What's new

On August 21, we organized a non-deal roadshow (NDR) for BOC Aviation. The firm's management spoke with investors about the trend of rentals, the expansion of fleet, the funding conditions, and the sales of aircraft at the company.

Comments

Tight supply continues to push up rentals; the pace of aircraft delivery is one of the key factor influencing leasing rate factor, in our view. Aircraft rental rates continue to increase, as demand for air travel continues to recover globally and insufficient production capacity along the supply chain weighs on the production and supply of aircraft. Data from the International Air Transport Association (IATA) shows that global passenger volume will likely increase by 10% YoY in 2024 and 6% YoY in 2025; and the passenger volume in the Asia-Pacific region may increase by 16% YoY in 2024 and 9% YoY in 2025. Cirium data shows that the number of aircraft delivered will likely drop by 1% YoY in 2024 and BOC Aviation expects tight supply to persist until at least 2026.

In 1H24, the company's lease rate factor stayed flat YoY, due to the delayed delivery of new aircraft and timing effects of older aircraft sold. The four off-lease aircraft at the end of 1H24 also weighed on yield1. Corporate filings show that the company is set to deliver 29 aircraft in 2H24, accounting for 62% of total aircraft scheduled for delivery in 2024. We think the company's gross lease yield will likely increase as the pace of aircraft delivery accelerates.

Finance leases will keep providing important opportunities for the company's business expansion, in our view. BOC Aviation provides both aircraft (via operating leases) and funding services (via finance leases) for airlines2. Operating leases will remain BOCA's main product offerings, but it still will seize the opportunity to increased the size of its finance leases. First, demand has been strong in the finance lease market, but funding supply has yet to fully recover at banks. Second, the company has a competitive advantage in funding costs, thanks to its high credit rating. Third, the company can effectively mitigate risks associated with finance leases by leveraging its aircraft assessment capability, well- established risk control process, and ability to gain high-quality customers.

We expect the growth of financing costs to slow; overseas rate cuts to create additional catalysts.

The cost of new bonds issued in 2H24 may be on par with the average cost of existing bonds: We think the cost of new bonds issued in 2H24 will decline marginally and be on par with the average cost of existing bonds (4.6%), given the current yield on 5-year US government bonds (3.65%) and the average yield spread in 1H24 (106bp).

The cost of floating rate-based liabilities (accounting for around 30% of total liabilities) will likely decline, due to the impact of repricing.

Around US$900mn of debts will be due for repayment in 2H24 are (vs. US$2.7bn in 1H24). Fewer debts due for repayment in 2H24 will likely mitigate the impact of debt restructuring on financing costs, in our view.

Sustained increase in asset value to boost the proceeds from aircraft sales. As of end-1H24, the market value of the company's operating lease fleet exceeded net book value by 14% (vs. 5% in 1H23 and 8% at end- 2023). In 1H24, the company sold 15 aircraft with with gains on aircraft sales margin at 14% (vs. 11% in 2023 and an average yield of 18% over 2017-2019). Overall, the company sells aircraft regularly to 1) reduce the number of older aircraft in its fleet and improve fleet management; 2) mitigate the concentration risk in its portfolio; and 3) cut back on low-yield contracts amid a boom in the industry. The company target to sell US$1bn worth of aircraft per annum. The higher asset value will boost the company's investment returns and support its valuation, in our view.

Financials and valuation

We cut our net profit forecasts 4% to US$775mn for 2024 and 4% to US$718mn for 2025, given the delay in aircraft delivery. We estimate core net profit at US$600mn for 2024. The stock is trading at 0.98x 2024e and 0.91x 2025e P/B. We maintain an OUTPERFORM rating and our target price of HK$81.4. Our TP implies 1.2x 2024e and 1.1x 2025e P/B, offering 22% upside.

Risks

Slower-than-expected aircraft delivery; higher-than-expected interest rates; geopolitical risks.