Event: the company releases results for the first half of 2021. The company achieved HK $1.59 billion in revenue in the first half of 21, down 3.1% from the same period last year, and its net profit was HK $303 million, down 8.7% from the same period last year. The company paid a cash dividend of about HK $110 million in mid-21, with a cash dividend rate of about 36 per cent.
Aviation demand has gradually recovered, and the company has returned to growth since the size of the organic team. The size of the company's organic team at the end of June 2021 was 104 (1 more than at the end of 20 and 9 less than at the end of June 20), of which 49 were under financial leasing contracts (same as at the end of 20 and 2 less than at the end of June 20). Operate 55 leased contract aircraft (2 more than at the end of 20 and 7 less than at the end of June 20). In the first half of 2021, the company delivered six aircraft to customers and sold another four aircraft. In the case of the gradual recovery of global aviation demand, the company gradually turned to an active business strategy and began to expand the size of the company's self-organic team.
The average lease yield increased, while the lease income decreased. The average lease return of the company in the first half of 2021 was 10.5%, an increase of 0.4pct over the same period last year, of which the average rate of return on financial leasing was 12.7%, an increase of 0.1 pct over the same period last year; the average rate of return on operating leases was 10.3%, an increase of 0.6pct over the same period last year, mainly due to the relative decline in the book value of the fleet due to the small number of new aircraft. Due to the decline in the size of the organic team compared with the same period last year, the company achieved rental revenue of about HK $1.16 billion in the first half of 21, down 8.6 per cent from the same period a year earlier.
Net income from aircraft trading rose slightly. The company sold four aircraft in the first half of 21, the same as the same period a year earlier, and its net income from aircraft transactions in the first half of 21 was HK $180 million, an increase of about 4.3 per cent year-on-year.
Lower interest rates boost pre-tax earnings. The company's operating expenses fell 11.9% in the first half of 21 compared with the same period last year, of which interest expenses decreased by 16.0% compared with the same period last year, mainly because the company's average real interest rate on bank and other loans in the first half of 21 was 2.67%, which decreased by 1.17pct compared with the same period last year (USD 3-month LIBOR fell from 1.9% at the beginning of January 2020 to 0.14% at the end of June 2021). In addition, depreciation expenses fell 12.7% from a year earlier, mainly because the company's operating leased aircraft decreased from 62 at the end of June 20 to 55 at the end of June 21.
Taken together, the company made a pre-tax profit of about HK $450 million in the first half of 21, up about 14% from a year earlier.
The company is not expected to grow slightly from the organic team. In the second half of 2021, the company plans to deliver 16 aircraft (self-owned + after-sale and leaseback) and plans to sell 7 aircraft, with a total net increase of 9 aircraft; in 2022, the company plans to deliver 30-35 aircraft and sell 30 aircraft; in the long run, the company plans to sell almost the same number of aircraft each year as it buys, while maintaining a small increase since the organic team.
Investment advice: global aviation demand is gradually recovering, and the size of the company's self-organic team will return to growth; the company will continue to promote multi-platform aircraft asset management business through a light asset model to improve capital utilization, increase return on net assets and reduce debt ratio; with the arrival of the post-epidemic era, the company's profitability is expected to return to steady growth. We maintain the company's 21-23 net profit of HK $850 million, HK $900 million and HK $980 million respectively. In view of the uncertainty about the evolution of the epidemic, we lowered the company's target price to HK $6.28 (corresponding to 1.05X2021E 's 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.