Net profit after tax is expected to increase 70-80% year-on-year

Bank of China Aviation Leasing (BOCA) disclosed the 1H24 profit forecast on August 5. The net profit after tax of 1H24 is expected to increase by 70-80% year-on-year, corresponding to USD445-471mN. The main driving factor is the two Boeing 747 aircraft taken back in March. We expect 1H24's comparable core net profit to increase 32%-42% year over year after excluding the impact of aircraft take-back, which is a relatively strong level. We believe that there will still be a situation where supply is less than demand in the aviation leasing market in 2024, and the rental rate and aircraft value will still increase; in addition, the upward pressure on financing costs is expected to be released. The net rental yield is expected to be no lower than in 2023, and the core ROE will be better than in 2023. We raised our forecast for net profit to mother for 2024/2025/2026 to 0.81/0.75/0.83 billion US dollars (previous value: 0.72/0.75/0.82 billion US dollars), and the core net profit for 24 was 0.71 In billion dollars, the target price was raised to HKD82 (previous value: HKD78), based on 1.15x 2024E PB (2019 1-1.5x PB) and 2024E BVPS of $9.17, maintaining the “buy” rating.

Taking back two Boeing 747s boosts net profit,

On March 24, the company announced the withdrawal of two Boeing 747 aircraft originally leased to relevant Russian airlines in March. In 2022, the company reduced the value of all 17 aircraft stranded in Russia. The net book value of the aircraft was USD804Mn, partially offset by USD223Mn cash collateral held by the company, and the net deduction before tax was USD581Mn. The Boeing 747s that were taken back this time are two wide-body aircraft. Based on IBA's forecast of the market value of medium-life wide-body aircraft, we estimate that the impact of the aircraft recall on net profit is approximately USD100mn.

3 factors driving core net profit

The increase in core net profit mainly comes from 3 aspects: 1) Fleet expansion drives net leasing revenue growth. The number of owned aircraft increased year-on-year to 429 at the end of 2Q24 (404 at the end of 2Q23). 1H24 Imbalances in supply and demand drive up rental rates. Although the upward pressure on financing costs has decreased, we expect it to remain higher than 1H23, and we estimate that the 1H24 net lease yield may remain flat. 2) Revenue from aircraft sales is an important factor driving the year-on-year increase in core net profit. 1H24 sold 15 aircraft (1H23:3), and the value of the aircraft also increased year over year. 3) The new financial lease agreements signed by the company in 2H23 and 1H24 also contributed to the increase in core net profit.

2024 core ROE expected to be higher than 2023

Throughout 2024, we expect supply shortages in the industry to continue, and rental rates and aircraft values will continue to rise. Also, considering the company's financing strength and the high global interest rate pressure that may be released in the second half of the year, we expect the net rental yield for the full year of 2024 to be no lower than in 2023. Furthermore, we expect the company to maintain a steady pace of aircraft sales in the second half of the year and seize the cyclical opportunities for aircraft values to rise. The 24-year core ROE is expected to be higher than the 23-year core ROE. The company's stock price is currently trading at 0.9x 2024EPB and 4.7% 2024E dividend rate. It is recommended to focus on the company's allocation value.

Risk warning: 1) The aviation industry is recovering slowly; 2) the cost of debt financing is rising rapidly; 3) aircraft supply continues to be disrupted; 4) US dollar liquidity is tightening.