Event: the company releases its 2020 results. The company achieved HK $3.49 billion in revenue over the past 20 years, down 1.1% from the same period last year, and its net profit was HK $334 million, down 62.7% from the same period last year. The company pays a cash dividend of HK $144 million at the end of 20 years, plus the interim dividend of 20 years, the company's actual cash dividend rate for the whole of 20 years is about 85.35%.
The epidemic reduced demand for aircraft imports, and the company scaled back from the size of the organic team. At the end of 2020, the company had 103 aircraft in the organic team (8 fewer than at the end of 19), of which 49 were under financial leasing contracts (4 fewer than at the end of 19) and 53 operated under leased contracts (4 fewer than at the end of 19). In 2020, the company delivered a total of 10 aircraft to customers, 2 aircraft under lease renewal and 18 aircraft sold (6 of which were entrusted by the company). At a time when global aviation demand has not fully recovered, the company is expected to continue to implement a conservative business strategy and cautiously expand the size of the company's self-organic team.
The average lease yield increased, and the lease income rose slightly. The company's average lease return in 2020 was 11.65%, an increase of 0.6pct over the same period last year, of which the average rate of return on financial leasing was 11.8%, down 0.8 pct from the same period last year; and the average rate of return on operating leases was 10.2%, an increase of 0.9pct over the same period last year, mainly due to the decline in the book value of aircraft under the influence of the epidemic. Although the company's fleet shrank in 2020, leasing revenue in 2020 was about 2.49 billion, up 1.1 per cent from a year earlier, as some aircraft were sold at the end of 2020.
The epidemic has had a negative impact on aircraft asset prices. The company sold 18 (chartered) aircraft in 2020, an increase of 3 over the same period in 19 years, but the company's net income from aircraft trading / trade in 2020 was 514 million Hong Kong dollars, down 13.5% from the same period in 19 years. The main reason is that the company sold a high-value wide-body aircraft in 19 years, while the reduction of the residual value of the aircraft and the breaking of the tenant's credit depressed the price of aircraft assets.
Investment losses and exchange losses lead to a sharp decline in pre-tax profits. The company's pre-tax profit fell significantly by 58.4% year-on-year in 2020, mainly due to the following reasons: 1) the company made a loss and provision of about HK $205 million on its investment in Aviation Synergy, which holds a 49% stake in Indonesia's aviation company; 2) the company incurred an exchange loss of about HK $306 million on RMB liabilities, and the book value of RMB debt was about 4 billion yuan by the end of 2020, of which about 50% had been hedged by forward foreign exchange contracts. Excluding the above two negative effects, the company made a pre-tax profit of about HK $944 million in 2020, down about 9.28% from a year earlier.
The difference of tax system leads to the increase of income tax rate. In the face of a sharp drop in pre-tax profits, the company's income tax expenses increased sharply in 2020 (the effective income tax rate rose to 38%), mainly because of the aircraft sold by the company in 2020. 17 were sold in China (only six aircraft were sold in China in 19 years). Although China has a high income tax rate on the sale of aircraft assets, some of the tax expenses can be refunded conditionally in the future.
Investment advice: the company's production and operation has been adversely affected by the epidemic; with the advance of global vaccination, the company's overall profitability is expected to gradually recover. Without considering stock dividend, we downgraded the company's 21-22 EPS to HK $1.18,1.25, and added 23-year net profit of HK $983 million, corresponding to HK $1.37 for EPS. In view of the negative impact of the epidemic on the aviation industry, we lowered the company's target price to HK $7.31 (corresponding to 1.2X 2021E PB after deducting permanent capital securities) to maintain the company's "overweight" rating.
Risk tips: the economic downturn and the longer-than-expected duration of the epidemic led to a decline in aviation demand; a drop in the prices of new and second-hand aircraft; a rise in corporate financing costs; and changes in legal and accounting policies led to an increase in the effective tax rate of companies.