The company's revenue for 2023 was in line with expectations. In 2023, the company achieved revenue of HK$4.76 billion (in line with our expectations of HK$4.79 billion), an increase of 14.2% over the previous year. Among them, leasing revenue was HK$4.20 billion, up 18.5% year over year. The main driver of the increase, which was slightly higher than our expectations, was the increase in the number of aircraft used by the company to operate and lease from 97 in 2022 to 113 in 2023 (an increase of 16.5%). Other operating income was HK$570 million, down 10.2% year on year. The main reason for the growth was lower than our expectations: in an environment of high overseas interest rates, the company's strategy was to slow down aircraft sales, and only 5 aircraft were sold in 2023.

Profit attributable to the company's shareholders in 2023 fell short of expectations. Profit attributable to the company's shareholders in 2023 was HK$28 million, lower than our forecast of HK$400 million. The main reasons are: 1) interest expenses exceeded expectations, and the average actual interest rate of the company's bank and other loans in 2023 was 6.12%, compared to only 4.20% in the same period in 2022; 2) the company made an impairment provision of approximately HK$160 million for CAG Group's shareholder loans based on prudential principles, considering the overseas high interest rate environment. If this non-operating and non-cash provision were added, the profit attributable to the company's shareholders would be HK$180 million. Looking forward to the future, considering that the domestic market is highly liquid and the company's RMB borrowing costs continue to fall, the company plans to continue to increase the share of RMB loans. At the same time, as expectations of overseas interest rate cuts are fulfilled, the company's cost pressure is expected to ease, and profit flexibility is expected to be released.

Shortage of aircraft supply is expected to drive up aircraft value and rental yields: from an industry perspective, supply chain shocks have caused Airbus and Boeing to cut delivery plans several times, and their current backlog of orders is about 10 times the average annual target delivery volume, and production capacity of the two major aircraft manufacturers is tightening. At the same time, global demand for air travel recovered rapidly after the pandemic, and the aircraft market (especially overseas markets) showed a trend where supply was in short supply. From the company's perspective, the total number of Airbus orders owned by the company is 113, and the cumulative number of orders and leases are close to half. Currently, the new lease contracts can only reserve seats for 2026-2027. The company's aircraft assets are “in demand”, and it is expected that the next 3-5 years will be a relatively clear lessor market. In this context, considering that more than 90% of the company's aircraft are narrow-body aircraft, which are popular in the market, we are optimistic that aircraft value and rental yield will continue to rise.

Profit forecast and investment rating: Considering that overseas interest rate cuts still have to wait, we adjusted the company's net income forecast for 2024-2026 to HK$51.5/53.3/5.47 billion, and the profit forecast attributable to shareholders of the company to HK$23/50,000,000. The current stock price is 0.57/0.52/0.47 times the 2024-2026 P/B, respectively. Our target price is HK$4.3, maintaining a “buy” rating.

Risk warning: Global aviation demand growth falls short of expectations, aircraft delivery progress falls short of expectations, declining aircraft value has led to asset impairment, and overseas interest rate cuts have slowed down.