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Buy BOC Aviation 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 ROA (adj.) (%) 5.5 2.9 2.9 3.1 3.1 3.0 USDm 3,489 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.
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