Core views:

September 13, 2024 Bohai Leasing Disclosure Notice: Its holding subsidiary Avolon intends to acquire 100% of Castlelake Aviation Limited (CAL)'s shares.

(1) Subject of the acquisition: As of 24Q2, CAL ranked 16th in the world according to asset value.

(2) Transaction price: 0.98xpb total price 1.2 billion US dollars. Against the backdrop of continued growth in aircraft rents, the acquisition of high-quality assets at prices below book value is steady.

(3) Source of capital for the acquisition: Avolon has strong operational independence from the parent company. This acquisition is Avolon's inventory expansion with its own financing and cash based on market environment optimization. As of 2024H1, according to Bohai Leasing's financial report, Avolon's balance ratio was about 73.5%, while BOCA, AERCAP, and AIRLEASE had balance ratios of 75.0%, 76.1%, and 76.4%, respectively. Avolon's balance ratio is lower than that of its peers. This merger and acquisition of high-quality assets through other financing methods such as self-financing will help accelerate expansion and consolidate its position as a leading aircraft leasing company.

(4) Necessity of acquisition: Currently, OEM deliveries continue to decline, and mergers and acquisitions have become a common way for aircraft leasing companies to expand their tables. Reviewing the post-pandemic merger and acquisition history of leading aircraft leasing companies. For example, AviLease successfully acquired Standard Chartered Bank's aviation finance leasing business in 23, SMBCaviation completed the acquisition of Goshawk in 2022, and AECAP acquired GECAS in 2021. As rents continue to grow, it is important to expand the rent table at a high level.

(5) Significance of the acquisition: CAL has superior assets. As of the end of June '24, CAL had 107 airliners, with an average age of 4.7 years, and narrow-body aircraft accounting for a relatively high proportion of 68%. Furthermore, the gross yield was high, at 12.3% in '23, higher than 11.4% under the Bohai Leasing Caliber.

(6) Rating impact: Fitch Ratings stated on 9/13/24 that Avolon (Avolon; BBB-/ Active) will not affect its rating due to Avolon (Avolon; BBB-/ Active)'s acquisition of CAL. The deal is expected to land in 25Q1.

Profit forecasting and investment advice. Revenue is expected to be 36.405 billion yuan in 2016. Considering the narrowing of asset and credit impairment and the increase in PDP interest income, the net profit to mother is estimated to be 1.657 billion yuan in 24, an increase of 29.3% over the same period. Referring to the industry's 24-year PB valuation average value is about 0.7x. Considering the company's “dilemma relief,” the valuation center is expected to rise. Giving a reasonable valuation of 0.7x PB in 2024, the “buy” rating is based on the 2024 BVPS of 5.15 yuan, which corresponds to a reasonable value of 3.61 yuan/share.

Risk warning. Interest rates rise, financial expenses increase, geopolitics, supply delays, etc.