Redeem part of the perpetual debt. The company issued US$200 million perpetual bonds in 2020, and actual payment costs increased significantly due to rising short-term interest rates. The company completed the redemption of 100 million US dollars of perpetual bonds in December '23, but the impact on the company's net profit due to mother will be reflected later. It is expected that the company will continue to redeem the remaining perpetual bonds in the future.

Investment advice: Global aviation demand is recovering rapidly, aircraft values and rents continue to rise, driving the company's revenue recovery; rising short-term financing costs erode the company's profit release. Considering the rise in the company's short-term financing costs and the time it will take to absorb perpetual bonds, we lowered the 24-25 net profit forecast by 53%/19% to HK$340 million and HK$630 million respectively, and added the 26-year net profit forecast of HK$760 million; considering that the company's future profits are still expected to benefit from US dollar interest rate cuts and maintain the company's “gain” rating.

Risk warning: The economic downturn has led to a decline in aviation demand; prices of new and used aircraft have fallen; corporate financing costs have risen; changes in legal and accounting policies have led to an increase in the company's actual tax rate.