The company's recent situation

We recently organized a reverse road show with BOC Aviation Leasing management. The company exchanged views on key issues that the market is concerned about, such as rent trends, fleet growth, financing conditions, and aircraft sales.

reviews

Tighter supply and demand continue to raise rent prices, and the speed of delivery is a key influencing factor in current rent realisation.

The continued recovery in global aviation demand (according to IATA data, global passenger traffic is expected to increase 10%/6% year on year in 2024/25, with Asia Pacific up 16%/9% year on year) vs. capacity constraints on aircraft production and supply (according to Cirium, aircraft deliveries are expected to drop 1% year on year; according to company estimates, supply constraints are expected to continue until at least 2026), driving up aircraft rental rates; the company's gross leasing yield remained flat year on year in the first half of the year, mainly due to delayed delivery of new aircraft and sales of old aircraft with lower book value. At the same time, four aircraft leasing (including the new takeover of the aircraft by Russia, which the company expects to complete delivery in the 3rd quarter) also affected yield performance in stages. According to the company's announcement, according to current delivery commitments, a total of 29 aircraft are expected to be delivered in the second half of the year (accounting for 62% of annual deliveries), and we expect to see a trend along with delivery rate restoration and gross lease yield expansion.

Financial leasing will still provide important phased opportunities. The company not only provides airlines with aircraft (operating leases), but also provides capital (financial leases) to airlines. The operating lease includes the remaining value of the aircraft.

Overall, operating leasing will remain the company's main product supply. At the same time, the company will also seize the financial leasing business development window in recent years and increase the scale of financial leasing in the short term. The main reasons are: 1) the financial leasing market has sufficient business needs, but the supply of banks and other funds has not yet been restored; 2) the company provides competitive advantage under the company's high-quality credit rating; 3) the company can achieve steady risk management and control of financial leasing by relying on aircraft evaluation expertise, strict risk control procedures, and high-quality customer screening.

The upward trend in financing costs may slow down, and overseas interest rate cuts will further provide catalysts. 1) We expect the cost of new debt issuance to be close to the current average inventory cost: considering the current 5-year US Treasury yield of 3.65%, combined with the average bond issuance spread of 106 bps in the first half of the year, the cost of new debt issuance is expected to decline marginally in the second half of the year and is close to the current 1H24 4.6% financing cost; 2) The cost of floating interest rate liabilities (accounting for about 30% of the total debt structure) is expected to decline due to heavy pricing; 3) The amount of debt outstanding in the second half of the year is 0.9 billion US dollars, which is smaller than 2.7 billion dollars of maturing debt in the first half of the year, or reducing the maturity of existing debt The marginal impact of replacement on financing costs.

Continued increase in asset value will help boost aircraft sales revenue. The profit forecast and valuation took into account aircraft delivery delays and lowered the company's 24e/25e net profit by 4% to 0.775 billion/0.718 billion US dollars, of which the 24-year core net profit corresponds to 0.6 billion US dollars; the company is currently trading at 0.98x/0.91x24e/25e P/B. Maintain an outperforming industry rating and target price of HK$81.4 (corresponding to 1.2x/1.1x24e/25e P/B with 20% upside).

risks

Aircraft deliveries fell short of expectations; interest environment exceeded expectations; geopolitical risks.