Incident: BOC Aviation Leasing disclosed 1H24 results, in line with previous positive profit forecasts. The company 1H24 achieved total revenue of 1.174 billion dollars/yoy +11%; net profit after tax of 0.46 billion US dollars/yoy +76%; core net profit after tax of 0.284 billion US dollars after excluding the recovery of 2 delayed Russian freighters B747-8F during the reporting period.

The fleet maintains a “youthful” operation, and BOCA's rich order book and new leases promise to lock in strong future profits in the context of limited supply. Fleet operation: According to the company's announcement, 1H24 has a fleet size of 680 aircraft, including 429 aircraft (yoy+25) from its fleet, with a utilization rate of 99% of its own aircraft at the end of the period (excluding 4 aircraft stranded in Russia); the average age of the aircraft after net book value is 4.9 years (4.7 years 2Q23), and the average remaining lease period is 7.9 years (2Q23 8.0). Sale and new lease signing: 1H24 sold 15 of its own aircraft (of which 11 were sold in 2Q24) and signed 55 new lease commitments. Order book situation: The final order book of 219 aircraft (scheduled to be delivered until the end of 2029, of which all aircraft scheduled to be delivered before 2025 will determine the airline). A rich order book and new signing promises will support the company's future performance growth in the context of limited supply.

The company's net rental yield is expected to rise steadily under strong industry demand and weak supply. According to the latest IATA data, global RPK yoy +9.1%, ASK yoy +8.5%, and PLF 85% in June 2024. BOCA aircraft dismantling revenue (1H24 accounts for 87% of revenue) = net book value of owned aircraft* rental yield. On the one hand, BOCA's own aircraft are steadily expanding. On the other hand, BOCA's fleet is dominated by the narrow-body A320 series and B737 series (which together account for 83%). The aircraft that have already been ordered (mainly Boeing 737 and Airbus A320) are all fuel-efficient models with the latest technology to meet market demand. We believe that while demand for air passenger transportation continues to recover and airline profits and cash flow improve, Boeing and Airbus aircraft manufacturing supply are limited, BOCA aircraft asset valuation rises, and the company's net leasing yield is expected to continue to rise in the future (1H24 7% /yoy remains flat), thus driving the growth of leasing revenue.

Interest spreads on newly issued bonds in a high-interest environment have reached a record low, and BOCA's financial expenses are expected to be reduced in anticipation of the Federal Reserve's interest rate cut. The 0.5 billion dollar bond issued by 2Q24 in May had a financing cost of 5.25% (80 bps compared to 10-year US bonds for the same period). Interest spreads reached a record low in a high-interest environment, demonstrating the company's ability to finance at low cost. We analyzed the possibility that the Federal Reserve will start cutting interest rates during the year in “Approaching the critical window for the Federal Reserve to cut interest rates, seizing Hong Kong stock allocation opportunities sensitive to US bond interest rates — Hong Kong Stock Market Monthly Tracking (24/07)”. BOCA core expenses for dismantling = aircraft costs (depreciation+impairment) +financial expenses, of which financial expenses accounted for 54% of total expenses in 1H24 (historical high). Further decomposition of financial expenses = loan size* cost of capital. Considering that BOCA capital costs generally change with the US federal benchmark interest rate, we believe that the expected interest rate cut by the Federal Reserve is expected to reduce BOCA financial expenses (BOCA capital cost 1H24 4.6%, vs. 4.1% in 2023).

The Asia Pacific region is a core contributor to the recovery of air passenger demand, and BOCA is the largest aircraft leasing company in the Asia-Pacific region. According to the latest IATA data, the Asia Pacific region was the core increase in global air passenger demand (RPK index) in June 2024, contributing 31.7%. According to Airbus forecasts, the Asia Pacific region is the core delivery area for 2024-2043E (accounting for 46% of global deliveries).

BOCA has been deeply involved in the Asia-Pacific region for decades: According to the company announcement, 47% of 1H24's aircraft rental income comes from the Asia-Pacific region; 1H24's layout accounts for 44% of the net book value of aircraft in the Asia-Pacific region. As the largest aircraft leasing company in the Asia-Pacific region, BOCA has built a solid brand advantage in the region and will fully enjoy the dividends brought by the region's high growth.

Investment analysis opinion: BOC Aviation Leasing's 24-25E profit forecast was lowered, 26E profit forecast was added, and the purchase rating was maintained.

Considering that the Federal Reserve's interest rate cut expectations are uncertain, and the capital costs of BOC aviation leasing are lagging behind, we raised 24E's capital costs. Considering that the supply of aircraft manufacturing is still limited, the 25E self-owned aircraft increase was lowered. As a result, the 24-25E profit forecast was lowered, and the 26E profit forecast was added. BOC Aviation Leasing is expected to achieve net profit of 783, 771, and 822 million US dollars (the original forecast for 24E-25E was 822 and 940 million US dollars), +3%, -2%, and +7%, respectively. Demand for air transportation has completely recovered and aircraft leasers' voice in the industry chain has increased in the face of insufficient supply. At the same time, the Federal Reserve's interest rate cut is expected to reduce BOCA's capital cost pressure, thereby driving performance growth and maintaining the BOC Aviation Leasing purchase rating.

Risk warning: The pace of the Federal Reserve's interest rate cuts fell short of expectations; geopolitics and macroeconomics dragged down the recovery of the aviation industry; risk incidents with airline customers made it difficult to recover rents; and aircraft manufacturers' supply deliveries fell short of expectations.