A top 5 lessor worth investing in; Initiate with BUY

30 Jul 2018 Securities Analysis PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE BUY (Initiation) Target Price HK$56.7 Up/downside +19.8% Current price HK$49.3 Hanbo Xu Tel: (852) 3761 8725 Email: xuhanbo@cmbi.com.hk Wenjie Ding, PhD Tel: (852) 3900 0856/ (86) 755 2367 5591 Email: dingwenjie@cmbi.com.hk China Leasing Sector Mkt. Cap. (HK$ mn) 34,215 Avg. 3mths t/o (HK$ mn) 80.4 52W High/Low (HK$) 51.8/39.8 Total Issued Shares (mn) 694 Source: Bloomberg Shareholding Structure Bank of China Group 70.0% Public float 27.3% Source: HKEX Share performance Absolute Relative 1-mth 0.7% 1.1% 3-mth 6.4% 12.0% 6-mth 4.4% 18.4% Source: Bloomberg 12-mth price performance Source: Bloomberg Auditor: Ernst & Young Web-site: www. bocaviation.com 30354045505560Jul 17Oct 17Jan 18Apr 18Jul 18HK$ BOC Aviation (2588 HK) A top 5 lessor worth investing in; Initiate with BUY  Top 5 aircraft operating leasing company globally. As of 31 Dec 2017, BOCA had a total portfolio of 318 aircraft, of which 287 are owned and 31 are managed. It ranked 5 globally measured by value of owned and managed aircraft with 100 or more seats. Led by experienced management team, the Company has delivered strong NPAT growth and stable ROE. Since 2013, NPAT grew 21% per annum, reaching US$587mn in 2017. Five-year average ROE was 15.2%. Excluding one-off tax adjustment in 2017, we forecast NPAT growth to be 21.6%/7.1%/2.5% in FY18/19/20E, reaching US$602/645/661mn. We forecast ROE to be 15.0%/14.6%/13.7% in FY18/19/20E.  Fleet condition and attractiveness are among the best in the industry. As of 2017, the Company’s average fleet age is 3.0 years, the lowest among peers. Average remaining lease term is 8.2 years, higher than peer average of 6.5 years. 85% of the Company’s owned fleet asset is the more popular, single-aisle aircraft (2nd highest among public peers). Benefiting from this asset management strategy, the Company’s core lease rental income grew at CAGR of 12% per year from 2013 to 2017, and realized consistent gain on sale of aircraft. We forecast FY18/19/20E core lease rental income growth to be 19.7%/10.7%/6.5%, reaching US$1,536/1,701/1,811mn.  Maintains net lease yield within targeted range of 8-8.5%. Over the past five years, the Company maintained a stable net lease yield, which reflected the fact that the Company had been able to increase lease rate factor to pass on interest rate increases to its airline customers. We forecast lease rate factor to increase to 10.6%/10.7%/10.7% in FY18/19/20E in a rising interest rate environment, and net lease yield to be stable at 8.4%.  Benefits from lower cost of fund. In 2017, the Company’s total indebtedness was US$10.9bn, comprised 54% unsecured bonds, 36% loans, and 10% export credit facilities. As the Company’s unsecured financing increased, S&P lifted the Company’s rating to A- in 2017. Backed by investment-grade credit ratings, the Company’s average cost of debt was only 2.8% in 2017, being the lowest among public peers. In a rising interest rate environment, while most of its public peers are high-yield debt issuers, the Company may actually gain competitive advantage. We forecast average interest rate mildly rise to 2.8%/2.9%/3.0% in FY18/19/20E.  Initiate with BUY. Given metrics better than peer average, we value the Company at peer average +1 standard deviation of P/B-ROE. This gives fair P/B ratio of 1.20x. Our Target Price is HK$56.7 per share. It is currently trading at 1.05x 2018E P/B, close to peer average of 0.91x, and historical average of 0.95x. Considering dividend yield, upside potential is 19.8%. Earning Table (YE Dec 31) FY16A FY17A FY18E FY19E FY20E Revenues (US$ mn) 1,193 1,401 1,653 1,818 1,928 Net profit (US$ mn) 418 587 602 645 661 EPS (US$) 0.64 0.85 0.87 0.93 0.95 EPS CHG (%) 10.0 32.1 2.7 7.1 2.5 PBR (x) 1.30 1.15 1.04 0.95 0.88 PER (x) 9.9 7.5 7.3 6.8 6.6 Yield (%) 2.8 4.7 4.8 5.1 5.3 ROE (%) 14.4 16.3 15.0 14.6 13.7 Gearing (%) 2.6 2.9 2.8 2.8 2.6 Source: Company, CMBIS estimates Equity Research 30 Jul 2018 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2 Table of contents INVESTMENT THESIS .................................................................................................. 3 FOCUS CHARTS .............................................................................................................. 5 COMPANY PROFILE ..................................................................................................... 6 INVESTMENT SUMMARY ............................................................................................ 9 1) LONG-TERM, STABLE REVENUE STREAM DENOMINATED IN US$...... 9 2) FLEET CONDITION AND ATTRACTIVENESS ARE AMON