1H23 performance is in line with profit forecast and lower than our expectations.
China aircraft leasing 1H23 income from + 23% to HK $2.33 billion year-on-year, net profit after tax of HK $200m (net loss after tax of HK $130 million in the same period in the first half of the year), which is in line with the performance forecast and lower than our expectations, mainly due to the increase in financing costs caused by the overseas high interest environment; the dividend per share in the first half of the year was flat at HK $0.15, corresponding to 56% of the adjusted EPS, reflecting its sufficient liquidity on hand and attention to shareholder returns.
Trend of development
The size of the fleet continues to grow and there are plenty of orders on hand. By the end of 1H23, the company had a fleet of 189aircraft, of which 162were of its own, + 12 at the beginning of the year and 27 in escrow. The company's self-organic team rental rate (100%, excluding 2 Russian-related aircraft), flight rate (> 90%), narrow-body aircraft (90%) are all at the industry-leading level; the current order is 213 (according to the company announcement, of which 64 Boeing Co aircraft orders will be transferred to Dubai Aerospace Group at the end of August), mainly a new generation of energy-saving aircraft, to provide effective support for future business growth. In terms of customer distribution, 74% of the company's aircraft are leased to the China Aviation Department, and we believe that it is expected to continue to benefit from China's strong aviation demand in the future.
Rental income continues to grow and interest costs rise. Income: 1) 1H23 rental income from + 24% to HK $2.06 billion, accounting for 87% of total revenue, is mainly driven by the growth of fleet size; the company plans to deliver eight new aircraft in the second half of the year, which will provide further support for rental income growth. 2) aircraft trading revenue is-33% to 44.7 million Hong Kong dollars over the same period last year. In the first half of this year, the number of aircraft sold dropped to 1 from 2 in the same period last year, and the corresponding unit price increased by 34% compared with the same period last year. We believe that in the second half of the year, the company's aircraft sales are expected to rise in both volume and price, leading to a higher increase in aircraft transaction revenue. Cost: 1) interest expense year-on-year + 42% to HK $1.08 billion, on the one hand, interest payment scale + 19% year-on-year, on the other hand, Libor increase drives the company's comprehensive cost of capital from + 1.44ppt to 5.72% (company caliber). 2) depreciation cost + 29% year-on-year to HK $750 million, mainly due to the increase in the number of aircraft leased from 97 at the end of 2022 to 108.
The improvement of supply and demand in the aviation industry helps to repair the short-term performance, and the post-market business advantage strengthens the medium-and long-term development capacity.
We believe that, on the one hand, relying on an attractive fleet and strong orders for narrow-body aircraft with new technology, China Air Rental is expected to achieve steady growth in the sustained recovery trend of the aviation industry. On the other hand, CNAC continues to strengthen its post-aviation market service capabilities such as aircraft / engine transactions and solutions, fuselage loan, maintenance and remanufacturing, and remaining life leasing, and continues to improve and enhance its post-market license advantages, it is expected to help it benefit from the global fleet renewal and replacement demand in the medium to long term (Boeing Co and Airbus predict that about 17000-21000 aircraft will be decommissioned and replaced in the next 20 years). We are optimistic about the medium-and long-term development of the company.
Profit forecast and valuation
Due to the rise in financing costs, the 24-year profit of 23% is reduced by 21% to HK $590 million / 720 million. The company trades on 0.6x/0.6x 23Compact 24e Pplash B. We lowered our target price by 11% to HK $5.50 and maintained our outperforming industry rating (0.83x/0.78x 23Universe 24e Pplink BMague 28% upside).
Risk
Geopolitical risks; demand repair is not as expected; aircraft delivery is delayed.