Deutsche Bank Markets Research
Rating Company Date 5 December 2016 Buy BOC Aviation Initiation of Coverage Asia Singapore Reuters Bloomberg Exchange Ticker Price at 1 Dec 2016 (HKD) 39.00 Banking / Finance 2588.HK 2588 HK HSI 2588 Price target - 12mth (HKD) 48.50 Other Financial Services 52-week range (HKD) 43.30 - 36.58
Straits Times Index 2,905
Sustaining profitability; initiating with Jacky Zuo Hans Fan, CFA Buy Research Associate Research Analyst (+852 ) 2203 6255 (+852 ) 2203 6353 The 5th largest global aircraft lessor about to re-lever up; Buy with HK$48.5 TP [email protected] [email protected] We expect BOCA to start a rapid fleet expansion with the asset base growing 17-20% yoy in 2016-18E to reach a 3.5x debt-to-equity ratio at end-FY18 (vs. 1H16: 2.9x after HK IPO). We expect the fast growth to be supported by its Price/price relative large order book (~100% of the existing fleet), high Asian exposure (55% of 45 lease portfolio), strong funding capability (2% funding cost) and young fleet 44 (3.3 years). We forecast the lessor to sustain pre-IPO profitability with average 42 ROE of 14.5% in 2016-18E. We initiate with Buy and a target price of HK$48.5. 41 39 We believe the stock may play catch-up after the recent rally of its US peers. 38 36 A new phase of growth 6/16 BOCA targets to raise leverage back to the pre-IPO level, i.e. 3.5-4.0x debt-to- BOC Aviation equity by the end of 2018. We forecast that the lessor will add over 130 aircraft Straits Times Index (Rebased) to its fleet portfolio in three years, with efforts to conduct more purchase-and- lease-back deals on top of its order book and disposing of fewer aircraft. BOCA Performance (%) 1m 3m 12m owned 226 aircraft and managed 39 aircraft as of June 2016. The lessor had 218 Absolute -9.9 -3.7 – aircraft on order as of 1H16, with 40 deliveries per year on average in the next Straits Times Index 3.3 3.1 1.2 five years. Source: Deutsche Bank
Superior quality compared with global peers BOCA has delivered a strong financial track record with average ROE of 15% in 2008-1H16. It has an attractive fleet portfolio (82% narrow-body aircraft) and diversified customer base with an Asia bias. Compared with global peers, BOCA had the highest PBT margin of 37% in 2015 (vs. the 26% peer average) due to its low funding cost (2% vs. 4% peer average), a young fleet strategy (3.3 years vs. 6 years for peers) and good aircraft trading gains (17% of PBT). We expect the net lease yield to rise to 8.4-8.5% from 8.2% in 2015 with limited impact from the expected US rate hikes on its funding. Outlook for aircraft leasing industry still positive; valuation and risks We maintain a constructive view of the aircraft leasing sector, supported by robust air travel demand and rising preference for leasing aircraft from airlines. We derive our HK$48.5 target price and 1.16x target P/B from a three-stage GGM valuation (same as the valuation of its close peer Air Lease given by our US team). Key downside risks include lower-than-expected growth and intensifying competition.
Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E EPS (USD) 0.52 0.58 0.66 0.72 0.83 EPS growth 11.4 11.3 13.0 9.3 15.9 PER (x) – – 7.6 7.0 6.0 Price/book (x) – – 1.0 0.9 0.8 Yield (net) (%) – – 2.4 2.9 5.0 ROE (%) 15.3 15.1 14.6 14.1 14.7 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
______Deutsche Bank AG/Hong Kong Distributed on: 04/12/2016 20:05:00 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.
5 December 2016
Other Financial Services BOC Aviation
Model updated:01 December 2016 Fiscal year end 31-Dec 2013 2014 2015 2016E 2017E 2018E
Running the numbers Data Per Share Asia EPS (stated) (USD) 0.47 0.52 0.58 0.66 0.72 0.83 EPS FD (stated) (USD) 0.47 0.52 0.58 0.66 0.72 0.83 Singapore EPS FD (DB adj.) (USD) 0.47 0.52 0.58 0.66 0.72 0.83 Other Financial Services Growth rate - EPS (stated) (%) nm 11.37 11.26 13.04 9.29 15.85 DPS (USD) 0.19 0.24 0.00 0.12 0.14 0.25 BVPS (stated) (USD) 3.27 3.55 4.14 4.80 5.37 5.95 BOC Aviation BVPS (DB adj.) (USD) 3.27 3.55 4.14 4.80 5.37 5.95 Reuters: 2588.HK Bloomberg: 2588 HK Average market cap 0 0 0 3,489 3,489 3,489
Shares in Issue (m) 590 590 590 694 694 694
Buy Valuation Ratios & Profitability Measures Price (1 Dec 16) HKD 39.00 P/E (stated) na na na 7.6 7.0 6.0 P/E FD (stated) na na na 7.6 7.0 6.0 Target Price HKD 48.50 P/E FD (DB adj.) na na na 7.6 7.0 6.0 52 Week range HKD 36.58 - 43.30 P/B (stated) na na na 1.0 0.9 0.8 P/B (DB adj.) na na na 1.0 0.9 0.8 Market Cap (m) HKDm 27,066 ROE (adj.) (%) 15.0 15.3 15.1 14.6 14.1 14.7 USDm 3,489 ROA (adj.) (%) 5.5 2.9 2.9 3.1 3.1 3.0 Dividend yield(%) na na na 2.4 2.9 5.0
Company Profile Dividend cover(x) 2.5 2.2 nm 5.4 5.0 3.3 Payout ratio (%) 40.5 45.9 0.0 20.0 20.0 30.0 BOC Aviation is a leading global aircraft lessor headquartered in Singapore founded in 1993, and the Profit & Loss (USDm) company ranked No.1 in Asia and No.5 globally in terms of value of owned aircraft in 2015. The company (originally Net interest revenue 668 786 807 867 1,044 1,231 called Singapore Aircraft Leasing Enterprise) was 100% Non interest income 115 52 115 123 127 132 acquired by Bank of China (BOC) in December 2006, and Fees & Commissions 28 12 40 59 76 88 went publicly listed in Hong Kong in June 2016. BOC Trading Revenue 0 0 0 0 0 0 remains the controlling shareholder of the company with 70% stake. BOC Aviation mainly acquires aircraft from Insurance revenue 0 0 0 0 0 0 OEMs and places aircraft on long-term operating lease Dividend income 0 0 0 0 0 0 contracts. Other revenue 87 40 75 64 51 45 Total revenue 783 838 922 990 1,172 1,363 Total operating costs 429 462 477 505 598 699 Pre-provision profit/(loss) 354 376 445 485 573 664 Bad debt expense 43 23 44 0 0 0 Operating Profit 311 353 401 485 573 664 Goodwill 0 0 0 0 0 0 Pre-tax associates 0 0 0 0 0 0 Extraordinary & Other Items 0 0 0 0 0 0 Pre-tax profit 311 353 401 485 573 664 Tax 34 44 58 63 75 86 Minorities 0 0 0 0 0 0 Preference dividends 0 0 0 0 0 0 Stated net profit 277 309 343 422 499 578 DB adj. core earnings 277 309 343 422 499 578
Key Balance Sheet Items (USDm) & Capital Ratios Risk-weighted assets 0 0 0 0 0 0 Interest-earning assets 9,124 9,923 9,476 11,278 13,303 15,518 Total loans na na na na na na Total deposits 0 0 0 0 0 0 Stated shareholders equity 1,927 2,096 2,440 3,329 3,728 4,133 Preference share capital na na na na na na Tier 1 capital 0 0 0 0 0 0 Tier 1 ratio (%) 0 0 0 0 0 0 Tangible equity/ total assets (%) 19 18 20 22 21 20
Credit Quality Gross NPLs / Total loans (%) na na na na na na Provisions / NPLs (%) nm nm nm nm nm nm Bad debt exp/ Avg loans (%) – – – nm nm nm
Growth Rates & Key Ratios Growth in net interest income (%) nm 17.6 2.6 7.5 20.5 17.8 Growth in fee income (%) na -58.5 243.3 47.4 30.0 15.0 Growth in non-interest income (%) na -55.0 123.7 6.8 3.4 4.0 Growth in revenues (%) nm 7.0 10.1 7.4 18.3 16.3 Growth in costs (%) nm 7.6 3.2 5.9 18.5 16.8 Pre-provision earnings growth (%) na 6.3 18.5 9.0 18.1 15.9 Growth in bad debts (%) nm -46.0 90.0 nm nm nm Growth in RWA (%) nm nm nm nm nm nm Growth in loans (%) na na na na na na Growth in deposits (%) nm nm nm nm nm nm Loan-to-deposits ratio (%) nm nm nm nm nm nm Net int. margin (%) 7.3 8.3 8.3 8.4 8.5 8.5 Cost income ratio (%) 54.8 55.1 51.7 51.0 51.1 51.3 Cost asset ratio (%) 8.5 4.3 4.0 3.7 3.7 3.6 Trading income/ Total Rev (%) 0.0 0.0 0.0 0.0 0.0 0.0
Source: Company data, Deutsche Bank estimates
Jacky Zuo +852 2203 6255 [email protected]
Page 2 Deutsche Bank AG/Hong Kong
5 December 2016
Other Financial Services BOC Aviation
Investment thesis
Outlook
We expect BOCA to have started a new phase of growth after its IPO in summer 2016. We forecast the lessor to add over 130 aircraft to its existing fleet (226 as of June 2016) by end-2018E and re-lever to 3.5x debt-to-equity ratio (1H16: 2.9x), versus the 3.5-4.0x range guided by management. With that, we estimate that its ROE will reach 14.7% in 2018E, close to the pre-IPO level.
We expect its rapid fleet growth to be supported by its large order book (~100% of the existing fleet, 40 deliveries per year on average in the next five years), high Asian exposure (55% of lease portfolio), strong funding capability (2% funding cost) and young fleet (3.3 years). As the largest Asian-based aircraft lessor, BOCA is well positioned to capture the strong growth in the region, where airlines are projected to take up 43% of global fleet orders (vs. 32% of their fleet share) according to Flightglobal Fleets Analyzer.
We expect a limited direct impact from US rate hikes – a 50bps rate hike would hit BOCA’s PBT by only 1% assuming no rise to the lease factor. We forecast net lease yield to improve marginally to 8.4-8.5% from 8.2% in 2015 on more fixed-rate lease contracts in the rate hike cycle. We expect net profit to grow 23%/18%/16% in 2016E-2018E, respectively, on fast asset growth and stable yield.
We still have a positive outlook for the global aircraft leasing industry, despite the current prolonged uptrend. We notice uncertainties in selective regions, but as aircraft are mobile assets, we think aircraft lessors will be able to re- deploy their aircraft quickly to other safe regions.
Valuation
We derive our HK$48.5 target price and 1.16x target 2017E P/B from a three- stage GGM valuation. We view our 1.16x P/B multiple as reasonable, as it equals 1.30x 2016E P/B, the same as the target P/B given to Air Lease (AL) by our US airline team. We view AL as a close comparison considering its high growth trajectory, young fleet and decent profitability, despite a shorter operation history.
Risks
Downside risks include 1) lower-than-expected growth; 2) aircraft oversupply and intensifying competition; 3) regional unrest and geopolitical concerns, particularly in Asia; and 4) higher funding cost.
Deutsche Bank AG/Hong Kong Page 3
5 December 2016
Other Financial Services BOC Aviation
Valuation and risks
Target price of HK$48.5 based on 1.2x 2017E P/B
We derive our HK$48.5 target price from 1.16x 2017E P/B, based on a three- stage Gordon Growth Model (GGM). We assume ROE for first stage/second stage/terminal stage to be 14.5%/12.5%/11.6%, with COE of 11.5%. Its COE is at the low end of the 11.5-14.0% range we assume for Chinese banks due to BOCA’s low-leverage business model with no imminent asset value risks (appraised portfolio value has 14% premium to net book value). We assume a payout ratio of 23%/40%/70% under the three stages, respectively, to reflect different growth rates. We summarize our valuation methodology in Figure 1.
Figure 1: Three-stage GGM valuation for BOCA – target price HK$48.5 BOCA Valuation 3-Stage Gordon Growth Model Inputs First StageSecond Stage Terminal ROE 14.5% 12.5% 11.6% Growth 11.1% 7.5% 3.5% CoE 11.5% 11.5% 11.5% Payout Ratio 23.3% 40.0% 70.0% No. of Years 3 3 Target P/B 1.16 Net assets 2017E (US$ m) 3,728 Valuation (US$ m) 4,341 Target price (USD) 6.3 Target price (HKD) 48.5
2015 2016E 2017E 2018E EPS (USD) 0.58 0.61 0.72 0.83 EPS (HKD) 4.51 4.72 5.57 6.45 Target P/E 10.75 10.3 8.7 7.5
BVPS (USD) 4.14 4.80 5.37 5.95 BVPS (HKD) 32.1 37.2 41.6 46.1 Target P/B 1.51 1.30 1.16 1.05 Source: Deutsche Bank estimates
We view our 1.16x 2017E P/B target as reasonable, as it equals 1.30x 2016E P/B, the same as the target P/B given to Air Lease (AL) by our US airline team. As we discuss in the peer comparison section, AL is running a similar strategy to BOCA with a high growth trajectory and young fleet, despite a shorter operation record (it was launched in 2010). On a pre-tax basis (most growing aircraft lessors do not need to pay cash tax), BOCA and AL are generating similar profitability.
BOCA is trading at 0.94x 2017E P/B, in line with the 0.9x peer average, as Figure 2 shows. Albeit a short trading history, BOCA trades on average one-
Page 4 Deutsche Bank AG/Hong Kong
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Other Financial Services BOC Aviation
year forward P/B of 1.0x and average one-year forward P/E and 7.5x. Our 1.16x target P/B implies a 17% premium to the historical mean.
Figure 2: Valuation comp – global aircraft lessor peers
DB TP Price Upside Crncy Market cap PE Ratio PB Ratio Return on Equity (%) Return on Asset (%) Dividend Yield (%) Ticker Name Rating LCY LCY % (US$ m) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E AIRCRAFT LESSORS 2588 HK Equity BOC Aviation Buy 48.5 39.0 24% HKD 3,490 8.6 7.6 7.0 1.22 1.05 0.94 15.1 14.6 14.1 2.9 3.1 3.1 0.0 2.4 2.9 AER US Equity AerCap Holdings N.V. Buy 65 42.9 52% USD 7,907 6.9 7.1 6.6 1.05 0.93 0.79 14.5 10.8 13.1 2.7 2.1 2.7 0.0 7.5 0.0 AL US Equity Air Lease Corporation Buy 44 35.9 23% USD 3,688 15.3 10.6 10.3 1.22 1.09 0.99 8.8 11.8 10.9 2.2 2.8 2.6 0.4 0.6 0.8 AYR US Equity Aircastle Limited Hold 19 21.5 -12% USD 1,689 12.3 11.9 10.0 0.97 0.93 0.89 7.0 6.8 8.6 1.9 1.8 2.1 4.2 4.6 4.8 FLY US Equity Fly Leasing Limited Buy 19 13.8 37% USD 464 4.4 7.5 6.7 0.87 0.70 0.62 18.5 9.4 9.7 3.4 1.8 1.9 8.6 0.0 0.0 1848 HK Equity China Aircraft Leasing Group NR NA 9.21 NA HKD 795 14.5 9.5 8.2 2.55 2.16 1.81 19.2 24.7 23.9 1.8 2.3 2.5 2.4 3.9 4.7 Av erage 9.7 8.5 7.8 1.17 1.03 0.91 13.1 11.9 12.8 2.5 2.4 2.7 0.8 4.5 1.4 Source: Deutsche Bank estimates, Bloomberg Finance LP; Price is as of December 1, 2016
Figure 3: One-year forward P/B band chart – BOCA Figure 4: One-year forward P/E band chart – BOCA (x) (x) 2SD 1SD Mean 1-yr forward P/B 1.10 8.30 2SD 1SD Mean 1-yr forward P/E 8.10 1.06x 8.03x 1.05 7.90 1.02x 7.76x 7.70 1.00 0.99x 7.50 7.50x
0.95 0.95x 7.30 7.24x 7.10 0.92x 6.98x 0.90 6.90 6.70 0.85 6.50
Source: Deutsche Bank estimates, Company data, Bloomberg Finance LP Source: Deutsche Bank estimates, company data, Bloomberg Finance LP
Risks
Sector-wise: Aircraft oversupply due to slowing down of the global economy;
Worsening operating trend of airline customers;
Regional unrest and geopolitical concerns; and
New IFRS 16 lease accounting rule of capitalizing operating lease (effective from 2019) could affect demand. Company-specific: Lower-than-expected leverage due to lower growth;
Faster pace of US rate hikes and failure to pass through higher funding cost to airline customers;
Failure to place aircraft ordered from OEM with airline customers in a timely manner;
Failure to source enough PBL deals to sustain growth; and
Intensifying competition, particularly from Chinese aircraft lessors.
Deutsche Bank AG/Hong Kong Page 5
5 December 2016
Other Financial Services BOC Aviation
Re-levering up to sustain profitability
A new phase of growth
Three-year re-leverage process With US$550m new capital raised at its Hong Kong IPO, BOCA is set to start a new phase of growth. The lessor targets to re-lever to its pre-IPO level, i.e. 3.5-4.0x leverage (debt to equity) by the end of 2018, from 2.9x in 1H16. This means the lessor will need to add at least 130 airplanes to its existing fleet in 2.5 years, on our estimates. We are positive about the fleet expansion of BOCA promised in its large order backlog and large Asian exposure. We derive our fleet forecast as shown below.
Large order backlog. As of June 2016, BOCA had 218 aircraft on order and 40 aircraft deliveries each year on average in 2016-2021. Scheduled aircraft deliveries from its order book for 2H16-2018 have already reached 137, based on company disclosures. The total order book accounted for 106% of its existing fleet in 2015, a rate that was only lower than Air Lease and Chinese lessors (Figure 5).
More purchase-and-lease-back (PLB) deals. Given the strengthening USD with rate hike expectations, Asian airlines would be reluctant to borrow USD debt. Instead, they would prefer to sell their airplanes to lessors and lease them back to alleviate funding pressure. BOCA conducted only six and four PLBs in 2015 and 1H16, respectively, but we forecast it to acquire 16-40 aircraft via PLB in 2016E-2018E (Figure 6).
Figure 5: BOCA has a large aircraft order book to support Figure 6: We anticipate BOCA to do more PLB deals in future growth the coming years to grow its fleet portfolio Number of owned fleet - 2015 Order book as % owned fleet (RHS) BOCA aircraft delivery schedule 1,200 180% From PLB From order book 162% 165%160% 80 72 1,000 70 69 140% 70 800 124% 120% 57 16 60 20 106% 48 48 100% 40 600 90% 50 16 80% 40 40 17 400 60% 32 6 26 31 28 27 30 5 40% 41% 40% 54 200 6 5 49 20% 20 12 41 34 32 7 27 31 0 1% 0% 0% 0% 10 22 22 14 17 7 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Source: Deutsche Bank, Company data Source: Deutsche Bank estimates, Company data; BOCA received 21 aircraft deliveries in 1H16 Note: For the number of aircraft deliveries in the order book, we also take into account those purchased by airline customers upon delivery. In 2015 and 1H16, 10 and 6 aircraft were purchased by customers upon delivery as a result of exercising their purchase options.
Less aircraft disposal in the coming years. BOCA accelerated aircraft disposals from 2014 and sold nearly 100 aircraft in 2014-1H16 to clean out its fleet of aircraft over 10 years old and all aircraft that were out of production. BOCA conducted its first portfolio sale of 24 aircraft in 2015. In 1H16, it sold 22 aircraft, including its last pre-2007 vintage
Page 6 Deutsche Bank AG/Hong Kong
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Other Financial Services BOC Aviation
aircraft. We forecast 14 aircraft disposals in 2H16E and 20-23 in 2017E-2018E (Figure 7). With more aircraft deliveries and fewer disposals, we forecast BOCA’s owned aircraft to grow to 359 at end- 2018E, up 59% from 226 in 1H16.
Figure 7: We think BOCA will sell fewer aircraft in the Figure 8: We forecast BOCA’s owned fleet to grow to coming years after accelerating disposals in 2014-1H16 349 at end-2018E from 226 in 1H16 Number of aircraft sold - BOCA Total owned fleet - BOCA 50 Accelerated 400 aircraft 359 45 43 disposal 350 40 36 307 33 300 35 261 30 250 230 227 206 23 25 21 200 179 20 158 20 140 150 118 15 12 12 10 10 100 73 10 6 59 5 3 50 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data
As a result, BOCA’s gearing would recover to 3.5x by 2018E in our numbers from 2.9x in 1H16. Compared with peers, 3.5x forecast leverage sits comfortably in the peer range. Referring to AerCap’s case, after obtaining equity capital via IPO in 2006-2007, it quickly raised debt leverage from 3.0x to 3.9x in three years. Chinese lessors (CDBL and CALC) tend to maintain much higher leverage due to more finance lease type business at the group level.
Figure 9: Leverage ratio forecast for BOCA Figure 10: BOCA’s leverage sits comfortably within the peer range (x) Leverage (debts/equity) - BOCA (x) Leverage ratio (debts/equity) 4.5 10.0 9.4 4.0 9.0 4.0 3.9 3.7 8.0 3.5 3.5 3.3 7.0 6.4 3.1 2.9 6.0 3.0 5.0 3.7 2.5 4.0 3.5 3.5 3.3 3.1 2.9 2.6 2.0 3.0 2.3 2.2 2.0 1.5 1.0 1.0 0.0
0.5
0.0 2013 2014 2015 1H16 2016E 2017E 2018E Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data Note: Global peer leverage ratio data were as of 2015, except for Avolon (3Q15)
Deutsche Bank AG/Hong Kong Page 7
5 December 2016
Other Financial Services BOC Aviation
Leadership in the growing Asian market
As an Asia-based aircraft lessor, BOCA has deep roots in the region in terms of Figure 11: BOCA had 55% lease customer relationships and market sense. It was in fact the largest Asia-based income from Asia in 1H16 lessor by fleet size in 2015, with 55% lease income from Asia in 1H16 (Avolon may take over BOCA’s position after acquiring CIT’s fleet), and this rose from 45% in 2013 (Figure 11). BOCA is well positioned to capture the growth opportunities in the region. Asia Pacific The rest, (ex China), 45% 35% Deutsche Bank’s global airline team forecasts capacity of airlines in China and Asia to grow at 11% and 7% in 2016E/17E, exceeding most other regions (Figure 12). According to Flightglobal Fleets Analyzer, Asian airlines take China, 20% around 43% of global fleet orders (16% from China), versus 32% of their current fleet share (Figure 14). This indicates that airlines anticipate strong Source: Deutsche Bank, Company data passenger demand from the region going forward.
Within the Asian market, China remains a key potential growth driver for BOCA, although it may take conservative steps as a foreign lessor. BOCA’s China exposure rose rapidly from 14% in 2013 to 20% in 1H16, with BOC’s brand name providing headroom to increase penetration further
Figure 12: China and Asia airlines are growing capacity Figure 13: BOCA’s Asia exposure rose rapidly from 45% fast in 2013 to 55% in 1H16 (%) ASK growth - 2016E ASK growth - 2017E Lease income % from Asian - BOCA 12.0 11.1 China Asia Pacific (ex China) 10.5 60% 54% 55% 9.6 10.0 49% 8.6 50% 45% 8.0 7.37.2 19% 20% 40% 15% 6.1 14% 6.0 5.5 4.9 30% 3.7 4.0 3.5 3.3 2.8 2.3 20% 35% 35% 2.0 32% 34% 10% 0.0 China Middle Asia Europe AU/NZ US Latin 0% East America 2013 2014 2015 1H16 Source: Deutsche Bank estimates, Company filings Source: Deutsche Bank, Company data Note: Available seat kilometers (ASK) forecast for each region are consolidated numbers of local airlines Note: China includes HK, Macau and Taiwan under Deutsche Bank coverage
Figure 14: Asian airlines take around 43% of global fleet orders (16% from China), versus 32% of their current fleet share As of Jan 2016 Africa Asia-Pacific (ex China Europe Latin America Middle East North America Total China) Firm order backlog 133 2,943 1,642 2,351 775 1,034 1,705 10,583 - as % of total 1% 28% 16% 22% 7% 10% 16% 100% Airline fleet 646 3,739 2,569 4,874 1,433 1,194 5,177 19,632 - as % of total 3% 19% 13% 25% 7% 6% 26% 100% Order backlog as % 21% 79% 64% 48% 54% 87% 33% 54% existing fleet Source: Deutsche Bank, Flightglobal Fleets Analyzer
Page 8 Deutsche Bank AG/Hong Kong
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Funding cost advantage
BOCA maintained funding cost at 1.9-2.0% in 2013-2015, which rose marginally to 2.3% in 1H16 due to higher LIBOR and more bond issuance (Figure 15). BOCA has the lowest funding cost among peers, as Figure 16 shows, and the second lowest funding cost was 3.7% by AerCap.
Figure 15: Low funding cost is a key reason behind Figure 16: BOCA has the lowest funding cost among BOCA’s strong financial performance peers Funding cost - BOCA Funding cost comparison - 2015 3.50% 7% 3.23% 6.3%
3.00% 2.78% 6% 5.4% 5.5% 2.59% 5% 4.6% 2.50% 2.30% 4.1% 4.1% 4.2% 2.00% 3.7% 3.7% 1.90% 1.90% 4% 2.00% 3% 1.50% 2.0% 2% 1.00% 1%
0.50% 0%
0.00% 2013 2014 2015 1H16 2H16E 2017E 2018E Source: Deutsche Bank estimates, Company data Source: Deutsche Bank, Company data Note: We use group funding cost for CDBL, as the company does not report segment funding cost for aircraft leasing
We think BOCA’s low cost of funding is mainly due to the following reasons: Figure 17: BOCA debt breakdown – 1H16 High credit rating: BOCA is rated A- by S&P, lower than only From BOC, Chinese/Japanese lessors that are backed by mega banks and higher 8.50% than other major aircraft leasing peers (e.g. BBB- for AerCap). As a result, BOCA was able to borrow floating USD loans at 1.8% on average in 1H16 (1.5% in 2015) and issue bonds at favorable terms From other (3.875% for 10-year unsecured bonds issued in April 2016). sources of debt, BOC support: BOCA’s controlling shareholder and parent is BOC, 91.50% which has a 70% post-IPO stake. BOC is one of the big four national banks in China and a top 10 global bank by market cap. It provides a Source: Deutsche Bank US$2bn unsecured revolving credit facility until 2022, which was fully undrawn as of June 2016, accounting for 22% of total debt in 1H16.
More floating debts: Due to a higher portion of floating rate lease contracts (56% in 2015 vs. 3% for AerCap), BOCA is able to borrow more floating rate debts to take advantage of the low interest environment before US rate hikes (Figure 18). In 1H16, BOCA increased interest rate hedges to swap more floating rate debts for fixed rate in anticipation that more airline customers would prefer fixed rate contracts on approaching US rate hikes. Global peers have 20-30% floating rate debts due to small floating rate lease assets, as shown in Figure 19. We acknowledge that BOCA’s funding cost may rise faster than peers facing rate hikes, but the financial impact should be minimal given the small duration mismatch between lease assets and liabilities, as we discuss in the next section.
Deutsche Bank AG/Hong Kong Page 9
5 December 2016
Other Financial Services BOC Aviation
Figure 18: BOCA is able to borrow more low-cost floating Figure 19: In contrast, global peers only have 20-30% rate debts with a high proportion of floating rate lease floating rate debts due to small floating rate lease assets assets
Floating rate debt % - BOCA Floating rate lease % - BOCA Floating rate debts as % total debts Narrowing 90.0% 100% 80.5% 88% floating mismatch 80.0% 90% 86% approaching US 81% 70.0% 80% 74% rate hikes 64.5% 70% 65% 65% 60.0% 56% 60% 52% 50.0% 50% 40.0% 29.0% 30.0% 40% 30.0% 24.4% 21.3% 30% 20.0% 20% 10.0% 10% 0.0% 0% BOCA - BOCA - Air Lease - Aircastle - Avolon - AerCap - 2013 2014 2015 1H16 1H16 2015 2015 2015 2014 2015 Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
No material direct impact from rate hikes As BOCA was nearly fully hedged against the interest rate mismatch in absolute value terms as of June 2016 (it claims to have hedged ~80% of the fixed-rate mismatch exposure), we do not see a material negative impact on its financials in case of any near-term US rate hikes. We estimate that a 50bps near-term hike would trim 1H16 PBT only by 1.2% by assuming no rise to the lease factor, as shown in Figure 20. In fact, we expect net lease yield to go up for BOCA as more airlines may want to lock in fixed-rate lease terms in a rate hike cycle.
Figure 20: We estimate 1.2% negative PBT impact on BOCA from a 50bps near-term rate hike US$ m 2015 1H16 Aircraft lease assets 9,476 10,760 - % floating rate lease 56% 52% Interest-bearing debts 8,715 9,065 - % floating rate debts 81% 65% Avg floating lease assets 5,451 Avg floating debts 6,431 Assumed near-term rate hike 0.50% Revenue impact -2 as % 1H16 PBT -1.2% Source: Deutsche Bank estimates, Company data
Young and attractive fleet portfolio
BOCA adopts an active and disciplined approach in managing its fleet portfolio. In most cases, it will sell the aircraft during the first lease, meaning it starts to look for aircraft buyers in the third year of the first lease. With this strategy, BOCA is able to maintain a young fleet portfolio and trade aircraft at favorable terms attached with long lease contracts. As of end-2015, aircraft under second leases in BOCA are less than 1% of the net book value of its owned aircraft.
The average age of BOCA’s aircraft portfolio was 3.3 years as of June 2016, with an average remaining lease term of 7.2 years (Figure 21). It
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has managed to keep an average fleet age of 2.9-3.7 years since 2008, which naturally led to relatively long average lease terms. Compared with global peers, BOCA has one of the youngest fleets attached with long lease terms (Figure 22).
Figure 21: BOCA maintains a young fleet and relatively Figure 22: BOCA has one of the youngest fleets attached long lease terms with long lease terms among global peers Average fleet age - BOCA Average remaining lease term - BOCA (yrs) Avg fleet age - 2015 Avg remaining lease term - 2015 (yrs) 12.0 8.0 7.6 7.5 7.4 7.2 10 10.0 7.0 7.5 7.7 6.0 8.0 7.1 7.4 7.2 6.6 6.2 6.5 5.9 5.8 5.9 5.9 5.0 6.0 3.7 4.5 4.0 3.4 3.6 3.3 3.2 3.3 3.3 3.3 3.5 3.6 2.9 3.1 4.0 3.2 3.0 2.0 2.0
1.0 0.0
0.0 2008 2009 2010 2011 2012 2013 2014 2015 1H16 Source: Deutsche Bank, Company data Source: Deutsche Bank, company data Note: Avolon data are as of 3Q15
Popular narrow-body aircraft models A320 and B737 accounted for 82% of BOCA’s owned fleet as of 2015, higher than most peers (Figure 23). By net book value, narrow-body aircraft made up 69% of BOCA’s owned fleet. As we will discuss in a later section, wide-body models currently have a higher storage rate (8.6% vs. 5.1% for narrow- body models as of July 2016), and their lease rate and market value are under more pressure.
BOCA also has a well-dispersed maturity schedule in its lease contracts, with zero expiring in 2H16 and 7-11 leases expiring in 2017- 2019.
Figure 23: 82% of BOCA’s owned fleet portfolio has Figure 24: BOCA has a well-dispersed maturity schedule popular narrow-body models in lease contracts Aircraft portfolio mix - 2015 Number of lease expiring No. of leases % of aircraft net book value with leases expiring (RHS) Others Airbus/Boeing widebody A320/B737 160 80.0% 100% 3 67.5% 6 6 6 6 140 70.0% 90% 18 19 12 14 28 80% 23 31 120 60.0% 17 70% 100 50.0% 19 60% 80 40.0% 50% 94 60 30.0% 40% 83 82 80 71 30% 66 65 40 11.6% 20.0% 53 8.4% 20 4.1% 4.5% 10.0% 20% 0.0% 1.9% 0 24 29 136 10% 13 11 0 7 0.0% 0% 2H16 2017 2018 2019 2020 2021 2022 and beyond CALC FLY BOCA Avolon AerCap Aircastle Air Lease CDBL Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data Note: The number excludes aircraft for which BOCA has sale or lease commitments.
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Figure 25: BOCA aircraft portfolio summary – 1H16
BOCA fleet - 1H16 Owned as % owned Managed On order Total as % total Airbus A320CEO family 111 49% 14 40 165 34% Airbus A320NEO family 0 0% 0 64 64 13% Airbus A330 family 11 5% 8 2 21 4% Boeing 737NG family 76 34% 8 49 133 28% Boeing 737 MAX 0 0% 0 61 61 13% Boeing 777-300ER 13 6% 2 2 17 4% Boeing 777-300 0 0% 1 0 1 0% Boeing 787 2 1% 0 0 2 0% Embraer E190 family 11 5% 2 0 13 3% Freighters 2 1% 4 0 6 1% Total 226 100% 39 218 483 100% A320 & B737 % 83% NA 56% 98% 88% NA Source: Deutsche Bank, Company data
Low concentration risks
BOCA leased and managed aircraft for 64 airline customers from 31 countries as of June 2016, implying 4 aircraft per customer and 8.5 aircraft per country. This demonstrates a superior ability to deploy aircraft assets in a global context, which largely minimizes the concentration risk of a single client or region.
Geographically, BOCA generated 35%, 20%, 17% and 22% of lease income in 1H16 from Asia Pacific ex China, China, Americas and Europe, with the remaining 7% from Middle East & Africa (Figure 26). Compared with peers, as shown in Figure 27, BOCA has high Asia exposure to capture the higher growth potential in the region and low Europe allocation, given Brexit and other uncertainties.
Figure 26: BOCA has a geographically diversified revenue Figure 27: BOCA has relatively high Asia exposure and stream low Europe exposure compared with peers 1H16 lease income breakdown - BOCA Others Americas Middle East and Africa Europe Asia Middle East & 100% 5 11 Africa, 7% 14 90% 9 20 24 21 22 20 80% 8 35 40 20 7 9 7 70% 7 10 60% 24 32 22 28 5 32 42 Europe, 22% 50% 32 Asia Pacific (ex 89 26 China), 35% 40% 30% 67 50 47 46 42 20% 36 33 31 29 Americas, 17% 10% China, 20% 0%
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data Note: China includes HK, Macau and Taiwan Note: Other region in Avolon includes Europe and Middle East & Africa
BOCA’s largest customer is Cathay Pacific Group, which accounted for 7.1% of its 1H16 lease income, with the rest of the top 10 customers each accounting for 3.5-5.9% (Figure 28). In contrast, CDBL’s top two customers accounted for 22.8% and 7.9% of its lease income in 2015.
BOCA has 17% China exposure in terms of lease income, higher than most US peers but lower than Chinese lessors (Figure 29). Given more domestic players (mostly backed by banks) are entering the aircraft
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leasing business, lease rates in China could be under pressure going forward. We think BOCA will take a conservative approach in expanding its China business, despite decent growth opportunities.
Figure 28: BOCA’s top 10 clients accounted for 3.5-7.1% Figure 29: We think BOCA may take a conservative of its lease income in 1H16 approach in expanding its China exposure BOCA top 10 airline customers by lease income - 1H16 Lease income contribution in China - 2015
8.0% 7.1% 100% 89% 7.0% 90% 5.9% 5.5% 5.4% 6.0% 80% 5.0% 4.7% 5.0% 4.6% 3.8% 3.8% 70% 4.0% 3.5% 60% 3.0% 50% 46% 2.0% 1.0% 40% 0.0% 30% 23% 17% 20% 13% 9% 10% 0% CALC CDBL Air Lease BOCA AerCap FLY Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Excellent track record with experienced management team
15% ROE on average in 2008-1H16 BOCA has delivered strong financial results, with average ROE of 15% during 2008-1H16 (Figure 30), regardless of several industry downturns, including the global financial crisis in 2008-2009 and Euro debt crisis in 2011-2012. This demonstrates its superior management quality and disciplined strategy implementation. CEO Robert Martin has been with the firm since 1998.
Figure 30: BOCA achieved 15.0% ROE on average in 2008-1H16
(x) Leverage (A/E) - BOCA ROE - BOCA 7.0 17.0% GFC Euro Debt Crisis 16.5% 6.0 16.3% 16.0% 16.0% 5.0 15.5% 15.3% 15.0% 15.0% 4.0 15.0% 15.1% 14.7% 14.6% 14.5% 3.0 6.1 14.0% 14.1% 14.0% 5.3 5.4 4.9 4.9 5.0 5.1 5.1 5.0 4.5 4.8 2.0 13.7% 4.2 13.5% 13.0% 12.9% 1.0 12.5% 0.0 12.0% 2008 2009 2010 2011 2012 2013 2014 2015 1H16 2H16E 2017E 2018E Source: Deutsche Bank, Company data
Superior aircraft trading ability Active purchasing and selling of aircraft is one of BOCA’s core competencies, and it makes regular gains from aircraft disposals, with selling gains accounting for 9-25% of PBT since 2013 (Figure 31). It regularly reviews its fleet portfolio and tends to sell aircraft at optimal times to generate attractive returns. Since 1993, BOCA has sold over 210 owned and managed aircraft, nearly equal to its current fleet size. In addition, BOCA has good market sense, evidenced by a large fleet purchase during the 2008-2009 financial crisis when
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aircraft value dropped to the bottom (Figure 32). We expect BOCA to conduct similar opportunistic purchases in the future, backed by its undrawn US$2.8bn credit line.
Figure 31: BOCA makes regular gains from aircraft Figure 32: BOCA has good market sense, evidenced by a disposals, with selling gains accounting for 9-25% of PBT large fleet purchase during the 2008-2009 GFC when since 2013 aircraft value dropped to the bottom (US$ m) Net gains on aircraft disposal - BOCA Gains on aircraft disposal as % PBT - BOCA Net increase of fleet size - BOCA 90 30%
80 GFC period 50 25% 25% 45 70 40 60 20% 17% 30 27 50 24 16% 15% 22 21 18 40 76 20 70 14 30 10% 9% 10 20 37 30 5% 0 10 -3 - 0% -10 2013 2014 2015 1H16 2008 2009 2010 2011 2012 2013 2014 2015 Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Nearly 100% fleet utilization and lease payment collection Its superior management ability is also demonstrated by a high fleet utilization rate and lease payment collection rate. As shown in Figure 33, the company’s aircraft utilization rate, defined as the total number of on-lease days as a percentage of available lease days, was 99.8% between 2008 and 2015, and the average lease payment collection rate in the same period was 99.6%. In addition, as of 2Q16, 100% and 60% of BOCA’s aircraft on order are placed to be delivered in 2016 and 2017.
Figure 33: Nearly 100% fleet utilization and lease Figure 34: 60% of BOCA’s aircraft deliveries in 2017 have payment collection – BOCA been placed already Aircraft utilisation rate - BOCA Lease payment collection rate - BOCA Advance placement of aircraft on order as of 2Q16 - BOCA 100% 120% 100% 100% 80%
80% 60% 60% 60% 40% 40%
20% 20%
0% 0% 2008 2009 2010 2011 2012 2013 2014 2015 1H16 2016 2017 Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data Note: 1) Aircraft utilization rate is defined as total number of on-lease days as a percentage of available lease days; 2) lease payment collection rate is calculated as the sum of collected revenue from lease rental and maintenance reserve payments plus cash recovery of outstanding receivables from previous years, divided by total contracted receivables
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Comparison with global aircraft lessor peers
We have collected the financial information and key indicators of global aircraft lessor peers (including four US-listed ones) and aircraft lessors with a China focus (CDBL and China Aircraft Leasing/CALC), as Figure 35 shows. We discuss the key difference between BOCA and its peers in this section.
BOCA vs. major global peers
A clear difference between BOCA and other major global peers is its young fleet age (3.3 years vs. the peer average of 6 years). BOCA’s strategy is to focus on the first lease after acquiring a new aircraft and preparing to sell it before the first lease terminates. We identify Air Lease and Avolon as possibly adopting the same young fleet strategy. As for the rest, they purchase old jets and are willing to deal with second leases. We summarize other key differences below:
Strong growth prospects: BOCA’s OEM order book was larger than its existing fleet size at end-2015. Some peers such as AWAS, Aircastle and FLY have few direct orders and prefer to purchase old jets or conduct PLBs with uncertain growth trajectories. Giant players such as AerCap also have limited growth potential, due to already large fleet sizes.
Lower lease yield: BOCA’s gross lease yield was 9.9% at end-2015, compared with the 13% peer average. We think this is mainly due to its young fleet and large floating rate lease portion (56% vs. small at peers). The gross lease yield is calculated by total rents divided by net aircraft value (net depreciation).
Lower funding cost: With a higher credit rating and higher floating debt, BOCA enjoys a much-lower-than-peer funding cost (2.0% vs. 4.0% for peer average). This supports net lease yield.
Good aircraft trading gains: As we can see from a DuPont analysis, “Other income” contributed 1.0% asset yield at BOCA (vs. 0.3% for peers). This mainly comes from the active aircraft trading activities aligned with its corporate strategy.
Good pre-tax margin: BOCA had the highest PBT margin of 37% among peers (26% on average) in 2015 as a result of the above merits, which granted it a higher-than-peer ROE of 15.1% (vs.12.3% for the peer average). BOCA vs. Chinese aircraft lessors
CDBL and CALC are two China peers, both with strong growth prospects. CDBL’s aircraft segment has a PBT margin below the peer average, due to a relatively high funding cost and depreciation rate. However, due to a much higher leverage rate (9.3x vs. 5.0x for peer average), CDBL aircraft generated a decent ROE of 16.7%.
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CALC runs a different model: it classifies the majority of its portfolio under financial leases, due to their long-term maturity (10 years’ term remaining vs. 6.4 years for peers). It has 89% revenue from China and may expand to other locations in the future. It also operates at high leverage (10.8x in 2015), leading to a high ROE of 19%.
Figure 35: Comparison sheet of global aircraft lessors
Aviation CDBL Capital Avolon & Weighted US$ mn BOCA Aircraft AerCap Air Lease Group AWAS HKAC Aircastle FLY Leasing CALC average Period 2015 2015 2015 2015 2015 2015 3Q15/9M15 2015 2015 2015 N.A. Ticker 2588 HK 1606.HK AER US AL US N.A. N.A. N.A. AYR US FLY US 1848 HK N.A. KEY INDICATORS Credit rating (S&P's) A- A+ BBB- BBB A- BB N.A. BB+ BB N.A. N.A. Owned fleet 227 180 1,109 240 254 257 207 162 80 65 N.A. Fleet order backlog 241 224 447 389 105 3 186 0 0 107 N.A. Total fleet (owned + order) 468 404 1,556 629 359 260 393 162 80 172 N.A. Average fleet age (yrs) 3.3 4.5 7.7 3.6 5.8 6.2 3.2 7.5 6.6 3.5 6.0 Avg remaining lease term (yrs) 7.4 5.9 5.9 7.2 N.A. 5.8 7.1 5.9 6.5 10.0 6.4 % Operating lease 100% 95% 100% 100% 100% 100% 100% 100% 100% 18% 97% % Finance lease 0% 5% 0% 0% 0% 0% 0% 0% 0% 82% 3% KEY RATIOS Aircraft lease yield 9.9% 12.3% 15.6% 11.9% 10.6% 13.4% 11.2% 14.0% 14.3% 7.7% 13.1% Funding cost -2.0% -4.2% -3.7% -3.7% -4.1% -5.5% -4.6% -6.3% -5.4% -4.1% -4.0% Net lease yield 8.3% 7.8% 12.1% 9.2% 7.7% 9.5% 7.6% 9.7% 9.6% 3.0% 9.8% Opex as % revenue 47.7% 45.8% 49.0% 46.1% 56.5% 50.6% 39.8% 57.3% 67.2% 20.3% 48.7% Depreciation as % avg leased assets -3.4% -4.1% -5.1% -3.6% -3.5% -3.3% -3.5% -4.5% -4.4% -4.1% -4.2% Impairment as % avg assets -0.4% 0.0% 0.0% 0.0% -0.4% -0.3% 0.0% -1.9% -1.7% 0.0% -0.3% Pre-tax profit margin 36.8% 22.8% 28.3% 32.1% 16.7% 20.5% 31.2% 15.2% 1.9% 31.0% 25.6% Leverage (A/E) 5.1x 9.3x 5.2x 4.1x 5.3x 3.8x 4.4x 3.7x 5.3x 10.8x 5.0x Debt level (debts/equity) 3.6x 6.4x 3.5x 2.6x 3.3x 2.2x 3.1x 2.3x 3.7x 9.4x 3.3x DUPONT ANALYSIS - AS % AVERAGE ASSETS Lease revenue 8.2% 9.4% 11.4% 10.2% 9.3% 11.4% 10.0% 12.6% 11.5% 5.9% 10.4% Other income 1.0% 0.4% -0.4% 0.4% 0.2% 0.1% 1.2% 1.3% 0.8% 1.5% 0.3% Total revenues 9.1% 9.8% 11.0% 10.6% 9.5% 11.4% 11.2% 13.9% 12.3% 7.3% 10.7% OpEx -4.4% -4.5% -5.4% -4.9% -5.4% -5.8% -4.5% -7.9% -8.3% -1.5% -5.3% incl. Depreciation -3.2% -3.8% -4.1% -3.5% -3.8% -3.5% -3.4% -5.0% -4.2% -0.4% -3.8% Asset impairment -0.4% 0.0% 0.0% 0.0% -0.4% -0.3% 0.0% -1.9% -1.7% 0.0% -0.3% Interest expense -1.4% -3.1% -2.5% -2.3% -2.5% -3.3% -3.2% -3.8% -3.8% -3.6% -2.7% PBT 3.4% 2.2% 3.1% 3.4% 1.6% 2.3% 3.5% 2.1% 0.2% 2.3% 2.8% Tax -0.5% -0.4% -0.4% -1.2% -0.4% 0.1% -0.2% -0.2% -0.1% -0.5% -0.4% ROAA 2.9% 1.8% 2.7% 2.2% 1.2% 2.5% 3.3% 1.9% 0.2% 1.8% 2.3% x avg leverage 5.3x 9.2x 5.4x 4.0x 5.4x 3.8x 4.4x 3.6x 5.5x 10.7x 5.2x ROAE 15.1% 16.7% 14.4% 8.7% 6.4% 9.3% 14.4% 7.0% 0.9% 19.2% 12.3% LEASING REVENUE BY REGION Asia 50% 67% 36% 46% 29% 47% 33% 42% 31% 89% 43% incl. China 17% 46% 13% 23% N.A. N.A. N.A. N.A. 9% 89% 21% Europe 24% 20% 32% 32% 26% 22% N.A. 28% 42% N.A. 26% Middle East and Africa 7% 9% 10% 8% 5% 7% N.A. 9% 7% N.A. 8% Americas 20% 5% 22% 14% 40% 24% 32% 21% 20% N.A. 21% Others 0% 0% 0% 0% 0% 0% 35% 0% 0% 11% 2% FLEET MIX - A320 family 48% 30% 42% 28% N.A. N.A. 48% 39% 34% 86% 41% - A330 5% 14% 10% 9% N.A. N.A. 11% 15% 5% 6% 10% - A350 etc. 0% 0% 0% 0% N.A. N.A. 0% 0% 4% 0% 0% Airbus 52% 44% 52% 37% N.A. N.A. 59% 54% 43% 92% 52% - 737 34% 23% 29% 36% N.A. N.A. 32% 27% 49% 8% 30% - 747-400SF 0% 2% 0% 0% N.A. N.A. 0% 7% 0% 0% 1% - 767 0% 0% 4% 0% N.A. N.A. 0% 0% 1% 0% 2% - 777-300ER 6% 3% 6% 8% N.A. N.A. 1% 6% 4% 0% 5% - 787 etc. 1% 0% 3% 0% N.A. N.A. 1% 4% 4% 0% 2% Boeing 41% 27% 41% 44% N.A. N.A. 35% 43% 58% 8% 40% Others 6% 28% 6% 19% N.A. N.A. 6% 3% 0% 0% 9% Total 100% 100% 100% 100% N.A. N.A. 100% 100% 100% 100% 100% A320/B737 % 82% 53% 71% 65% N.A. N.A. 80% 66% 83% 94% 71% BALANCE SHEET & INCOME STATEMENT Total assets 12,474 8,596 43,915 12,355 9,340 9,521 7,072 6,570 3,417 3,090 N.A. Asset growth (yoy) 9.4% 16.7% 0.1% 15.6% 7.0% -18.8% 11.8% 6.4% -19.1% 30.8% 3.1% Debt 8,715 5,878 29,807 7,712 5,788 5,622 4,983 4,041 2,397 2,680 N.A. Total liabilities 10,034 7,676 35,489 9,335 7,587 7,015 5,470 4,790 2,773 2,805 N.A. Total equity 2,440 920 8,426 3,020 1,753 2,506 1,602 1,780 643 285 N.A. Lease revenue 975 749 4,995 1,175 837 1,208 502 801 441 160 N.A. Net profit 343 145 1,179 253 107 262 163 122 7 49 N.A. Source: Deutsche Bank, Company data, Bloomberg Finance LP Note: 1) we adjusted net profit for AWAS and FLY by adding back internal interest paid to shareholders and impairment. 2) For Avolon, only 3Q15 financial data are available, as it was acquired by Bohai Leasing (000415.SZ) at end-2015. 3) Avolon in October 2016 announced that it will acquire the aircraft business of CIT, and the combined fleet size would exceed 910 (owned plus orders), making Avolon one of the three largest aircraft lessors globally.
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Financial forecast
We see BOCA accelerating growth after its IPO
We forecast BOCA’s net profit to grow 23%/18%/16% in 2016E-2018E on fast fleet expansion and stable net yield. Our earnings forecasts are 2-4% higher than consensus.
Figure 36: P&L forecast – BOCA
BOC Aviation Ltd. ANNUAL YoY Growth US$ mn 2013 2014 2015 2016E 2017E 2018E 2014 2015 2016E 2017E 2018E P&L Total revenues 919 988 1,091 1,216 1,479 1,790 8% 10% 11% 22% 21% Lease rental income 804 937 975 1,093 1,352 1,657 17% 4% 12% 24% 23% Interest and fee income 28 12 40 59 76 88 -58% 243% 47% 30% 15% Net gain on sale of aircraft 76 30 70 59 46 39 -60% 132% -16% -23% -14% Other income 10 10 5 5 5 5 -5% -45% 0% 0% 0%
Total cost and expenses (608) (636) (689) (730) (906) (1,125) 5% 8% 6% 24% 24% Depreciation of plant and equipment (336) (381) (382) (395) (476) (560) 13% 0% 3% 20% 18% Finance expenses (136) (151) (169) (225) (308) (426) 11% 12% 34% 36% 39% Staff costs (41) (51) (59) (67) (79) (94) 26% 15% 15% 18% 18% Impairment of aircraft (43) (23) (44) - - - -46% 90% -100% na na Other operating costs and expenses (52) (29) (36) (42) (43) (45) -44% 23% 18% 2% 3% CIR -66% -64% -63% -60% -61% -63% 2% 1% 3% -1% -2%
Profit before income tax 311 353 401 485 573 664 13% 14% 21% 18% 16% PBT margin 34% 36% 37% 40% 39% 37% 2% 1% 3% -1% -2% Income tax expense (34) (44) (58) (63) (75) (86) 30% 32% 9% 18% 16% -Tax rate -10.9% -12.5% -14.5% -13.0% -13.0% -13.0% 15% 16% -10% 0% 0% Net profit 277 309 343 422 499 578 11% 11% 23% 18% 16%
Source: Deutsche Bank estimates, Company data
We see improving lease yield at BOCA due to its having more lease contracts on fixed rate terms and potential US rate hikes. We factor in one rate hike at the end of this year and two rate hikes in 2017 per our US economists’ forecast. We believe BOCA is able to manage net lease yield well with the small interest rate mismatch between assets and liabilities.
Figure 37: Key ratio forecast – BOCA
BOC Aviation Ltd. ANNUAL YoY Growth 2013 2014 2015 2016E 2017E 2018E 2014 2015 2016E 2017E 2018E Key Ratio BVPS (USD/shr) 3.3 3.6 4.1 4.8 5.4 6.0 9% 16% 16% 12% 11% BVPS (HKD/shr) 25.3 27.5 32.1 37.2 41.6 46.1 9% 16% 16% 12% 11% ROAA 2.9% 2.9% 2.9% 3.1% 3.1% 3.0% 0.0% 0.0% 0.2% 0.0% 0.0% ROAE 15.0% 15.3% 15.1% 14.6% 14.1% 14.7% 0.3% -0.2% -0.5% -0.5% 0.6% PBT on avg equity 16.8% 17.5% 17.7% 16.8% 16.3% 16.9% 0.7% 0.2% -0.9% -0.6% 0.7% Lease rate factor / gross yield 9.7% 9.8% 9.9% 10.4% 11.0% 11.5% 0.1% 0.1% 0.5% 0.6% 0.5% Average cost of funds 1.9% 1.9% 2.0% 2.4% 2.8% 3.2% 0.0% 0.1% 0.4% 0.4% 0.5% Net lease yield 8.1% 8.3% 8.2% 8.4% 8.5% 8.5% 0.2% -0.1% 0.2% 0.1% 0.0% Pre-tax profit margin 33.8% 35.7% 36.8% 39.9% 38.8% 37.1% 1.8% 1.1% 3.1% -1.2% -1.6% Gross leverage (A/E) 5.3x 5.4x 5.1x 4.5x 4.8x 5.0x 0.2x -0.3x -0.6x 0.2x 0.3x Net leverage (gross debt/equity) 3.9x 4.0x 3.7x 3.1x 3.3x 3.5x 0.2x -0.3x -0.6x 0.2x 0.2x Average fleet age 3.3 3.2 3.3 3.2 3.3 3.5 -0.1 0.1 -0.1 0.1 0.2 Average remaining lease term 7.6 7.5 7.4 7.4 7.4 7.4 -0.1 -0.1 0.0 0.0 0.0 Source: Deutsche Bank estimates, Company data
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We expect fast balance sheet expansion at BOCA and forecast total assets to grow 17-20% yoy in 2016E-2018E. We expect the lessor to return to 3.5x leverage by 2018E, as management has guided, and its owned fleet size to reach 359 by 2018E from 227 in 2015.
Figure 38: Balance sheet forecast – BOCA
BOC Aviation Ltd. ANNUAL YoY Growth US$ mn 2013 2014 2015 2016E 2017E 2018E 2014 2015 2016E 2017E 2018E Balance Sheet Plant and equipment 9,594 11,015 11,717 14,352 17,257 20,136 15% 6% 22% 20% 17% - Aircraft net book value 9,124 9,923 9,476 11,278 13,303 15,518 9% -5% 19% 18% 17% - Aircraft progress payments 468 1,089 2,240 3,071 3,953 4,620 133% 106% 37% 29% 17% Assets held for sale - - 222 - - - na na -100% na na Cash and fixed deposits 538 367 507 609 432 603 -32% 38% 20% -29% 40% - Cash on hand (mainly fixed deposits) 501 232 371 473 296 467 -54% 60% 27% -37% 58% - Encumbered deposits 37 135 135 135 135 135 266% 0% 0% 0% 0% Other assets 16 20 27 27 27 27 26% 34% 0% 0% 0% Total assets 10,149 11,403 12,474 14,988 17,716 20,766 12% 9% 20% 18% 17% - Current assets 552 386 754 636 459 630 -30% 96% -16% -28% 37% - Non-current assets 9,596 11,018 11,720 14,352 17,257 20,136 15% 6% 22% 20% 17%
Loans and borrowings 7,255 8,162 8,612 9,990 11,988 14,265 12% 6% 16% 20% 19% Finance lease payables 59 86 77 77 77 77 44% -10% 0% 0% 0% Maintenance reserves 335 384 433 620 832 1,063 14% 13% 43% 34% 28% Security deposits 193 214 221 254 298 349 11% 3% 15% 18% 17% Deferred income tax liabilities 175 220 277 340 415 501 25% 26% 23% 22% 21% Liabilities associated with assets held for sale - - 36 - - - na na -100% na na Other current liabilities 204 242 379 379 379 379 19% 56% 0% 0% 0% Total liabilities 8,222 9,307 10,034 11,659 13,988 16,634 13% 8% 16% 20% 19% - Current liab. 869 1,039 1,215 1,338 1,569 1,833 20% 17% 10% 17% 17% - Non-current liab. 7,353 8,267 8,819 10,321 12,419 14,801 12% 7% 17% 20% 19%
Share capital 608 608 608 1,159 1,159 1,159 0% 0% 91% 0% 0% Retained earnings 1,319 1,489 1,832 2,170 2,569 2,974 13% 23% 18% 18% 16% Hedging reserve (0) ------100% na na na na Total equity 1,927 2,096 2,440 3,329 3,728 4,133 9% 16% 36% 12% 11% Source: Deutsche Bank estimates, Company data
Figure 39: Fleet forecast – BOCA
Fleet portfolio 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Number of owned aircraft 59 73 118 140 158 179 206 230 227 261 307 359 - net new increase 14 45 22 18 21 27 24 -3 34 46 52 - new deliveries 7 26 48 32 28 27 48 57 40 70 69 72 - aircraft sold 12 12 3 10 10 6 21 33 43 36 23 20 Number of managed aircraft 17 19 24 26 25 24 20 20 43 35 35 35 Total fleet (owned + managed) 76 92 142 166 183 203 226 250 270 296 342 394
Source: Deutsche Bank estimates, Company data
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Company basics
Company description, shareholders, history, management
BOC Aviation Ltd. is the largest operating leasing company headquartered in Asia and one of the top five in the world. It was founded in 1997 by Singapore Airlines and acquired by Bank of China (BOC) in 2006. In 1H16, it was listed on HKEx as the largest ever aircraft operating lease company IPO with net proceeds of USD550m. As of June 2016, it has a fleet of 265 owned and managed aircraft on lease to 64 customers in 31 countries.
Figure 40:Shareholding structure (as of 1H16) – BOCA
BOC
100%
BOCGI
100% Beijing Hanguang Sky Splendor Ltd Public Investment Co.
2.7% 65.5% 31.8%
BOC Aviation Limited
100% 100% 100% 100% 100% 100%
BOC Aviation BOC Aviation (UK) BOC Aviation BOC Aviation BOC Aviation Cayman & other (Ireland) Ltd Ltd (USA) Co. Leasing (Tianjin) Ltd (Bermuda) Ltd subsidiaries
Source: Deutsche Bank, Company data
Figure 41:Company history and milestones – BOCA
Singapore Placed first Launched Owned Owned and managed Got listed in HKEx Aircraft Leasing order with SALE's first fleet fleet reached 250 and changed its Enterprise(SAL Airbus for 12 bond issue reached 50 aircraft, aircraft on name to BOC E) established A320 aircraft aircraft order exceeded 200 Aviation Ltd.
1993 1995 1996 1997 2000 2001 2004 2006 2014 2015 2016
SALE Temasek Holdings and Gov't Opened first BOC acquired SALE First portfolio sale of 24 acquired first of Singapore Investment co. overseas 100% and changed aircraft to a special purpose owned became shareholders of SALE office in name to BOC purchase funded by the aircraft with 14.5% stake each London Aviation Pte. Ltd. capital markets
Source: Deutsche Bank, Company data
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Figure 42:Management profile – BOCA
Name Age Position Major duties Past work experience Chen Siqing 56 Chairman and Non- Responsible for the formulation of Mr. Chen joined BOC in 1990. He held various positions in the executive Director strategic directions and the high level company in last two decades. He was appointed as the Chairman & oversight of the management and Non-executive director of BOCA in 2011 and president of BOC in Feb operation of the Group 2014. Mr. Chen is a CPA and holds an MBA degree from the Murdoch Uni. of Australia. Robert James Martin 51 Managing Director, Chief Responsible for the day-to-day Mr. Martin joined the Group in Jan 1998. He has 28 years of Executive Officer and management of the Group experience in the aircraft and leasing business and has worked in Executive Director various locations both in Europe and Asia. He graduated from Cambridge University with a master degree in Economics. Wang Genshan 59 Vice-Chairman and Responsible for the day-to-day Mr. Wang joined BOC in Shanghai in 1978. After being posted to the Executive Director management of the Group Sydney Branch in 1985 for 7 years, He was subsequently promoted to the position of Deputy General Manager in 1992. He became Deputy Head of the Aircraft Leasing Preparation Team in 2006 and Vice-Chairman and Executive Director in 2008. Phang Thim Fatt 59 Deputy Managing Director Responsible for the Group's finance Mr. Phang Thim Fatt has been with the company since Jan 1996. and Chief Financial Officer and treasury matters Prior to joining the Group, he had extensive experience at Singapore Airlines Limited, the former shareholder of the company. Steven Townend 46 Chief Commercial Officer Responsible for the Group's revenue Mr. Townend joined the Group in Jan 2001 as Structured Finance activities in Europe, Americas and Director to establish the company's first European office. He was Africa then posted to Singapore from 2004 for 10 years and is now in London to oversee all revenue activities in the regions. Gao Jinyue 58 Chief Commercial Officer Responsible for the Group's revenue Mr. Gao joined BOC in July 1986 and BOC Aviation in 2006. He held activities in Asia Pacific and the Middle various senior positions in BOC Head Office and was also the East General Manager of BOC Hong Kong branch. He obtained two master degrees from both Wuhan University and Harvard University.
David Walton 55 Chief Operating Officer Responsible for the Group's Mr. Walton joined the Group in Nov 2014. He has over 25 years of operations, legal and transaction aviation finance and leasing experience. Prior to joining the Group, he management, portfolio management, served as a general counsel for both privately held and publicly listed technical, compliance, investor companies. He was also a partner at the law firm of Perkins Coie. Mr. relations & corporate communications Walton holds a Bachelor of Arts degree from Stanford University and functions a law degree from the University of California. Source: Deutsche Bank, Company data
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Appendix 1
Important Disclosures
*Other information available upon request
Disclosure checklist Company Ticker Recent price* Disclosure BOC Aviation 2588.HK 39.00 (HKD) 1 Dec 16 7 Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.
7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.
Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.
7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=2588.HK
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Jacky Zuo
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Historical recommendations and target price: BOC Aviation (2588.HK) (as of 12/1/2016)
44.00 Previous Recommendations
43.00 Strong Buy Buy 42.00 Market Perform 41.00 Underperform Not Rated 40.00 Suspended Rating
39.00 Current Recommendations
38.00 Buy Hold Security PriceSecurity 37.00 Sell Not Rated 36.00 Suspended Rating
35.00 *New Recommendation Structure as of September 9,2002 34.00 **Analyst is no longer at Deutsche
33.00 Bank Jun 16 Sep 16 Dec 16 Date
Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 500 53 % share-holder return (TSR = percentage change in 450 share price from current price to projected target price 400 350 37 % plus pro-jected dividend yield ) , we recommend that 300 investors buy the stock. 250 200 Sell: Based on a current 12-month view of total share- 150 19 % 10 % 100 18 % 25 % holder return, we recommend that investors sell the 50 stock 0 Buy Hold Sell Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not Companies Covered Cos. w/ Banking Relationship recommend either a Buy or Sell. Asia-Pacific Universe Newly issued research recommendations and target
prices supersede previously published research.
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Additional Information
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flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.
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