BOC Aviation (2588 HK)

China Industrials 17 October 2016

BOC A

Target price: HKD50.00 Share price (14 Oct): HKD41.70 | Up/downside: +19.9%

Initiation: cruising with a strong tailwind Kelvin Lau (852) 2848 4467  In the sweet spot of rising Asia Pacific air traffic demand [email protected]  But solid growth prospects yet to be reflected in share price Jason Mok (852) 2773 8842  Initiating with a Buy (1) rating and TP of HKD50 [email protected]

Investment case: We initiate coverage of BOC Aviation (BOCA), one of Share price performance the world’s top aircraft lessors, with a Buy (1) rating and DCF-based 12- (HKD) (%) month target price of HKD50. We expect long-term global air traffic demand 42 100 growth to remain solid from 2016-35, and believe BOCA’s backlog will help 41 95 it capture this growth opportunity. 40 90 38 85

37 80 Catalysts: Strong order book and deliveries the major growth drives. Jun-16 Sep-16 Even though BOCA is already the largest Asia-Pacific-based aircraft BOC Avia (LHS) Relative to HSI (RHS) operating lessor by fleet size, we still see strong earnings growth prospects for the company. At the end of June 2016, BOCA had an order book of 218 12-month range 37.00-42.00 aircraft, representing 82% of its owned and managed fleet of 265 aircraft. In Market cap (USDbn) 3.72 addition to further purchase and lease-back transactions, we forecast its 3m avg daily turnover (USDm) 3.31 lease rental income to see a CAGR of 13% from 2016-18. Shares outstanding (m) 694 Major shareholder Sky Splendor Limited (70.0%)

Aircraft disposal gains also support bottom line. Since its inception in Financial summary (USD) 1993 up until the end of 2015, the company had sold more than 210 Year to 31 Dec 16E 17E 18E aircraft, proving its expertise in managing and maintaining a young and in- Revenue (m) 1,175 1,390 1,591 demand fleet by acquiring widely used aircraft models while disposing of Operating profit (m) 673 814 948 Net profit (m) 412 487 576 aged aircraft and generating positive gains. We forecast gains from aircraft Core EPS (fully-diluted) 0.634 0.701 0.829 disposals to account for 13-15% of the company’s profit before tax for EPS change (%) 8.9 10.6 18.3 2016-18. Daiwa vs Cons. EPS (%) 4.1 3.1 5.0 PER (x) 8.5 7.7 6.5 Dividend yield (%) 3.5 3.9 4.6 Low funding cost advantage. Due to its higher-than-peer credit rating and DPS 0.190 0.210 0.249 diversified funding channel, the company’s funding cost was only 1.9-2.0% PBR (x) 1.1 1.0 0.9 in 2013-15, among the lowest of its rivals. Its low funding cost is one of its EV/EBITDA (x) 11.6 10.6 9.6 ROE (%) 14.2 13.8 14.7 major competitive advantages, and also supports its ROE, which we Source: FactSet, Daiwa forecasts forecast to reach 13.8-14.7% in 2017-18, outperforming its global peers.

Valuation: The stock is trading currently at 1.0-1.1x 2016-17E PBRs, in line with its global peers’ average, but significantly lower than its closest Hong Kong-listed peer, China Aircraft Leasing’s (CALC) (1848 HK, HKD9.54, Buy [1]) 2.0-2.4x, based on our forecasts. Considering the company’s: 1) rich order book and delivery schedule, 2) low-cost funding advantage, 3) higher-than-peer ROEs, and 4) leading market position in the Asia-Pacific region, we believe the value of BOCA has not yet been fully priced in by the market. Our TP implies 1.2-1.3x 2016-17 PBRs, which we see as justified against our 2016-18 earnings forecast CAGR of 19% and ROE of 13.8-14.7%.

Risks: The key risks to our call are a lower-than-expected spread between the company’s lease rate factor and its financing cost, a sudden and significant decrease in aircraft value, and a macro slowdown resulting in a delay in aircraft deliveries.

See important disclosures, including any required research certifications, beginning on page 79

BOCA (2588 HK): 17 October 2016

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook BOCA: net profit and net profit growth (2013-18E) We forecast BOCA’s earnings to grow at a CAGR of 19% (USD m) for 2016-18 on: 1) strong order book deliveries during the 700 25% period (an average of 62 aircraft per year in 2016-18E), 2) 600 20% 18% 18% improving sales gains from aircraft disposal (on average 39 500 20% aircraft to be sold annually from 2016-18E with improving 400 15% per aircraft sales gains), and 3) ongoing benefits from low- 300 11% 11% 576 cost funding. We see our forecast as achievable given that 487 200 412 343 10% 100% of the company’s scheduled order book deliveries for 277 309 2016 and 67% of its 2017 deliveries had been placed on 100 lease (ie, placed but not yet delivered) by end-June 2016. 0 5% 2013 2014 2015 2016E 2017E 2018E The company’s young, modern and in-demand fleet should Net profit (LHS) YoY Growth (RHS) also support its aircraft value and sales gains. Source: Company, Daiwa forecasts

Valuation BOCA: 12-month forward PER (since listing in June 2016)

The stock is trading currently at 1.0-1.1x 2016-17E PBRs, (PBR) based on our estimates, in line with global peers’ and its 1.1 average since listing in June 2016, but significantly lower than the 2.0-2.4x for its closest Hong Kong-listed peer, CALC. Given its advantage in obtaining low-cost funding and potential to post a strong earnings CAGR of 19% over 1.0 2016-18, we believe the stock deserves to trade at a premium to its peers. As such, our 12-month TP implies 1.2-1.3x 2016-17E PBRs, which we see as justified due to the stock’s superior ROE (2016-17E ROE of 14% vs. 0.9 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 peers’ average of 10-11%). PBR Average PBR Source: Bloomberg, Daiwa forecasts

Earnings revisions BOCA: consensus earnings revisions (2016-17E)

The market started to revise up BOCA’s EPS forecasts in (USD) late August, when the company announced strong 1H16 0.70 interim results. Our 2016-18E EPS are 3-5% higher than consensus as we are more confident about the company’s 0.65 outlook, expecting new aircraft demand, especially in the APAC region to which the company has high exposure, to 0.60 remain robust and drive leasing demand and support aircraft value. 0.55

0.50 Jul-16 Aug-16 Sep-16 Oct-16 2016E 2017E

Source: Bloomberg

BOCA (2588 HK): 17 October 2016

Financial summary Key assumptions Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Aircraft deliveries (units) n.a. n.a. 48 57 50 68 62 57 Aircraft sold (units) n.a. n.a. 21 33 43 38 40 40 Managed aircraft (units) n.a. n.a. 20 20 43 43 58 75 Fleet size (units) n.a. n.a. 226 250 270 300 337 371

Profit and loss (USDm) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Lease rental income n.a. n.a. 804 937 975 1,041 1,222 1,389 Net gain on sales of aircraft n.a. n.a. 76 30 70 68 80 88 Other Revenue n.a. n.a. 38 21 45 65 88 114 Total Revenue n.a. n.a. 919 988 1,091 1,175 1,390 1,591 Other income n.a. n.a. (28) (10) (12) (17) (16) (18) COGS n.a. n.a. 0 0 0 0 0 0 SG&A n.a. n.a. (45) (56) (64) (68) (81) (93) Other op.expenses n.a. n.a. (351) (396) (400) (417) (479) (532) Operating profit n.a. n.a. 494 527 614 673 814 948 Net-interest inc./(exp.) n.a. n.a. (136) (151) (169) (201) (238) (268) Assoc/forex/extraord./others n.a. n.a. (48) (23) (44) 0 (6) (7) Pre-tax profit n.a. n.a. 311 353 401 471 569 673 Tax n.a. n.a. (34) (44) (58) (59) (83) (98) Min. int./pref. div./others n.a. n.a. 0 0 0 0 0 0 Net profit (reported) n.a. n.a. 277 309 343 412 487 576 Net profit (adjusted) n.a. n.a. 277 309 343 412 487 576 EPS (reported)(USD) n.a. n.a. 0.470 0.523 0.582 0.634 0.701 0.829 EPS (adjusted)(USD) n.a. n.a. 0.470 0.523 0.582 0.634 0.701 0.829 EPS (adjusted fully-diluted)(USD) n.a. n.a. 0.470 0.523 0.582 0.634 0.701 0.829 DPS (USD) n.a. n.a. 0.192 0.236 0.000 0.190 0.210 0.249 EBIT n.a. n.a. 494 527 614 673 814 948 EBITDA n.a. n.a. 845 923 1,015 1,090 1,293 1,480

Cash flow (USDm) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Profit before tax n.a. n.a. 311 353 401 471 569 673 Depreciation and amortisation n.a. n.a. 351 396 400 417 479 532 Tax paid n.a. n.a. 0 (0) (0) (59) (83) (98) Change in working capital n.a. n.a. 123 55 161 28 24 22 Other operational CF items n.a. n.a. 53 158 150 201 238 268 Cash flow from operations n.a. n.a. 839 962 1,112 1,058 1,228 1,398 Capex n.a. n.a. (2,503) (3,143) (3,410) (3,880) (3,788) (3,420) Net (acquisitions)/disposals n.a. n.a. 913 1,316 2,092 1,846 1,943 1,943 Other investing CF items n.a. n.a. 0 0 0 0 0 0 Cash flow from investing n.a. n.a. (1,589) (1,827) (1,318) (2,035) (1,845) (1,477) Change in debt n.a. n.a. 894 998 536 660 990 550 Net share issues/(repurchases) n.a. n.a. 0 0 0 550 0 0 Dividends paid n.a. n.a. (113) (139) 0 (42) (130) (155) Other financing CF items n.a. n.a. (143) (263) (192) (220) (257) (286) Cash flow from financing n.a. n.a. 638 596 344 948 603 109 Forex effect/others n.a. n.a. 0 0 0 0 0 0 Change in cash n.a. n.a. (112) (269) 139 (28) (14) 30 Free cash flow n.a. n.a. (1,588) (915) (231) (1,002) (647) (112) Source: FactSet, Daiwa forecasts

BOCA (2588 HK): 17 October 2016

Financial summary continued … Balance sheet (USDm) As at 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Cash & short-term investment n.a. n.a. 501 232 371 343 329 358 Inventory n.a. n.a. 0 0 0 0 0 0 Accounts receivable n.a. n.a. 0 5 0 0 1 1 Other current assets n.a. n.a. 52 149 382 384 389 393 Total current assets n.a. n.a. 553 386 754 727 718 752 Fixed assets n.a. n.a. 9,594 11,015 11,717 13,354 14,739 15,702 Goodwill & intangibles n.a. n.a. 0 0 0 0 0 0 Other non-current assets n.a. n.a. 1 2 3 3 3 3 Total assets n.a. n.a. 10,149 11,403 12,474 14,084 15,459 16,457 Short-term debt n.a. n.a. 686 889 963 1,023 1,113 1,163 Accounts payable n.a. n.a. 112 68 106 106 106 106 Other current liabilities n.a. n.a. 77 87 146 157 186 213 Total current liabilities n.a. n.a. 874 1,044 1,215 1,287 1,405 1,482 Long-term debt n.a. n.a. 6,569 7,272 7,649 8,249 9,149 9,649 Other non-current liabilities n.a. n.a. 778 990 1,170 1,189 1,189 1,189 Total liabilities n.a. n.a. 8,222 9,307 10,034 10,724 11,743 12,320 Share capital n.a. n.a. 608 608 608 1,158 1,158 1,158 Reserves/R.E./others n.a. n.a. 1,319 1,489 1,832 2,202 2,559 2,979 Shareholders' equity n.a. n.a. 1,927 2,096 2,440 3,360 3,717 4,137 Minority interests n.a. n.a. 0 0 0 0 0 0 Total equity & liabilities n.a. n.a. 10,149 11,403 12,474 14,084 15,459 16,457 EV n.a. n.a. 10,484 11,659 11,970 12,659 13,663 14,183 Net debt/(cash) n.a. n.a. 6,754 7,929 8,240 8,929 9,933 10,453 BVPS (USD) n.a. n.a. 3.266 3.554 4.136 4.841 5.355 5.961

Key ratios (%) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Sales (YoY) n.a. n.a. n.a. 7.6 10.3 7.7 18.3 14.5 EBITDA (YoY) n.a. n.a. n.a. 9.1 10.0 7.4 18.7 14.5 Operating profit (YoY) n.a. n.a. n.a. 6.6 16.6 9.5 21.0 16.5 Net profit (YoY) n.a. n.a. n.a. 11.4 11.3 20.1 18.0 18.3 Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. 11.4 11.3 8.9 10.6 18.3 Gross-profit margin n.a. n.a. 100.0 100.0 100.0 100.0 100.0 100.0 EBITDA margin n.a. n.a. 92.0 93.3 93.0 92.7 93.0 93.0 Operating-profit margin n.a. n.a. 53.8 53.3 56.3 57.2 58.6 59.6 Net profit margin n.a. n.a. 30.2 31.2 31.5 35.1 35.0 36.2 ROAE n.a. n.a. 15.0 15.3 15.1 14.2 13.8 14.7 ROAA n.a. n.a. 2.9 2.9 2.9 3.1 3.3 3.6 ROCE n.a. n.a. n.a. 5.4 5.8 5.7 6.1 6.6 ROIC n.a. n.a. n.a. 4.9 5.1 5.1 5.4 5.7 Net debt to equity n.a. n.a. 350.6 378.2 337.8 265.7 267.3 252.7 Effective tax rate n.a. n.a. 10.9 12.5 14.5 12.5 14.5 14.5 Accounts receivable (days) n.a. n.a. n.a. 0.9 0.9 0.1 0.1 0.1 Current ratio (x) n.a. n.a. 0.6 0.4 0.6 0.6 0.5 0.5 Net interest cover (x) n.a. n.a. 3.6 3.5 3.6 3.3 3.4 3.5 Net dividend payout n.a. n.a. 40.8 45.0 0.0 30.0 30.0 30.0 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Source: FactSet, Daiwa forecasts

Company profile

Founded in 1993, BOC Aviation is principally engaged in aircraft leasing and associated businesses, such as the sale of used aircraft. Based in Singapore, the company started its business by acquiring its first aircraft in 1995. BOC Aviation was acquired by Bank of China back in 2006, and became the bank’s 100% owned subsidiary. With the support of its parent company, and efforts made by management, the company had developed a fleet of 265 owned and managed aircraft by end-June 2016, with 218 aircraft on order, emerging as a top global aircraft lessor.

BOCA (2588 HK): 17 October 2016

Strong order book and stable lease rate factor Rich order book is a valuable asset Order book should boost growth Strong order book BOCA had an order book of 218 aircraft as at end-1H16, comprising 106 Airbus aircraft supports fleet expansion and 112 Boeing aircraft. Over 90% of the aircraft on the order book are well-accepted and lease rental growth single-aisle aircraft, including the Airbus A320 current engine option (CEO) family aircraft and Boeing 737 next generation (NG) family aircraft, while some of them are new technology models, such as the A320 new engine option (NEO) and B737 MAX8 aircraft. These models are widely used by airlines in operating short/medium-haul routes. We view BOCA’s rich order book, which comprises in-demand aircraft types, as a valuable asset to support its lease rental income growth over our forecast horizon.

BOCA: delivery schedule (2016-21) Aircraft type 2016 2017 2018 2019 2020 2021 Narrowbody Aircraft 62 56 37 37 23 31 Airbus A320CEO family 41 22 - - - - Airbus A320NEO family 0 10 24 27 3 - Boeing 737NG family 21 24 13 - - - Boeing 737 MAX 8 - - - 10 20 31 Widebody Aircraft 5 4 - - - - Airbus A330-300 2 2 - - - - Boeing 777-300ER 3 2 - - - - Total 67 60 37 37 23 31

Source: Company Note: data as at 12 October 2016

BOCA: order book by model BOCA: order book by aircraft type

2, 1% 4, 2%

Airbus A320CEO family 40, 18% Airbus A320NEO family 61, 28% Airbus A330 family Narrow body aircraft Boeing 737NG family Wide body aircraft 64, 29% Boeing 737 MAX 8 214, 98% 49, 23% Boeing 777-300ER

2, 1%

Source: Company, Daiwa Source: Company, Daiwa Note: *includes all commitments to purchase aircraft including those where an airline customer Note: includes all commitments to purchase aircraft including those where an airline customer has the right to acquire the relevant aircraft, data as of end-1H16 has the right to acquire the relevant aircraft, data as of end-1H16

BOCA (2588 HK): 17 October 2016

Purchase and lease back another growth factor Purchase and lease back Besides placing direct orders with manufacturers, BOCA also purchases aircraft through provides further upside purchase and lease back (PLB) transactions with airlines. Under a PLB agreement, the for fleet expansion company takes over aircraft purchase commitments that airlines have with aircraft manufacturers or purchases aircraft from airlines, then leases them back to the airlines. Airlines sometimes prefer to use PLB transactions over direct purchases as it reduces the need for a large upfront capital investment and allows them to reserve cash for other use.

After carrying out as many as 17 PLBs in 2013 and 16 in 2014, the company only entered into 6 such transactions in 2015, and we estimate it will complete 7 transactions each in 2016-17, as we believe it will face capex constraints due to a strong delivery schedule (55- 61 aircraft in 2016-17 on our estimates) that will hinder it from taking on more PLBs given the high order book delivery. However, we expect the company’s PLB transactions to rebound back to 20 aircraft in 2018 on the back of lower scheduled delivery of 37 aircraft. Going forward, BOCA will likely continue to expand its fleet through both order book purchases and opportunistic market PLB transactions, which we see as the most important driver of lease rental income growth.

BOCA: historical aircraft deliveries (2007-18E) Aircraft delivery (units) 68 70 62 57 7 57 60 7 48 48 50 50 16 6 20 40 32 17 28 27 30 26 31 61 5 55 6 5 44 20 12 41 37 27 31 10 7 22 22 14 17 7 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E From order book From PLB transactions Source: Company

High visibility due to Aircraft lessors and lessees usually confirm contracts 12-18 months prior to aircraft industry practice delivery. According to management, 100% of its scheduled order book deliveries for 2016 and more than 60% of its 2017 deliveries had been placed on lease by end-June 2016. Hence, we believe its fleet expansion plan is very much on track. We now assume the company’s owned aircraft will expand from 227 at end-2015 to 296 by end-2018, or a CAGR of 9%.

BOCA: number of owned aircraft No. of owned aircraft (units) 350

300

250

200

150 296 257 279 230 227 100 206 179 140 158 50 118 59 73 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Source: Company, Daiwa forecasts

BOCA (2588 HK): 17 October 2016

Stable lease rate factor which may see minor expansion We expect BOCA’s lease The lease rate is one of the most important factors driving an aircraft lessor’s rental rate factor to remain income. Aircraft operating lessors also compete by providing more competitive lease rates stable to lessees. From an historical perspective, various factors may affect a lessor’s lease rate, including aircraft demand-supply dynamics, the global economic outlook, change in air traffic demand from passenger or air cargo services, change of regulations, fluctuations in the interest rate and jet fuel costs, etc.

From 2013-15, BOCA’s lease rate factor, defined as the lease rental income divided by the average net book value of an aircraft, was stable, ranging from 9.7% to 9.9%. We see this as being due to a combination of robust aircraft demand and the company’s fleet management strategy, which focuses on widely-used single-aisle aircraft.

The lease rate factor usually moves in line with interest rates. Therefore, we expect the company’s lease rate factor to edge up from 9.9% at end-2015 to 10.2-10.3% for 2016- 18E, assuming the company sees rising funding costs and the US raises interest rates.

BOCA: lease rate factor (2013-18E) 12%

10%

6% 9.7% 9.8% 9.9% 10.2% 10.3% 10.3% 4%

0% 2013 2014 2015 2016E 2017E 2018E Source: Company, Daiwa forecasts Note: The lease rate factor is calculated as lease rental income divided by average net book value of aircraft

In short, given favourable factors such as solid air traffic growth and the resulting aircraft demand, as well as stable lease rates, we see strong growth potential for BOCA’s lease rental income.

Lengthy remaining leases Lengthy remaining lease Meanwhile, for 2013-1H16, the average remaining lease term of the company’s aircraft term enhances lease was 7.2-7.6 years, one of the highest among its global peers. In terms of expiration revenue visibility and pattern, the distribution is well-dispersed, with few near-term expirations. The relatively mitigates risks longer remaining and dispersed lease term not only raises the visibility for its lease income stream, but also prevents a concentrated expiration of a large number of leases.

Generally speaking, the remaining lease term of a fleet is inversely related to its age. BOCA tends to sell aircraft around 5 years before the lease matures, in order to maintain a young fleet.

BOCA (2588 HK): 17 October 2016

BOCA: average remaining lease term (years) 9 7.6 7.5 8 7.4 7.2 7 6 5 4 3 2 1 0 2013 2014 2015 1H16 Source: Company Note: Weighted by net book value of owned fleet

BOCA: long-term contracted lease revenue (no. of leases) (%) 140 64.5% 70% 120 60% 100 50% 80 40% 60 30%

40 11.6% 20% 8.3% 4.9% 20 2.4% 4.2% 10% 0 9 14 12 24 29 130 0% 2017 2018 2019 2020 2021 2022 and beyond No. of leases expiring (LHS) Percentage of aircraft net book value with leases expiring (RHS)

Source: Company Note: Owned aircraft with leases expiring in each calendar year, excluding any aircraft with lease or sale commitments as at 31 March 2016, weighted by net book value (unless otherwise indicated); all data as at 31 December of relevant year unless otherwise indicated

BOCA (2588 HK): 17 October 2016

Further upside from aircraft sales BOCA has expertise in managing its fleet Fleet structure matters BOCA’s fleet consists of As mentioned, BOCA tends to sell aircraft around 5 years before the lease matures, in young and in-demand order to maintain a young fleet. Thus, compared to its peers, BOCA owns a modern and aircraft young fleet comprising new and widely-used aircraft models. Over 80% of its fleet, in terms of aircraft units, consist of Airbus A320 family and Boeing 737 family aircraft, which are the dominant single-aisle aircraft types that airlines operate on short- to medium-haul routes. Further, its fleet age was only 3.3 years at end-June 2016, among the youngest of its peers. We believe all these factors are important for the company to maintain favourable disposal values when it decides to dispose of aircraft in its fleet.

BOCA: fleet portfolio (in terms of aircraft units)

Single-aisle aircraft accounts for 88% of owned aircraft 1% 1% Airbus A320CEO family 6% 5% Boeing 737NG family 5% Embraer E190 family 49% Airbus A330 family Boeing 777-300ER 34% Boeing 787 Freighters

Source: company Note: only counts owned aircraft; data as of 30 June 2016

Comparison of average fleet age of selected aircraft operating lessors (2014) BOCA CALC AerCap Aircastle Air Lease AWAS* Avolon ACG Average Fleet age (years) 3.2 3.9 7.7 8.4 3.5 4.9 2.5 5.8 5.0

Source: company reports, Flightglobal Fleets Analyzer Note: *year-ended 30 November, 2014

Proven track record in selling aircraft Management’s expertise BOCA has sold 150 aircraft since 2007, and 21, 33 and 43 aircraft were respectively traded in selling used aircraft in 2013, 2014 and 2015. The buyers included other leasing companies, airlines and reduces execution risk investors. We believe BOCA’s sales history demonstrates its competence in selling used aircraft.

Meanwhile, the company has sold the last four aircraft it had acquired prior to 2007 in 1H16. As such, no aircraft in its fleet is currently older than 10 years. Further, BOCA announced in late 2015 its first-ever portfolio sale of aircraft, a deal that was completed in early 2016. The deal included 24 aircraft, consisting of 11 Airbus A320 family, 7 Boeing 737NG, 2 Embraer E190, 2 Airbus A330 and 2 Boeing 777 aircraft. We believe the deal has opened up the potential for similar transactions in the future.

BOCA (2588 HK): 17 October 2016

BOCA: unit of aircraft sold (2007-15) Aircraft sold (units) 50 45 40 35 30 25 20 43 15 33 10 21 12 12 5 10 10 6 0 3 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Company

BOCA (2588 HK): 17 October 2016

Competitive funding cost Diversified and economical funding driving ROE Better-than-peer credit rating Benefits from its higher- Most of the global aircraft lessors are rated at between a lower medium grade than-peer credit rating (BBB-) and non-investment grade speculative (Ba1/BB+) level by the credit agencies. However, BOCA is rated A- (stable) by both Standard & Poor’s and Fitch, an investment grade credit rating.

We see the company’s above-peer credit rating as a major advantage because a corporate with a high credit rating can often obtain easier and cheaper funding. The company’s higher-than-peer credit rating and its resulting lower funding cost are likely to raise its competitiveness, especially as aircraft leasing is a capital-intensive business.

Credit rating of selected aircraft lessors BOCA AerCap Aircastle Air Lease AWAS Avolon ACG Credit rating Moody's NA Ba1 Ba1 NA Ba3 NA NA Standard & Poor's A- BBB- BB+ BBB- BB+ NA BBB- Fitch A- BB+ NA NA NA NA BBB-

Source: Companies Note: rating as of 9 May 2016

Diversified funding source ensures sufficient funding facilities BOCA’s diversified financing portfolio also suggests it is able to access different sources of funding. The company has built relationships with more than 60 banks and financial institutions across Asia, Australasia, Europe, the Middle East and North America. In addition to its outstanding credit rating, BOCA is able to obtain competitively priced funding from loan financing, debt capital markets and other channels, such as US Exim and European Credit Agency Supported Financing. According to the company’s 1H16 data, loans, debt capital market and ECA/EXIM accounted for 43%, 43% and 14% of its total funding.

Well-supported but not As a subsidiary of Bank of China, BOCA is supported by its parent company. Bank of fully reliant on parent China has provided the company with a USD2.0bn committed unsecured revolving credit company facility which matures in April 2022. The facility has not yet been drawn down by the company to date. According to management, as at end-1H16, about 9% of its total funding came from the Bank of China Group, which we see as a reasonable and manageable level. We believe the company will continue to be supported by its parent, while not becoming over-reliant on it. Further, the company’s diversified financing portfolio is likely to effectively reduce its credit risk and allow it to acquire low-cost funding.

BOCA: funding sources

14.4% Loans - other parties 34.3% Loans - BOC Group Debt Capital Markets

42.8% ECA/ EXIM 8.5%

Source: Company Note: data as of end-June 2016

BOCA (2588 HK): 17 October 2016

Low-cost funding allows the company to offer attractive lease terms As mentioned, aircraft leasing is a capital-intensive industry, which requires immense upfront capital investment. For instance, the list price for an A320 and B737 aircraft can reach USD100m each. Meanwhile, aircraft buyers are often required to make a pre- delivery payment (PDP), an instalment paid to manufacturers typically beginning 24 months prior to the scheduled aircraft delivery, which can be as much as 30-50% of the aircraft’s total purchase price. Therefore, lessors rely heavily on external financing resources when acquiring new aircraft. This explains why interest expenses typically account for 20-40% of an aircraft lessor’s total operating expenses. BOCA also possesses a similar cost structure to its peers. Its interest costs accounted for 24% of its total operating expenses in 2015, which was its second-largest cost component after aircraft depreciation expenses.

Interest cost/total operating cost ratio of selected aircraft BOCA: cost structure (2015) lessors 2011 2012 2013 2014 2015 BOCA - - 22% 24% 24% AerCap 34% 35% 31% 29% 28% AirLease 23% 33% 34% 34% 32% 11% AirCastle 40% 34% 34% 34% 32% 24% Interest expense Average 32% 34% 30% 30% 29% 9%

Depreciation SG&A Others 55%

Source: Companies, Daiwa Source: Company, Daiwa

Low-cost funding is Given the capital-intensive nature and cost structure of the aircraft leasing business, low- BOCA’s major cost funding can give a lessor a major competitive advantage. BOCA’s interest cost was a competitive advantage low 1.9-2.0% for 2013-15 due to its strong credit rating, and was lower than the peer average of 4%. Therefore, though BOCA’s lease rate factor is lower, it is still capable of earning a competitive spread compared to its rivals. Meanwhile, from the perspective of a lessee, a lower lease rate factor implies a more attractive offer to rent an asset as the market price of a brand-new aircraft should be comparable across different lessors. We believe that BOCA’s financing cost advantage could result in a major competitive edge.

BOCA: funding costs BOCA: lease rates offered to customers Average funding cost (%) Lease rate factor (%) 7% 15% 6% 14% 5% 13% 4% 12% 3% 1.9% 1.9% 2.0% 11% 9.9% 2% 10% 9.7% 9.8% 1% 9% 0% 8% 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 BOC Aviation AerCap AirLease AirCastle BOC Aviation AerCap AirLease AirCastle

Source: Company, compiled by Daiwa Source: Company, compiled by Daiwa Note: AirLease data calculated as rental of flight equipment/ average fleet net book value

BOCA (2588 HK): 17 October 2016

Financial review Lease rental income is the major earnings driver Lease income should grow steadily driven by a strong order book Robust order book and The company delivered 27 aircraft in 1H16, and seeks to deliver a further 40 in 2H16. It stable fleet utilisation plans to deliver 60 and 37 aircraft, respectively, in 2017 and 2018; and in 2019-21, it support lease rental targets to deliver on average 30 aircraft per year. BOCA is also opportunistic in taking PLB growth transactions, as suggested by its track record. After considering its capex burden, we now estimate the company will conduct 7 PLB transactions in 2016, 7 in 2017, and 20 in 2018, which will translate into total deliveries of 68 aircraft in 2016, 62 in 2017, and 57 in 2018.

We believe BOCA has strong deal-sourcing and execution ability, as indicated by its high lease rental collection and fleet utilisation ratio which reached an average of 99.6% and 99.8%, respectively, from 2008-1H16. Therefore, we expect the company to be able to maintain its high lease rental collection and fleet utilisation ratio over our forecast horizon. According to management, 100% of the company's 2016 order book scheduled deliveries and more than 60% of its 2017 deliveries had been placed on lease by end-June 2016. This also increases the lease income visibility, in our view.

BOCA: delivery schedule (2016-21E) BOCA: historical collection rate and fleet utilisation rate (2008- 1H16) (unit of aircraft) Average collection rate: 99.6% Average fleet utilisation: 99.8% 80 100.0% 100.0% 100.0% 100.0% 99.8% 99.0% 99.0% 100.0% 100.0% 70 100% 60 15 80% 50 26 40 25 60% 98.5% 99.4% 100.9% 99.8% 100.4% 99.9% 100.4% 100.0% 30 13 10 97.2% 40% 20 34 27 27 31 20% 10 24 20 0 3 0% 2016 2017 2018 2019 2020 2021 2008 2009 2010 2011 2012 2013 2014 2015 1H16 Collection rate Fleet utilisation Delivered aircraft in 1H16 Airbus Boeing Source: Company Source: Company

BOCA: historical and forecast aircraft delivery (2007-18E) Aircraft delivery (units) 68 70 62 57 7 57 60 7 48 48 50 50 16 6 20 40 32 17 28 27 30 26 31 61 5 55 6 5 44 20 12 41 37 27 31 10 7 22 22 14 17 7 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E From order book From PLB transactions Source: Company, Daiwa forecasts

Increasing fixed rate debt likely to drive interest costs up … Increasing fixed rate The company’s number of leases with fixed rate terms has been increasing since 2013, debt is expected to lead rising from 26% in 2013 to 48% in 1H16. We believe such a change may be due to the to a rise in financing market’s expectation of a USD interest-rate hike at some point in the future. In response, costs BOCA’s fixed rate debt proportion (including floating rate debt swapped to fixed rate liability) also increased from 14% in 2013 to 36% as at end-June 2016. In our view, the

BOCA (2588 HK): 17 October 2016

company will continue to adjust its floating rate debt proportion in order to mitigate interest- rate risk. In addition to the expected rate hike and rising LIBOR, we expect its funding costs to rise mildly in 2016-18.

BOCA: lease-type by fixed and floating rate* (2013-1H16) BOCA: proportion of fixed/ floating rate debt (2013-1H16) 100% 100% 90% 90% 80% 80% 56% 52% 70% 65% 70% 65% 60% 74% 60% 81% 86% 88% 50% 50% 40% 40% 30% 30% 44% 48% 20% 35% 20% 36% 10% 26% 10% 20% 14% 13% 0% 0% 2013** 2014 2015 1H16 2013 2014 2015 1H16 Fixed rate Floating rate Fixed rate* Floating rate

Source: Company Source: Company Note: *by net book value; **excludes 1 aircraft on ground Note: *fixed rate debt included floating rate debt swapped to fixed rate liabilities

… but lease rate factor should also edge up accordingly We expect its lease rate As such, the company’s 1H16 average cost of funds rose to 2.3% from 2.0% in 1H15. factor to catch up with Against the backdrop of an expected rise in interest rates, we forecast BOCA’s financing the rise in funding costs cost to edge up from 2.3% in 2016 to 2.5% by 2018. However, in general, the aircraft lease rate factor is aligned with interest-rate movements. Therefore, a slow rate hike path, which is mostly expected by the market, should allow the company to transfer most of its increasing borrowing cost onto its customers. Hence, we forecast its lease rate factor to expand accordingly from 9.9% in 2015 to 10.2% in 2016, and remain at the 10.3% level in 2017-18.

Combining all the above-mentioned factors, we forecast the company's lease rental income to reach USD1.0bn, USD1.2bn and USD1.4bn in 2016, 2017 and 2018, respectively, translating into 7%, 17% and 14% YoY growth, and remaining the most important earnings growth driver for BOCA over our forecast horizon.

BOCA: lease rate factor and cost of funding (2013-18E) BOCA: lease rental income and growth (2013-18E) 10.4% 3.0% (USD m) (YoY %) 2.5% 2.4% 1,600 20% 2.3% 2.5% 10.2% 2.0% 1,400 17% 1.9% 1.9% 17% 2.0% 1,200 15% 14% 10.0% 1,000 1.5% 10.3% 800 10% 9.8% 10.2% 10.3% 600 1.0% 7% 9.9% 9.6% 9.8% 400 5% 9.7% 0.5% 4% 200 804 937 975 1,041 1,222 1,389 9.4% 0.0% 0 0% 2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E Lease rate factor (%, LHS) Cost of funding (%, RHS) Lease rental income (LHS) Growth (YoY %, RHS)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Aircraft disposal gains pose upside potential The company is likely to stay active in aircraft trading We expect BOCA to Looking back over 2013-15, aircraft disposal accounted for about 6% of the company’s actively participate in revenue on average, but reached about 17% of its pre-tax income. As mentioned, aircraft trading aircraft in order disposal is also a crucial way for the company to optimise its fleet structure and reduce to generate gains and residual value risk. quicken its cash flow

BOCA (2588 HK): 17 October 2016

The company sold 21 aircraft in 2013, 33 in 2014 and 43 in 2015, relatively more aggressive than the average of 8 aircraft it sold per year from 2007-12. Given the robust scheduled order book deliveries for 2016-18 and occasional PLB transactions, we expect the company to remain opportunistic in selling its fleet so as to speed up cash inflow and reduce its capex burden. Hence, we assume 38-40 aircraft will be sold in each of 2016-18.

Gain per aircraft sold should improve Gain per aircraft should BOCA announced on 20 June 2016 that it had disposed of the final 4 owned aircraft it had improve given the acquired prior to 2007. As a result, no aircraft in its fleet is now older than 10 years. As at company’s continued end-June 2016, the average fleet age of its owned fleet was only 3.3 years weighted by net efforts at fleet book value, one of the youngest in the industry. In our view, the June transaction marked modernisation the successful implementation of the company’s fleet management strategy. We forecast the company’s per aircraft disposal gain to gradually improve from USD1.6m in 2015 to USD1.8-2.2m in 2016-18 given its young and modern fleet structure.

Management revealed, during the interim results announcement on 25 August, that the average aggregate value of its owned fleet as assessed by 5 independent appraisers is USD11,015m, which is about a 14% premium to its net book value of USD9,693m. Further, the company recorded no aircraft impairment loss in 1H16, compared to the USD13.6m charged in 1H15. We see all this as evidence supporting our argument that the per aircraft disposal gain should improve over our forecast horizon.

BOCA: units of aircraft sold (2007-18E) BOCA: gain on disposal of aircraft (2013-18E) Aircraft sold (units) (USD m) (USD m) 50 100 3.6 4.0 3.5 40 80 3.0 2.2 30 60 2.0 2.5 1.8 1.6 2.0 43 20 38 40 40 40 1.5 33 0.9 1.0 10 21 20 12 12 0.5 10 10 76 30 70 68 80 88 3 6 0 0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2013 2014 2015 2016E 2017E 2018E No of owned aircraft sold Net gain on sales of aircraft (LHS) Net gain per aircraft sold (RHS)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Interest-rate risk not an excessive concern Reducing lease-debt mismatch mitigates interest-rate risk As at end-1H16, 52% of the company’s total leases, by net book value, are linked to floating rate, but 64.5% of its liabilities are in floating rate. Therefore, interest rate risk has arisen due to the mismatch in lease rentals and borrowings.

Interest-rate sensitivity BOCA targets to hedge at least 50% of its mismatched interest-rate exposure through reduced as a result of different financial instruments. As at end-2015, it had hedged about 60% of its mismatched increased hedging ratio interest-rate exposure. Given that more lessees now opt for fixed rate contracts, the company raised its hedging ratio to around 80% of its mismatched interest-rate exposure at end-June 2016. Hence, its interest-rate sensitivity to a 10bps increase in interest rates, dropped from a USD1.7m decline in net profit at end-2015 to about a USD1m decline at end-June 2016. Our analysis shows that a 10bps rise in interest rates would result in a 0.2% decrease in our 2016 net profit forecast. As such, we believe interest-rate risk should not be an excessive concern for investors.

BOCA (2588 HK): 17 October 2016

BOCA: fixed vs. floating leases and debt BOCA: interest rate sensitivity analysis 100% Assumes 10bp increase in interest rates, 2016E net profit would change by (%) End-2015 interest rate sensitivity: -0.4% 36% End-1H16 interest rate sensitivity, after increasing fixed rate debt proportion: -0.2% 80% 48% Hedged 80% of 60% mismatched floating rate ex posure as at end-1H16 40% 64% 52% 20%

0% Leases Debt Floatint rate Fixed rate Source: Company Source: Company, Daiwa estimates Note: fixed rate debt included floating rate debt swapped to fixed rate liabilities; data as of end- 1H16

Balance sheet review Gearing Gearing fell significantly BOCA’s gearing ratio (calculated as gross debt/total equity) had declined to 2.9x at end- in 1H16 following the 1H16, an improvement from 3.7x at end-2015. Management attributed the decline to its IPO in June 2016 IPO in June 2016, which generated net proceeds of about USD550m and enlarged its equity base. Management expects the gearing ratio to rise back to 3.5-4.0x gradually, by the end of 2018, which management sees as acceptable to ratings agencies.

Capex Capex likely to remain The company’s order book for 2016-18 comprises: 67 aircraft to be delivered in 2016, 60 in high over 2016-18 due to 2017 and 37 in 2018. In addition to ad hoc PLB opportunities and its PDP instalment, we order delivery schedule expect its capex to reach USD3.4-3.9bn per year throughput this period. Given such a strong delivery pipeline, we expect BOCA to sell 38-40 aircraft during the same period, which would enable it to accelerate cash inflow and generate disposal gains. In sum, we forecast the company’s net capex to be about USD1.5-2.0bn over 2016-18.

Payout ratio Management intends to The company paid a dividend of USD113m in 2013 (representing a payout ratio of 41%) have a 30% payout ratio and USD139m in 2014 (payout ratio of 45%), but paid no dividends in 2015. Management going forward has stated its intention to maintain a 30% dividend payout, and we use this as our assumption. Considering the company’s capex needs and its stable cash flow as a result of its steadily growing lease rental business, we assume a 30% payout ratio over our forecast horizon, which translates into 2016, 2017 and 2018E dividend yields of 3.5%, 3.9% and 4.6%, respectively.

1H16 results review Strong 1H16 earnings BOCA’s 1H16 revenue came in at USD579m, up 8.2% YoY. The largest component, its growth lease rental income business, saw a 5.7% YoY increase in revenue, due mainly to an increase in the USD LIBOR on its floating rate rental contracts and because it signed more new fixed lease rate contracts. The revenue from net gains made on its aircraft sales grew by 35.3% YoY, driven by more aircraft sales over the period. On the cost front, its depreciation for plant and equipment (mostly relating to aircraft) declined by 3.7% YoY, on the increase in aircraft sales in 1H16 and the disposal of all aircraft more than 12 years old that were depreciated at 4.5% per annum vs 3.6% of aircraft less than 12 years old.

Its finance expenses increased by 23.8% YoY as a result of the rising USD LIBOR and a higher proportion of fixed-rate debt for hedging purposes. Hence, the company recorded a pre-tax profit of USD240m, up 20.3% YoY. Its tax expenses declined by 1.2% YoY, due to write-backs on its tax provisions. As such, its net profit expanded by 23.8% YoY.

BOCA (2588 HK): 17 October 2016

Operating update All of the aircraft The company delivered 27 aircraft in 1H16. As at 30 June 2016, BOCA had a fleet of 226 scheduled for delivery in owned and 39 managed aircraft. In 1H16, the company sold 22 aircraft, including its 4 last 2016 have been placed remaining pre-2007 acquired aircraft. The average age of its fleet, therefore, was only 3.3 on lease years as at 30 June 2016, one of the youngest among its peers. In 2H16, the company is scheduled to deliver 30 aircraft on its order book. Moreover, 100% of its scheduled order book deliveries for 2016 and 67% of its 2017 deliveries had been placed on lease by end- June 2016. Based on BOCA’s run-rate, management sees more visibility over 2H16 and 2017 earnings and is confident about the long-term prospects.

Asia Pacific should continue to drive business growth Asia Pacific is likely to Some 54.8% of the company’s 1H16 lease rental income was derived from the Asia-Pacific lead its business growth region, vs. 48.9% in 1H15. Management continues to see this region as one of the fastest- growing in terms of new aircraft demand. It also sees opportunities in North America and Europe, driven by aircraft replacement demand.

BOCA: 1H16 results summary (USDm) 1H15 1H16 YoY % Lease rental income 488 516 5.7% Interest and fee income 16 26 62.4% Other income: Net gain on sale of aircraft 28 37 35.3% Other income 4 1 -86.9% Total revenue and other income 535 579 8.2%

Depreciation of plant and equipment (193) (186) -3.7% Finance expenses (82) (101) 23.8% Staff costs (28) (32) 13.1% Other operating costs and expenses (19) (20) 7.3% Impairment of aircraft (14) - -100.0% Total cost and expenses (336) (340) 1.1%

Profit before income tax 199 240 20.3% Income tax expense (28) (27) -1.2% Net profit 171 212 23.8%

EPS (USD) 0.29 0.35 20.3% DPS (USD) - 0.06 n.a.

Source: Company

BOCA (2588 HK): 17 October 2016

Valuation and recommendation Valuation methodology We use DCF as our valuation methodology We use DCF to value The cash stream from aircraft leasing is relatively predictable due to its long-term nature aircraft leasing (lease terms usually range 8-12 years) and stable lease rates. In most cases, companies manufacturers, lessors and lessees usually discuss the new leases 12-18 months prior to aircraft delivery, which also provides visibility for lessors’ lease rental income. Thus, we apply DCF as our valuation methodology as we believe it better captures the value of the company’s future leases. Besides, while PER and PBR comparisons may provide reference values to investors to compare different companies, we believe metrics such as earnings growth and ROE should also be considered.

Recommendation Initiate coverage with a We initiate coverage on BOCA with a Buy (1) rating and DCF-based 12-month target price Buy (1) rating and 12- of HKD50. We think the company is well positioned to capture growing opportunities in the month TP of HKD50 emerging Asia-Pacific aircraft leasing market on rising air-traffic demand. Its strong order book, competitive low funding cost, and modern and in-demand fleet also allows the company to stand out from its peers. Further, we are confident in management’s execution capability given BOCA’s operating history.

BOCA: DCF valuation FY end 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Years ahead 1 2 3 4 5 6 7 8 9 Discount rate 0.96 0.92 0.88 0.85 0.81 0.78 0.75 0.72 0.69 Revenue 1,390 1,591 1,697 1,767 1,787 1,819 1,841 1,873 1,907 EBIT 814 948 1,003 1,030 1,023 1,026 1,018 1,019 1,021 Tax on EBIT (118) (137) (145) (149) (148) (149) (148) (148) (148) After-tax EBIT 696 810 857 881 875 878 870 871 873 Add: Depreciation & Amortization 479 532 576 607 631 656 682 710 739 Minus: Capex (1,845) (1,477) (1,184) (823) (982) (946) (1,091) (1,091) (1,091) Minus: Increase of NWC 24 22 12 8 2 4 2 4 4

Free Cash Flow (647) (112) 261 673 527 591 463 494 525 PV of FCF (620) (103) 231 570 428 461 347 355 362

Source: Daiwa estimates

BOCA: DCF calculation BOCA: DCF sensitivity analysis Target gearing (debt/capital) (%) 80 Discount NPV of FCF Enterprise Value Equity Value Equity Value Per Market risk premium (%) 10.6 rate (USD m) (USD m) (HKD m) Share (HKD) Risk-free rate (%) 0.9 3.7% 2,107 16,179 56,186 81.0 Cost of debt (%) 2.5 3.8% 2,092 15,546 51,281 73.9 Cost of equity (%) 12.6 3.9% 2,076 14,956 46,713 67.3 WACC (%) 4.2 4.0% 2,061 14,406 42,450 61.2 4.1% 2,046 13,891 38,461 55.4

Terminal Value 4.2% 2,031 13,409 34,722 50.0

Terminal Growth Rate (%) 1.0 4.3% 2,016 12,956 31,210 45.0 Terminal WACC (%) 4.2 4.4% 2,001 12,529 27,904 40.2 DCF Valuation 4.5% 1,987 12,127 24,788 35.7

NPV of Forecasts (USDm) 2,031 4.6% 1,972 11,747 21,844 31.5 NPV of Terminal Value (USDm) 11,378 4.7% 1,958 11,388 19,060 27.5

Enterprise Value (USDm) 13,409 Less: Net Debt (USD) -8,929 Equity Value (USDm) 4,480

No. Shares (m) 694 USD HKD exchange rate 7.75 Per Share Equity Value (HKD) 50.00

Source: company, Daiwa estimates Source: Daiwa estimates

BOCA (2588 HK): 17 October 2016

Valuation comparison We think superior ROE deserves a valuation premium Attractive valuation at Among the 3 Hong Kong-listed aircraft leasing companies (BOCA, CALC and CDBL), current share-price level, BOCA is trading at the lowest average 2016-17 PER of 7.7-8.5x, based on our forecasts. in our view In terms of average 2016-17E PBR, the stock is trading at 1.0-1.1x, which is comparable to CDBL’s 0.9-1.0x, but significantly lower than that of its closest Hong Kong-listed peer, CALC, at 2.0-2.4x.

BOCA: 12-month forward PER (since listing in June 2016) (PBR) 1.1

1.0

0.9 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 PBR Average PBR Source: company, Daiwa forecasts

Our target price implies an average 2016-17E PBR of 1.3x, higher than the average of its peers, at 1.0-1.1x. However, judging by what we see as the company’s superior ROE of 13.8- 14.2% for 2016-17, compared to peers’ 10.4-10.9%, we think our target price is justified and achievable. Our 12-month target price of HKD50 represents upside potential of 20% from the current share-price level, which we see as a good entry point. We forecast a 2016-17 dividend yield of around 4%, which we think also raises the attractiveness of the stock.

Global aircraft leasing peers: valuation comparisons Name Bloomberg Trading Share price Rating PER (x) PBR (x) EV/EBITDA(x) Div yield (%) ROE (%) Code Currency 14-Oct-16 FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E Aircraft leasing China Aircraft Leasing Group * 1848 HK HKD 9.54 Buy 11.1 9.0 2.4 2.0 12.4 11.1 3.2 4.5 24.7 24.6 BOC Aviation Ltd * 2588 HK HKD 41.70 Buy 8.5 7.7 1.1 1.0 11.6 10.6 3.5 3.9 14.2 13.8 China Development Bank Finan 1606 HK HKD 1.92 NR 11.1 9.8 1.0 0.9 n.a. n.a. 0.0 0.0 9.8 n.a. Bohai Financial Investment-A 000415 CH CNY 7.18 NR 21.8 16.6 1.5 1.4 n.a. n.a. 0.0 0.0 7.5 7.9 Aircastle Ltd AYR US USD 19.48 NR 11.0 8.8 0.8 0.8 7.8 7.0 0.0 0.1 7.5 9.2 Aercap Holdings Nv AER US USD 38.77 NR 6.5 6.1 0.8 0.7 8.2 7.9 n.a. n.a. 11.8 13.8 Air Lease Corp AL US USD 28.23 NR 8.3 7.6 0.9 0.8 8.6 7.6 0.0 0.0 11.5 11.3 Fly Leasing Ltd-Adr FLY US USD 11.94 NR 8.8 6.0 0.6 0.5 7.5 6.4 0.0 n.a. 7.7 10.3 Weighted average 11.8 9.8 1.1 1.0 5.8 5.3 0.6 0.7 10.9 10.4 High 21.8 16.6 2.4 2.0 12.4 11.1 3.5 4.5 24.7 24.6 Low 6.5 6.0 0.6 0.5 7.5 6.4 0.0 0.0 7.5 7.9 Median 9.9 8.3 0.9 0.8 8.4 7.7 0.0 0.0 10.7 11.3

Source: Bloomberg, *Daiwa forecasts

Risks Delayed aircraft deliveries Delays in aircraft The global large single-aisle aircraft manufacturing market, to a large extent, is controlled delivery could cap the by the duopoly of Airbus and Boeing, and we do not expect the market landscape to company’s growth change radically in the near future. Currently, BOCA’s order book is filled entirely with Airbus and Boeing aircraft. Therefore, if these manufactures decide to slow down or face disruptions in their production process, BOCA’s scheduled deliveries and its lease rental growth would be affected.

That said, given the piled-up order book of Airbus and Boeing and the continued strong market demand for narrow-body aircraft, we see little chance of these two companies suddenly reducing their production capacity of narrow-body aircraft significantly within our

BOCA (2588 HK): 17 October 2016

forecast horizon, and both Airbus and Boeing plan to ramp production for in-demand single aisle aircraft such as the A320 and B737, instead of cutting production.

Credit risk Delays or failures in A typical aircraft operating leasing contract for a new aircraft often lasts 10-12 years. receiving lease rentals Therefore, credit risk arises whenever any lessee delays or fails to pay lease rentals, as pose a credit risk most of the lessors fund their aircraft purchases through debt financing.

To address this risk, BOCA requires customers to pay their rent mostly in advance and provide security deposits and pay maintenance reserves. Thorough appraisals are made before it approves new leases, while regular reviews are also carried out of existing contracts. The average lease payment collection rate for 2008-15 was 99.6%, implying the company’s measures have effectively controlled its credit risk, in our view.

Market competition In terms of the value of owned aircraft, BOCA is the largest aircraft operating lessor based in Asia, and it ranked among the top-5 global aircraft operating lessors in 2015. We think its strategy and cost advantages are the major reasons for the company’s leading position in the industry.

Rising Asia-based However in recent years, many Asia-based lessors, especially from China, have been lessors could lead to seeking to gain a foothold in the market. For example, Bohai Leasing acquired Avolon more intense market Holdings, another top-5 Asia-Pacific-region lessor, for USD2.6bn in 2015. ICBC Leasing competition and AVIC Capital were also reported to be interested in bidding for AWAS, an Irish lessor. NWS Holding (659 HK, not rated) acquired a 40% stake in Goshawk Aviation in 2015 to expand into the aircraft leasing business. We think the eagerness of new players to enter the market will drive up the aircraft transaction price, which could lead to a lower lease rate factor. As such, we would see this as a risk to our Buy (1) call on the stock.

Interest rate risk BOCA’s interest risk Similar to other lessors, BOCA offers lessees contracts on fixed- or floating lease terms. As could be mitigated by its at end-1H16, 52% lease of the company’s total leases, by net book value, are linked to hedging policy, while … floating rate, but 64.5% of its liabilities are in floating rate. Therefore, interest rate risk has arisen due to the mismatch in lease rentals and borrowings. As such, any increase in interest rates would lead to a drop in the company’s earnings due to this type of lease-debt mismatch.

As at end-June 2016, the company hedged about 80% of its mismatched interest-rate exposure. Our analysis shows that a 10bps rise in the interest rate would result in a 0.2% decrease in our 2016 net-profit forecast.

… maintaining its Further, the company is now rated at an investment grade credit rating by both Standard & investment grade credit Poor’s and Fitch, which enables the company to borrow at low cost. Any failure to maintain rating is crucial for its credit rating is likely to result in a surge in borrowing costs and would adversely affect its obtaining low-cost profitability, in our view. funding going onward Residual risk Unlike finance leases, the structure of operating leases places the residual value risk on the lessors, and this residual value can only be realised when the leased-aircraft is sold or disassembled. Therefore, residual value risk exists if there is any sudden and significant decrease in aircraft value.

Any sudden or Nonetheless, BOCA’s fleet comprises mostly modern and young aircraft (ie, single-aisle significant drop in the aircraft). The company sold its last 4 pre-2007 acquired aircraft in 1H16, bringing the value of its aircraft could average age of its fleet to only 3.3 years weighted by net book value. As at end-June 2016, harm the company's the average of 5 independent appraisers’ aggregate values for its fleet was about a 14% value premium to its net book value. We think all these factors provide a buffer for the company

BOCA (2588 HK): 17 October 2016

to mitigate residual value risk. Also, to support this, the company had zero aircraft impairment losses in 1H16, compared to USD13.6m in 1H15.

Forex risk Given that the USD is the The USD is the dominant currency used in the global aviation business. Hence, BOCA dominant currency in the collects all revenue in USD. However, some of the company's borrowing is in other global aviation business, currencies, such as AUD, CNY and SGD. As a result it has adopted foreign exchange the company sees swap contracts to convert these liabilities into USD-denominated borrowing to reduce its minimal currency risks forex risk. Therefore, management does not expect any changes in the foreign exchange rates to have a material impact on the company’s financials.

BOCA (2588 HK): 17 October 2016

Company background A top-class aircraft lessor With 22 years’ Founded in 1993, BOCA is primarily engaged in aircraft leasing and associated experience in the businesses, such as selling used aircraft. Based in Singapore, the company started its industry, BOCA is a business by acquiring its first aircraft in 1995. BOCA was acquired by the Bank of China, globally recognised ranked among the top-10 banks globally by market capitalisation, in 2006, and became aircraft lessor one of the bank’s 100%-owned subsidiaries. With support from its parent company, and due to efforts made by management, the company had a fleet of 265 aircraft, as at end- June 2016, with 218 aircraft on order. It is also one of the leading global aircraft lessors.

The company was listed on the Hong Kong Exchange on 1 June 2016 via the largest aircraft operating lessor IPO in the history. Going forward, the company aims to develop its aircraft leasing business and expand its fleet portfolio.

BOCA: management profile Management Title Experience Robert Martin Managing Director Appointed CEO of BOCA in 2004 Chief Executive Officer A member of the board of directors since July 1998 28 years’ banking and leasing experience Wang Genshen Vice-Chairman A member of the board of directors since December 2016 Deputy Managing Director Involved in the acquisition of the company by Bank of China 37 years’ experience at BOC Phang Thim Fatt Deputy Managing Director 20 years as CFO of BOCA Chief Financial Officer Previously worked as treasury role at for Singapore Airlines 36 years’ industry experience, involved in the establishment of the company Steven Townend Chief Commercial Officer In charge of revenue-making activities for the Americas, Europe, Africa 15 years with BOCA 24 years’ banking and leasing experience Chris Gao Chief Commercial Officer In charge of revenue-making activities for Asia Pacific and the Middle East A member of the board of directors since December 2016 Extensive capital market experience with BOC David Walton Chief Operating Officer Joined as senior management in 2014 Previously held aircraft-leasing company COO and general counsel roles More than 25 years’ legal and leasing experience

Source: Company, Daiwa

BOCA: corporate milestones Year Event 1993 Establishment of Singapore Aircraft Leasing Enterprise (SALE) 1995 Acquired first aircraft 1996 Placed first order with Airbus for 12 A320 aircraft 1997 Placed first order with Boeing for 6 B777 aircraft Temasek Holding (Private) Limited and Government of Singapore Investment Corporation Private Limited each became a 14.5% shareholder of SALE 1998 Sold its first owned aircraft 2000 Launched SALE's first bond issue 2001 First overseas office opened in London 2004 Own fleet reached 50 aircraft 2006 BOC acquired 100% of SALE on 15 December 2006 Office opened in Seattle 2007 Changed company name to BOCA Pte. Ltd. 2009 Own fleet exceeded 100 aircraft Office opened in Dublin 2011 Own fleet exceeded 150 aircraft Placed first order with Embraer for E190 family aircraft 2013 Own fleet exceed 200 aircraft 2014 Own and managed fleet reached 250 aircraft Aircraft on order at the end of the year exceeded 200 2015 Office opened in Tianjin First portfolio sales of 24 aircraft to a special purpose purchaser funded by the capital markets 2016 Company listed; name changed to BOCA Limited

Source: Company, Daiwa

BOCA (2588 HK): 17 October 2016

BOCA: organisational chart

BOC

100%

BOCGI

100%

Sky Splendor Limited Public shareholders

70% 30%

BOC Aviation (2588 HK)

100% 100% 100% 100% 100% 100% BOCA (Ireland) BOCA (UK) BOCA (USA) BOCA (Tianjin) BOCA (Bermuda) Cayman and other Limited Limited Limited Limited Limited subsidiaries

Source:Ccompany, Daiwa

BOCA (2588 HK): 17 October 2016

Appendix Customer and geographical coverage Well-diversified customer base mitigates concentration risks Has a well-established BOCA has built up a well-established customer network through its more than 20 years of customer network operations. It has a customer base of 64 airlines, across 31 countries for its owned and managed fleet portfolios, according to 1H16 data. The Asia-Pacific region was the biggest contributor in 1H16, accounting for about 55% of its lease rental income, followed by 22% from Europe, 17% from the Americas and 7% from the Middle East and Africa. No single lease accounted for more than 8% of its total lease income in 2015. Revenue from its top-5 customers contributed about 34.7%, 33.3% and 30.1% of its total lease rental income for 2013, 2014 and 2015, respectively. We believe such a diversification strategy has effectively lowered the company’s concentration risk.

BOCA: lease rental income by region (1H16)

Asia Pacific (excl. Chinese Mainland, HK, 6.5% Macau & Taiwan)

Chinese Mainland, HK, Macau & Taiwan 16.9% 35.0% Europe

21.8% Americas

19.8% Middle East & Africa

Source: Company

BOCA: lease rental income by customer (1H16) Cathay Pacific Group 7.1% 5.9% AirAsiaX Thai Airways 5.5% Lion Air Group 5.4% Aeroflot Iberia 50.7% 5.0% Qantas 4.7% Jet Airways 4.6% Southwest Airlines 3.8% EVA Airways 3.8% 3.5% Others

Source: Company Note: Total lease rental income for the 3 months ended 31 June 2016; Cathay Pacific Group includes leases with Cathay Pacific (Hong Kong) and Cathay Dragon (Hong Kong); Lion Air Group includes leases with Lion Air (Indonesia), Thai Lion Air (Thailand), MalindoAir (Malaysia) and Batik Air (Indonesia)

BOCA (2588 HK): 17 October 2016

BOCA: YTD aircraft transactions Date Nature Details Parties involved Note 12-Jan-16 Delivery Delivered 1 Airbus A321-200 aircraft An Asian airline From the company's existing order book. 13-Jan-16 Delivery Delivered 1 Boeing 737-800 aircraft An Asian airline From the company's existing order book. 14-Jan-16 Delivery Delivered 1 Airbus A321-200 aircraft An Asian airline From the company's existing order book. 15-Jan-16 Delivery Delivered 1 Airbus A321-200 aircraft An Asian airline From the company's existing order book. 22-Jan-16 Delivery Delivered the third of 3 Boeing 737-800 aircraft Pegasus Airlines From the company's existing order book. 2-Feb-16 Delivery Delivered 1 Airbus A321-200 aircraft An Asian airline From the company's existing order book. 3-Feb-16 Aircraft sold Sold 1 Airbus A320-200 leased An Asian airline N.A. 5-Feb-16 Aircraft sold Sold 1 Airbus A320-200 leased An European airline N.A. 5-Feb-16 Delivery Delivered 1 Boeing 737-800 aircraft An Asian airline From the company's existing order book. 25-Feb-16 Delivery Delivered 1 Airbus A321-200 aircraft EVA Air From the company's existing order book. 29-Feb-16 Aircraft sold Sold 2 Airbus A319-100 aircraft leased North American airline N.A. 2-Mar-16 Delivery Delivered 1 Airbus A320-200 aircraft A Middle Eastern airline From the company's existing order book. 3-Mar-16 Aircraft sold Sold 1 Airbus A320-200 leased An Asian airline N.A. 24-Mar-16 Aircraft sold Sold 1 Airbus A320-200 leased An Asian airline N.A. 31-Mar-16 Delivery Delivered 1 Airbus A320-200 aircraft A Middle Eastern airline From the company's existing order book. 7-Apr-16 Aircraft sold Sold 1 Airbus A319-100 aircraft leased North American airline N.A. 7-Apr-16 Aircraft sold Sold 1 Airbus A320-200 leased An Asian airline N.A. 12-Apr-16 Aircraft sold sold 1 Boeing 737-800 aircraft An Asian airline N.A. 15-Apr-16 Delivery Delivered 1 Airbus A320-200 aircraft An Asian airline From the company's existing order book. 21-Apr-16 Delivery Delivered 1 Airbus A320-200 aircraft An Asian airline From the company's existing order book. 21-Apr-16 Delivery Delivered 1 Airbus A320-200 aircraft An Asian airline From the company's existing order book. 26-Apr-16 Delivery Delivered the first of three Airbus A320-200 aircraft ANA Holdings The aircraft will be operated by ANA's wholly owned subsidiary, Vanilla Air. It is also the first time BOCA worked with an airline under the ANA umbrella 27-Apr-16 Aircraft sold Sold 2 Airbus A320-200 aircraft leased An Asian airline N.A. 3-May-16 Delivery Delivered 1 Airbus A320-200 aircraft Vistara This delivery is a part of the airline’s 20 Airbus A320 aircraft order, within BOCA's existing order book. 10-May-16 Aircraft sold Sold 2 Boeing 737-800 aircraft leased An Asian airline N.A. 12-May-16 Delivery Delivered 1 Airbus A321-200 aircraft EVA Air From the company's existing order book. 26-May-16 Aircraft sold Sold 1 Boeing 737-800 aircraft leased An Asian airline N.A. 27-May-16 Aircraft sold Sold 1 Boeing 737-900ER aircraft leased An Asian airline N.A. 2-Jun-16 Delivery Delivered 1 Airbus A320-200 aircraft Vistara This delivery is a part of the airline’s 20 Airbus A320 aircraft order, within BOCA's existing order book. 16-Jun-16 Aircraft sold Sold 2 Airbus aircraft, 1 A319-100 and 1 A320-200 An Asian airline N.A. 16-Jun-16 Delivery Delivered 2 Boeing 737-800 aircraft Transavia Airlines Transavia Airlines, a member of the Air France KLM Group, is a new customer for BOCA. This delivery was from the company's existing order book. 18-Jun-16 Aircraft sold Sold 1 Boeing 747-400F aircraft leased An Asian airline N.A. 18-Jun-16 Aircraft sold Sold 1 Airbus A320-200 aircraft leased An Asian airline N.A. 20-Jun-16 Aircraft sold Sold 4 aircraft, 3 Airbus A320 family and 1 Boeing 747 N.A. The aircraft sold its last 4 owned aircraft that it had acquired before 2007. freighter Following this transaction, none of its aircraft in its own fleet are more than 10 years old 28-Jul-16 Delivery Delivered 1 Boeing 737-900ER aircraft P.T. Lion Mentari N.A. 28-Jul-16 Aircraft sold Sold 1 Airbus A321-200 aircraft leased An Asian airline N.A. 11-Aug-16 Delivery Delivered 1 Boeing 737-800 aircraft Lucky Air First of 7 Boeing 777-800 aircraft to Lucky Air, from the company's existing order book 11-Aug-16 Place of Placed an order of 6 Boeing 737-800 aircraft China Airlines First time to add China Airlines as a customer order 12-Aug-16 Delivery Delivered 1 Boeing 737-900 aircraft P.T. Lion Mentari N.A. 15-Aug-16 Place of Placed an order of 2 new Airbus A320 family aircraft Wizz Air First time to add Wizz Air as a customer, from the company's existing order order book 18-Aug-16 Delivery Delivered 1 Boeing 737-800 aircraft Lucky Air First of 7 Boeing 777-800 aircraft to Lucky Air, from the company's existing order book 18-Aug-16 Delivery Delivered 1 AirbusA321-200 aircraft An Asian airline From the company's existing order book. 9-Sep-16 Delivery Delivered 1 Boeing 737-800 aircraft China Airlines First of 6 Boeing 737-800 aircraft to China Airlines, from the company's existing order book. 20-Sep-16 Delivery Delivered 1 Airbus A320-200 aircraft Vistara The delivery is a part of the airline’s 20 Airbus A320 aircraft order, within the company's existing order book. 27-Sep-16 Aircraft sold Sold 1 Airbus A320-200 aircraft leased An Asian airline N.A. 29-Sep-16 Delivery Delivered 1 Boeing 737-800 aircraft China Airlines Second of 6 Boeing 737-800 aircraft to China Airlines, from the Company's existing order book. 29-Sep-16 Delivery Delivered 1 Airbus A321-200 aircraft Interjet First of 3 Airbus A321-200 aircraft to Interjet, from the Company's existing order book. 30-Sep-16 Delivery Delivered 1 Airbus A321-200 aircraft EVA Air From the company's existing order book. 3-Oct-16 PLB Enter Into Purchase-And-Leaseback arrangement for 3 Air China All scheduled for delivery from the manufacturer in the 4th quarter of 2016 arrangement Boeing 777-300ER and 2 Airbus A330-300 aircraft 5-Oct-16 Delivery Delivered 1 Airbus A320-200 aircraft Vistara The delivery is a part of the airline’s 20 Airbus A320 aircraft order, within the company's existing order book. 12-Oct-16 Delivery Delivered 1 Airbus A321-200 aircraft EVA Air From the company's existing order book.

Source: Company, Daiwa

BOCA (2588 HK): 17 October 2016

BOCA: aircraft order placement in recent years Date Nature Details Parties involved Note 31-Aug-16 Order placement Ordered 5 mew Airbus A321-200 aircraft Airbus The order is scheduled for delivery in 2017. 7-Jan-16 Order placement Placed an order for 30 Airbus A320 Family Aircraft, comprising 18 A320 Airbus With this order, BOCA became one of Airbus’ top-10 NEO family and 12 A320 CEO family aircraft customers, 24-Nov-15 Order placement Placed an order for 22 Boeing 737 Family Aircraft, comprising 11 Boeing Boeing The order is scheduled for delivery from 2018-21 Next Generation 737-800 aircraft and 11 Boeing 737 MAX 8 aircraft 25-Aug-14 Order placement Placed its first order For Boeing 737 MAX, comprising 50 737 MAX 8 and 30 Boeing The order is scheduled for delivery from 2016-21 Next Generation 737-800 aircraft 15-Jul-14 Order placement Placed orders for additional 43 A320 Family aircraft, comprising 7 NEOs Airbus The delivery will be completed by 2019 and 36 CEOs across A320 and A321 variants 25-Sep-13 Order placement Placed orders for 25 A320 Family aircraft, comprising A320 and A321 Airbus The order is scheduled for delivery from 2015-19 variants for both CEOs and NEOs 15-Jan-13 Order placement Placed orders for 50 A320 Family aircraft, comprising A320 and A321 Airbus The order is scheduled for delivery from 2014-19 variants of both engine options, CEOs and NEOs 14-Feb-12 Signing of Launch Signed Launch Customer Agreement with Commercial Aircraft Corporation Commercial Aircraft The signing of the LCA with COMAC builds upon the Customer Agreement of China for 20 C919 aircraft Corporation of China CNY50bn Strategic Cooperation Framework Agreement signed between Bank of China and COMAC on 3 June 2011 3-Nov-10 Order placement Placed orders for 30 A320 Family aircraft Airbus The order was scheduled for delivery from 2012-14 22-Feb-08 Order placement Placed orders for 5 A330-200F freighters Airbus The order was scheduled for delivery from 2012-13 25-Apr-06 Order placement Placed an order for 10 more Next-Generation 737 aircraft, plus 10 options Boeing The order was scheduled for delivery from 2009-10 and 10 purchase rights

Source: Company, Daiwa

China Development Bank Financial Leasing (1606 HK): 17 October 2016

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China Development Bank Financial Leasing (1606 HK): 17 October 2016

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China Development Bank Financial Leasing (1606 HK): 17 October 2016

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; John HETHERINGTON (852) 2773 8787 [email protected] Shipbuilding; Steel Regional Deputy Head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] Rohan DALZIELL (852) 2848 4938 [email protected] Banking; Capital Goods (Construction and Machinery) Regional Head of Asia Pacific Product Management Iris PARK (82) 2 787 9165 [email protected] Kevin LAI (852) 2848 4926 [email protected] Consumer/Retail Chief Economist for Asia ex-Japan; Macro Economics (Regional) SK KIM (82) 2 787 9173 [email protected] Olivia XIA (852) 2773 8736 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Macro Economics (Hong Kong/China) Thomas Y KWON (82) 2 787 9181 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Head of Automobiles; Transportation and Industrial (Hong Kong/China) Kevin JIN (82) 2 787 9168 [email protected] Brian LAM (852) 2532 4341 [email protected] Small/Mid Cap

Auto Components; Transportation – Railway; Construction and Engineering (China) TAIWAN Leon QI (852) 2532 4381 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Banking; Diversified financials; Insurance (Hong Kong/China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Yan LI (852) 2773 8822 [email protected] (Regional) Banking (China) Christie CHIEN (886) 2 8758 6257 [email protected] Anson CHAN (852) 2532 4350 [email protected] Banking; Insurance (Taiwan); Macro Economics (Regional) Consumer (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Adrian CHAN (852) 2848 4427 [email protected] IT/Technology Hardware (PC Hardware) Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (Handsets and Components) Gaming and Leisure (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] John CHOI (852) 2773 8730 [email protected] Small/Mid Cap Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Carlton LAI (852) 2532 4349 [email protected] INDIA Small/Mid Cap (Hong Kong/China) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Dennis IP (852) 2848 4068 [email protected] Head of India Research; Strategy; Banking/Finance Power; Utilities; Renewables and Environment (Hong Kong/China) Saurabh MEHTA (91) 22 6622 1009 [email protected] Jonas KAN (852) 2848 4439 [email protected] Capital Goods; Utilities Head of Hong Kong and China Property Cynthia CHAN (852) 2773 8243 [email protected] SINGAPORE Property (China) Ramakrishna MARUVADA (65) 6499 6543 [email protected] Thomas HO (852) 2773 8716 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Custom Products Group David LUM (65) 6329 2102 [email protected] Banking; Property and REITs PHILIPPINES Royston TAN (65) 6321 3086 [email protected] Patricia Tamase (63) 2 797 3024 [email protected] Oil and Gas; Capital Goods Banking Shane GOH (65) 64996546 [email protected]

Property and REITs; Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)

China Development Bank Financial Leasing (1606 HK): 17 October 2016

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China Development Bank Financial Leasing (1606 HK): 17 October 2016

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China Development Bank Financial Leasing (1606 HK): 17 October 2016

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The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 64.0% Hold** 21.2% Sell*** 14.8% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2016. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

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