1H24 net profit exceeded our expectations; core indicators performed slower than expected

The company's 1H24 revenue was +11% to 1.17 billion US dollars, and net profit was +76% to 0.46 billion US dollars, exceeding our expectations, mainly supported by the recycling of two Russian aircraft (net profit after tax increase of 0.175 billion US dollars, corresponding net profit accounting for 38%); excluding the impact of Russian aircraft, core net profit +9% year-on-year to 0.284 billion US dollars. The growth rate was slightly lower than our previous expectations, or operating lease income grew lower than expected due to limited delivery, while maintaining low-interest debt The high interest rate environment combined with maturity raises financing costs.

Development trends

The limited expansion of the operating leasing fleet dragged down revenue performance in the first half of the year, and sales accelerated the monetization of asset value premiums. 1H24's operating lease rental revenue was -1% year-on-year to 0.93 billion US dollars, accounting for 79% of total revenue, of which: 1) Delivery: The 1H24 order book delivered 6 new aircraft, accounting for 33% of total deliveries. OEM capacity restrictions dragged down the short-term expansion of the operating leasing fleet, but we believe that the company's sufficient and high-quality order book structure is expected to lay the foundation for long-term fleet growth; 2) Price: 1H24 rental factor remained flat to 9.8% year on year, and the net lease yield for corresponding operating leases remained flat to 7.0% year on year, or was limited mainly due to new aircraft deliveries and Sales of old aircraft with low book value have accelerated. We believe that the improvement in delivery in the second half of the year may drive the rental factor into the upward channel; 3) Disposal: 1H24 aircraft sales revenue +301% to 55.87 million US dollars (aircraft sales yield compared to 1H23/2023 -1pct/+3pct to 14%, year-on-year decline or due to differences in the sales fleet structure). The assessed market value of the company's leased fleet is 14% premium over the net book value (vs 8% at the end of 23), reflecting strong aircraft price restoration and also aircraft Sales proceeds create space.

Financial leasing provides an engine for growth, and pricing has risen significantly in a high-interest environment. 1H24's financial leasing revenue was +380% to 96 million US dollars year-on-year, accounting for +5pct to 8% of total revenue compared to the full year of last year.

Among them: 1) Delivery: As of 1H24, there were 59 financial leasing aircraft (VS.1H23 12), and the company delivered 12 new financial leasing aircraft in the first half of the year; 2) Price: The yield on financial leasing rental was +1.0pct to 7.2% year-on-year, or the increase in interest rate pricing was mainly driven by the high interest rate environment and the high capital requirements of airlines. Looking ahead, based on Cirium, the global aviation industry will need around $90 billion in aircraft financing in '24. Good returns are compounded by strong demand, and we expect financial leasing to continue to contribute an important increase.

Overseas interest rate cuts may catalyze net leasing yields into an expansion channel. 1H24 capital costs were +0.6 pct/month-on-month +0.2 pct to 4.6%, corresponding to a significant increase in total debt compared to the end of last year. Capital costs increased significantly or mainly due to the maturity of existing low-interest debt. The company's credit spread for bonds issued in the first half of the year was lower than last year's and historical levels, effectively controlling the cost of incremental debt. Looking ahead, we believe that if the Federal Reserve cuts interest rates, the company's incremental financing costs are expected to decline, which in turn will drive net rental yields into an expansion channel.

Profit forecasting and valuation

Considering the increase in one-time Russian aircraft recycling revenue in 24 years, we raised the company's 24-year profit by 11% to 0.81 billion US dollars; considering that delivery delays dragged down operating lease performance, we lowered 25-year profit by 3% to 0.75 billion US dollars. Currently, the company is trading at 24e/25e 1.0x/0.9x P/B. Maintain an outperforming industry rating and target price of HK$81.40 (corresponding to 24e/25e 1.2x/1.1x P/B and 18% upside).

risks

Geopolitical risks; demand recovery falls short of expectations; aircraft delivery delays exceed expectations.