Core views

At 24H1, the company achieved net profit of 0.46 billion US dollars, +76% year over year; after excluding the impact of the withdrawal of the two remaining Russian aircraft, the core net profit was 0.284 billion US dollars, +10% year on year, exceeding unanimous expectations, and high performance growth continued. 1) In terms of volume, the company sold 15 old aircraft in the first half of the year, and introduced 12 aircraft through post-purchase leasing; 2) In terms of price, the rental rate remained 9.8% in the first half of the year, but due to rising interest rates, the net lease yield was 7.0%, down slightly from 7.1% in 2023A but the same as 23H1; the rental yield on financial leases reached 7.2%, higher than 6.2% of 23H1 and 6.6% of 2023A. Currently, the company's financial leasing profitability is good, and it is expected that in the future, it will achieve high performance growth through sufficient bank credit to carry out machine purchases and leaseback. I'm looking forward to the double click that the downward cycle of interest rates will usher in.

occurrences

The company announced its 2024 interim results announcement, with strong performance growth. The market expected that the company's total revenue for the first half of 2024 was +11% to 1.174 billion US dollars, slightly worse than BBG's agreed estimate of 1.266 billion US dollars; recorded net profit after tax of 0.46 billion US dollars, +76% year over year; excluding the impairment and return caused by the two remaining Russian aircraft taken back in March 2024, the core net profit was 0.284 billion US dollars, +10% over the same period last year, exceeding BBG's agreed expectations $0.268 billion, high performance growth continues.

Brief review

The impact of aircraft remaining in Russia is on the market: the withdrawal of Russian aircraft brings significant increases in shareholder returns

Looking at the impact of the repurchase of Russian aircraft on the company, (1) in 2022 due to the Russian-Ukrainian conflict, the company calculated an impairment loss of 0.791 billion US dollars in 2022; after deducting the lease security deposit of 0.223 billion US dollars and the income tax credit of 0.061 billion US dollars, the net impact after tax was 0.507 billion US dollars; (2) in 2023, the company received compensation from the insurance company for 11 Russian aircraft $0.258 billion. The company has stopped making claims against Aeroflot, insurance companies and other relevant parties for these 11 aircraft; (3) In March 2024, the company took back the two 747-8F aircraft that had previously been stranded in Russia, confirming that the impairment of these two aircraft was returned to $0.1748 billion, which brought a significant increase in the company's current net profit. According to the company's announcement, as of the end of June 2024, the net deduction amount for the remaining 4 Russian aircraft before tax was 0.1184 billion US dollars.

We believe that since the Russian-Ukrainian conflict broke out in 2022 and the company announced that the stranded Russian aircraft could not be recovered, the company's previous stock price fully reflected the impact of the deduction and impairment of the aircraft remaining in Russia. Since then, the company's announcement to obtain claims from insurance companies and take back the two aircraft stranded in Russia has not caused significant fluctuations in the company's stock price. However, we believe that on the one hand, as Russian aircraft continue to reach settlements and be withdrawn, the company's compensation and recovered aircraft will drive future growth while promoting the restoration of the company's balance sheet; on the other hand, even without considering the disruption of the company's normal operations by Russian aircraft, the positive impact of the Russian aircraft's withdrawal on net profit is expected to increase shareholder returns. Previously, the company's net profit fell sharply to 0.02 billion US dollars in 2022. In order to guarantee shareholders' returns, the company calculated dividends based on 35% of the company's core net profit of 0.527 billion US dollars after excluding the effects of the Russian aircraft write-down; then, for the 2023 and 2024 interim dividends, the company calculated dividends based on financial net profit including compensation and impairment transfers from Russian aircraft, which shows the importance the company attaches to shareholders' returns.

Operating leasing: The net lease yield remained stable, and the revenue scale declined in the first half of 2024 due to factors such as upstream aircraft manufacturers' delivery schedule falling short of expectations and the continued rise in the downstream aviation market. The rental rate for the company's operating leasing business was 9.8%, in line with 23H1 and 2023A; however, due to an increase in the 24H1 market interest rate compared to 23H2, the net leasing yield remained 7%, which was the same as 23H1 but lower than 7.1% of 2023A.

In the first half of 2024, the company added 6 new operating leased aircraft and sold 15 aircraft, resulting in a net reduction of 9 aircraft in the number of aircraft used for operating leases; affected by this, 24H1 rental revenue fell 1.3% year on year to 0.928 billion US dollars.

Financial leasing: The number of aircraft launched and rental yield have risen rapidly. Since 2023, the company has continued to expand its fleet size through the aircraft purchase and leaseback business. 2023A and 24H1 introduced 46 and 12 aircraft, respectively; and since the aircraft obtained by purchasing and leasing back are in the financial leasing model, the number of aircraft used by the company for financial leasing has increased significantly; as of June 30, 2024, the number of aircraft used by the company for financial leasing was 59, compared to 6 in 2023 There was a significant increase of 12 aircraft on January 30 and 47 aircraft on December 31, 2023 (and all were introduced as a method of purchasing and leasing). On the other hand, due to factors such as the global high interest rate environment and strong demand from downstream airlines, the company's aircraft's financial lease rental yield reached 7.2%, higher than 6.2% of 23H1 and 6.6% of 2023A.

Thanks to the “sharp rise in volume and price” in the number of aircraft and rental yield, 24H1's financial leasing interest income reached 0.096 billion US dollars, a significant increase of +379.5% over the previous year.

Aircraft sales: The number of aircraft launched and rental yields have risen sharply. The rapid increase in financial leasing interest income was affected by factors such as delayed delivery of upstream aircraft manufacturers and strong demand from downstream airlines. The tight supply and demand relationship in the 24H1 aircraft market intensified, and aircraft value increased dramatically; the average valuation of 24H1 aircraft had a 14% premium compared to net book value, which greatly increased the yield on aircraft sales to 1.4 percent.

In this context, the company seized market opportunities to accelerate the elimination of old aircraft and sold 15 aircraft at 24H1 (vertical comparison: 23H1 and 23H2 sold 3 and 17 aircraft respectively; horizontal comparison: A ERCAP and Air Lease sold 64 and 16 aircraft respectively at 24H1), and the average age of the aircraft sold by the company was 10 years, which is about twice the average age of the fleet. At 24H1, the company achieved a net revenue of 0.056 billion US dollars from aircraft sales, a significant increase of 300.7% over the previous year.

Investment advice: The company's fundamentals have been excellent for a long time, and it is expected that the decline in interest rates will bring a double hit. Maintaining a purchase rating of 24H1 is affected by factors such as delayed delivery by upstream aircraft manufacturers and strong demand from downstream airlines; 1) In terms of volume, the company seized the market opportunity to sell 15 old aircraft and achieved considerable sales revenue. At the same time, 12 aircraft were charged through post-purchase leaseback. The fleet size was expanded and financial lease interest income increased dramatically; 2) In terms of price, the company maintained a high rent rate of 9.8% under tight market supply and demand. rank However, due to the rise in 24H1 interest rates compared to 23H2, the company's net rental yield fell slightly to 7.0% compared to 7.1% in 2023A, but remained the same year on year as 23H1. 3) Furthermore, the two aircraft taken back to Russia brought the company a performance increase of 0.17 billion US dollars, thereby driving the company's interim dividend of 0.1988 US dollars/share, a significant increase of 76% over the previous year, to a record high.

Looking ahead, some investors are concerned about the future growth of the company's performance and the company's profitability. However, we believe that as the world's leading aircraft operator and leasing company, the company has successfully gone through multiple industry cycles under the leadership of an experienced executive team, and will also achieve high-quality steady expansion and maintain a higher level of profitability than the industry in the future.

First, in terms of growth, there are currently 219 aircraft awaiting delivery on the company's order book, but according to the current production schedule of aircraft manufacturers, the company expects to deliver less than 50 aircraft by 2026, which is a certain gap compared to other major leasers. However, we believe that the company's steady financial situation and sufficient credit lines will be expected to provide the company with strong capacity to expand its accounts, and in the future, the company is expected to achieve countercyclical expansion through the purchase of aircraft and leasing back. Reviewing history. Previously, during periods of downturn in the aviation market, such as the financial crisis of 2008 to 2009 and the COVID-19 pandemic from 2020 to 2022, companies could use their sufficient bank credit lines to take the opportunity to buy and lease back the aircraft, thus achieving rapid expansion in fleet size at competitive prices. However, with the strong support of the parent company Bank of China and the company's good financial performance, the company currently still has an unsecured loan credit of 4.9 billion US dollars that have not been withdrawn; therefore, we believe that it is inappropriate to simply evaluate the company's future growth space based on the current aircraft order situation. When market conditions are appropriate, the company can use huge bank credit to reverse the trend, and the company's capacity and growth capacity are still sufficient.

Second, in terms of profitability, some investors have certain questions about the profitability of the financial leasing model. Admittedly, the main income from financial leasing comes from interest income from interest spreads. The main competitiveness lies in the company's capital costs and use of financial leverage. However, we believe that on the one hand, the company's financial situation is good and capital costs are lower than those of its peers, which has brought significant competitiveness to the company; on the other hand, the current financial lease rental yield has risen sharply in the face of tight aircraft supply and demand and high market interest rates. 24H1 has reached 7.2%, up from 6.2% in 23H1 and 6.6% in 2023A. We estimate that after taking into account aircraft sales revenue and depreciation costs generated by operating leasing, the net profit margin of financial leasing may be higher than operating leasing; moreover, if the industry cycle declines in the future, it will be easier for companies to buy and rent back the aircraft on more favorable terms during the downturn period, thereby increasing the profit margin of financial leasing.

At present, the aviation market has basically recovered to pre-pandemic levels; according to IATA data, as of the end of June 2024, ASK and RPK in the domestic market were equivalent to 108.85% and 109.04% of the same period in 2019 before the pandemic, respectively; with the downstream market basically recovering, we think there is room for further increase in rental rates, and because upstream aircraft manufacturers are still slow, the revenue growth space is also limited to a certain extent, so in the short term, market interest rate decisions may be a major factor in the company's performance. Currently, the company's floating interest rate debt accounts for about 30%. According to the company's guidelines at the mid-term results conference call, adjustments in market interest rates can be transmitted to the company's debt costs in about 3 months, and every 10 bps decline in market interest rates is expected to increase the company's profit by 6 million dollars. Under a neutral assumption, if the Federal Reserve starts cutting interest rates in September, it is expected to boost the company's profits while at the same time driving the company's valuation repair, and the company's stock price is expected to experience a “double hit by Davis.”

Considering the impact of the two remaining Russian aircraft taken back in March and under the neutral assumption that the Federal Reserve will start cutting interest rates in September, we expect the company's net profit for 2024/2025/2026 to be 0.742/0.723/0.814 billion US dollars, respectively. The target price for the next 12 months was HK$84.32, corresponding to 1.2 times PB in 2024, maintaining the buy rating.

Risk warning:

The recovery of the aviation market fell short of expectations: although the aviation market showed a strong recovery trend after the pandemic, there is great uncertainty about the recovery of the aviation market due to various factors such as macroeconomics and residents' willingness to travel. If the recovery of the aviation market falls short of expectations, the demand for aircraft and the ability of the company's downstream airlines to repay will deteriorate, which will adversely affect the company's performance.

Aircraft delivery falls short of expectations: Aircraft delivery is affected by multiple factors such as the manufacturer's production schedule, and there is some uncertainty. If aircraft delivery falls short of expectations, it will adversely affect the company's ability to achieve future performance and competitiveness.