1H24 net profit beat our expectations
BOC Aviation's revenue rose 11% YoY to US$1.17bn and net profit grew 76% YoY to US$460mn, beating our expectations, mainly due to the recovery of two Boeing 747-8F (the aircraft recovery boosted after-tax net profit by US$175mn, equaling 38% of net profit). Excluding the impact of aircraft recovery, core net profit rose 9% YoY to US$284mn. The growth in core net profit was slightly slower than our expected, possibly due to slower-than-expected growth in leasing revenue from operating leases amid delayed delivery, as well as higher financing costs driven by the maturity of existing low-interest debts amid high interest rates.
Trends to watch
Constraints on fleet expansion subject to operating leases weighed on 1H24 lease rental income; accelerating disposal of aircraft helped the firm reap benefits from the price premiums of its assets. In 1H24, rental income from operating leases fell 1% YoY to Rmb928mn, accounting for 79% of the company's total revenue.
Delivery: The firm acquired six new aircraft on operating lease from orderbook in 1H24, accounting for 33% of total deliveries. OEM capacity constraints weighed on the fleet expansion subject to operating leases in the short term, but the firm's ample and high-quality orders will likely lay a foundation for long-term fleet expansion.
Price: In 1H24, the operating lease rate factor stood at 9.8%, which made the net operating lease yield keep stable at 7.0% in 1H24 despite rising cost of debt(YoY growth flat vs. 1H23). We think the restrictions on the delivery of new aircraft and accelerated sales of old aircraft with low book value weigh on the growth of lease rate factor. And in our view, if the pace of delivery improves in 2H24, the lease rate factor will likely increase.
Disposal: Net gain on aircraft sales rose 301% YoY to US$55.87mn in 1H24. Yield from aircraft sales fell 1ppt (vs. 1H23) and rose 3ppt (vs. 2023) to 14%, and we think the YoY decline was possibly due to the different structure of aircraft sold. The current market value of BOC Aviation's operating leased fleet, as assessed by their appraisers, now exceeds net book value by 14% (vs. 8% at end-2023), reflecting strong recovery in aircraft prices and will boost the firm's gains from aircraft sales.
Financial leases generated growth engine; the lease rental yield for aircraft on finance leases rose notably amid high interest rates. In 1H24, the interest income from finance leases rose 380% YoY to Rmb96mn, and its percentage of total revenue rose 5ppt YoY to 8%. The firm's aircraft on finance leases increased from 12 in 1H23 to 59 in 1H24, and it newly delivered 12 aircraft subjected to finance leases in 1H24. The lease rental yield for aircraft on finance leases increased by 1ppt YoY to 7.2% in 1H24, possibly due to price hikes driven by high-interest rates and airlines' strong capital demand. Cirium estimates that the global aviation industry will need funds of about US$90bn in 2024. We expect finance leases to continue to contribute significant earnings growth drivers amid high earnings and robust demand.
The drop in overseas interest rates will help the net operating lease yield expand. In 1H24, the cost of funds rose 0.6ppt YoY and 0.2ppt HoH to 4.6%, with a 2% decline in total debts compared with the end-2023 level. The significant increase in cost of funds may be caused by the maturity of existing low-interest debts. The credit spread of the firm's bonds issued in 1H24 was lower than last-year and historical levels, showing that BOC Aviation had effectively controlled incremental debt costs. Looking ahead, if the Fed cuts interest rates, we think the firm's incremental financing costs will likely drop and its net lease rental yield will likely trend upward.
Financials and valuation
As the recovery of two Boeing 747-8F will have a one-off positive impact on the company's financials in 2024, we raise our 2024 earnings forecast 11% to US$807mn. Given that delayed delivery weighed on operating leases, we lower our 2025 earnings forecast 3% to US$750mn. The stock is trading at 1.0x 2024e and 0.9x 2025e P/B. Considering the P/B valuation, we maintain an OUTPERFORM rating and our TP of HK$81.40, implying 1.2x 2024e and 1.1x 2025e P/B, offering 18% upside.
Risks
Geopolitical risks; demand recovery disappoints; delay in fleet delivery.