BOC Aviation (BOCA) reported higher-than-expected financial results in 1H24. Its net profit increased 75.9% YoY to US$460m in 1H24, mainly thanks to recovery of the two Boeing 747-8F aircraft and the steady recovery in global airline industry. Its total revenue and other income increased 10.7% YoY to US$1,174m in 1H24. Excluding the impact of the Russia event, its core net profit after tax increased 9% YoY to US$284m in 1H24. Finance expenses increased 20.6% YoY in 1H24, mainly due to increase in cost of debt. We noted that its cost of debt reached 4.6% in 1H24, up from 3.9% in 1H23. Looking ahead, we believe that global air passenger travel will continue to improve in 2H24, as Chinese policymakers will firmly promote further opening-up policy. Furthermore, aircraft values now exceed net book value by 14%, which should bode well for market value of BOCA's operating leased fleet. Maintain BUY rating.

Key Factors for Rating

The lease rental yield reached 9.8% in 1H24, unchanged from 9.8% in 1H23. Meanwhile, net lease yield reached 7.0% in 1H24, against 7.0% in 1H23. As a result, its core lease rental reached US$276m in 1H24, which is largely in line with 1H23.

Its interest and fee income increased 119% YoY to US$132.3m, accounting for 11.3% of total revenues and other income in 1H24. Meanwhile, its net gain on sale of aircraft surged 301% YoY to US$55.9m in 1H24.

Its owned aircraft utilisation reached 99% as at 30 June 2024, unchanged from 99% at 31 March 2024. BOCA reported 4.9 years average fleet age and 7.9 years average remaining lease term in 2Q24, against 4.8 years and 7.9 years in 1Q24.

Key Risks for Rating

The pace of USD interest rate cut might be slower than expected. The global airline industry will be negatively affected if global economy slows down significantly.

Valuation

BOCA is one of the geared beneficiaries of the steady growth in global airline industry. BOCA's business model remained solid and its dividend yield may reach about 4.2% in 2024. Looking into 2025, we expect BOCA's core earnings to continue to increase as global airline industry will further improve and Federal Reserve may cut interest rates. We increased our target price from HK$76.52 to HK$80.55, based on 1.15x 2024E P/B. Maintain BUY rating.

Business operation maintained steady growth in 1H24. In terms of delivery pipeline and lease commitments, BOCA maintained decent performance. BOCA reported 24 lease commitments in 2Q24 and 55 lease commitments in 1H24, against 45 lease commitments in 1H23. Meanwhile, BOCA delivered 13/18 aircraft in 2Q24/1H24, against 16 aircraft in 1H23. In addition, BOCA reported a customer base of 93 airlines in 47 countries and regions in the owned and managed portfolios in 2Q24, against 90 airlines in 45 countries and regions in 1Q24 and 91 airlines in 45 countries and regions in 4Q23.

BOCA is one of the geared beneficiaries of the steady airline industry recovery. Global air passenger travel has shown steady recovery in 1H24 thanks to the robust recovery of global air traffic and rising demand. According to IATA, RPKs (revenue passenger-kilometers) and ASKs (available seat-kilometers) of global passenger market in June 2024 increased 9.1% and 8.5% YoY, against the growths of 31% and 28.8% in June 2023. As the airline industry moves away from the pandemic period and the low base effect wanes, RPKs and ASKs growth rates are expected to return to normal level. According to IATA, global airline industry reported net profits of US$27.4bn in 2023 and US$30.5bn in 2024, against the estimated net loss of US$3.6bn in 2022. Meanwhile, We believe that global air passenger travel will continue to improve in 2H24, as Chinese policymakers will firmly promote further opening-up policy and continue to expand visa-free programme to more countries to facilitate international travel. At present, foreign nationals from 54 countries are eligible for the 72/144-hour transit visa-free policies.