Company Reports

BOC Aviation’s, or BOCA’s, first-half revenue of USD 1.17 billion and net profit of USD 460 million were in line with our estimates, although we are slightly disappointed that lease rental income slipped 1.3% year on year because of delays in aircraft deliveries. However, this was offset by higher finance lease income and aircraft sale gains. As anticipated, BOCA saw a net write-back of USD 170 million related to two recovered freighter aircraft. Outside of the write-back, we expect a stronger operating performance in the second half of 2024, with delivery of aircraft pushed from the first half to the second half. Our fair value estimate is raised to HKD 76 per share from HKD 73, on improving free cash flow, but given BOCA’s solid share price performance since the end of June, we prefer a wider risk buffer before buying. However, we note that 2024 dividend yield is attractive, at 4.8%. Interim dividend per share of USD 0.1988 (HKD 1.55) will be paid on Oct. 10, with the share price going ex-dividend on Sept. 23.

BOC Aviation’s role as an aircraft leasing firm is mainly to provide liquidity to global airlines, either through operating leases or financing arrangements, in their access to aircraft. Rather than lock up their capital in fixed assets, airlines increasingly opt to lease aircraft. Based on data from Ascend Analytics and BOC Aviation, the proportion of the global airline fleet on operating leases has risen to 52% in 2023 from 23% in 1990. We expect BOC Aviation’s market share to be stable, so its volume of leases should at least track global commercial fleet growth of about a 2.9% compound annual growth rate through 2033, based on Oliver Wyman data.

While we still expect United States interest rates to start easing in the second half of 2024, we push back the extent of the cut in our assumptions and, thus, see a more gradual improvement in BOC Aviation’s net lease yield over the next few years. As a result, we lower our 2025-28 profit forecast by an average of 29%, but we raise our fair value estimate to HKD 73 from HKD 71 after accounting for the possible rise in the company’s asset value following the return of two Boeing 747-8 freighters from Russia. At HKD 73, BOCA would trade at 1.02 times the 2024 estimated price/book. BOCA’s current share price is attractive at 0.79 times price/book, 7.8 times price/earnings, and around a 20% discount to our fair value estimate. We expect BOCA to average 9.4% core earnings growth through 2028 as it benefits from easing interest rates.

BOC Aviation’s role as an aircraft leasing firm is mainly to provide liquidity to global airlines, either through operating leases or financing arrangements, in their access to aircraft. Rather than lock up their capital in fixed assets, airlines increasingly opt to lease aircraft. Based on data from Ascend Analytics and BOC Aviation, the proportion of the global airline fleet on operating leases has risen to 52% in 2023 from 23% in 1990. We expect BOC Aviation’s market share to be stable, so its volume of leases should at least track global commercial fleet growth of about a 2.9% compound annual growth rate through 2033, based on Oliver Wyman data.

BOC Aviation’s 2023 net profit of USD 764 million fell 8% short of our expectation, as much of the firm's new aircraft was only delivered in the fourth quarter. While this limited growth in 2023 operating lease income to 7.1% year on year, the recovery of USD 258 million from insurers for aircraft detained in Russia helped lift the top line. Net lease yield improved to 7.1% from 7.0% a year ago, implying that while the leasing market was robust, it is currently mainly tracking higher funding costs. With interest rates expected to decline in the second half of 2024, coupled with a more even spread in aircraft deliveries, we expect net lease yields for BOC Aviation to widen to 7.8% in 2024 and 8.3% in 2025. We believe the aircraft leasing market outlook remains positive, with airlines still short of capacity and delays in aircraft deliveries benefiting BOC Aviation, which has a confirmed order book and access to funding.

BOC Aviation’s role as an aircraft leasing firm is mainly to provide liquidity to global airlines, either through operating leases or financing arrangements, in their access to aircraft. Rather than lock up their capital in fixed assets, airlines increasingly opt to lease aircraft. Based on data from Ascend Analytics and BOC Aviation, the proportion of the global airline fleet on operating leases has risen to 52% in 2023 from 23% in 1990. We expect BOC Aviation’s market share to be stable, so its volume of leases should at least track global commercial fleet growth of about a 2.9% compound annual growth rate through 2033, based on Oliver Wyman data.

We expect BOC Aviation to reflect a stronger rebound in earnings on decent growth in its aircraft portfolio and higher lease rates. We lift our 2023 and 2024 core net profit estimates by 3% and 12%, respectively, but our 2025 forecast is little changed. Inclusive of an estimated writeback of around USD 200 million in 2023 for a recovery in payments owed for 11 aircraft stuck in Russia, our 2023 net profit is raised 38% to USD 831 million from USD 601 million.

BOC Aviation’s role as an aircraft leasing firm is mainly to provide liquidity to global airlines, either through operating leases or financing arrangements, in their access to aircraft. Rather than lock up their capital in fixed assets, airlines increasingly opt to lease aircraft. Based on data from Ascend Analytics and BOC Aviation, the proportion of the global airline fleet on operating leases has risen to 52% in September 2022 from 23% in 1990. We expect BOC Aviation’s market share to be stable, so its volume of leases should at least track global commercial fleet growth of about 2.9% per-year CAGR through 2033, based on Oliver Wyman data.

Following first-half results from BOC Aviation, we fine-tune our cost assumptions, lowering our full-year 2023 net profit to USD 601 million from USD 646 million, but leaving our fair value estimate at HKD 68. Revenue was in line with our expectation, but we factor in higher professional fees paid out and a slight rise in our average cost of debt assumption. There is minimal change to our midterm forecast. BOC Aviation trades at a 10% discount to our fair value estimate, which prices the company at 1.1 times forward price/book, but we would wait for a slightly more attractive entry point before buying. We think the business environment is supportive, with strong airline profits and a tight aircraft market likely to keep demand for aircraft leases robust.

BOC Aviation’s role as an aircraft leasing firm is mainly to provide liquidity to global airlines, either through operating leases or financing arrangements, in their access to aircraft. Rather than lock up their capital in fixed assets, airlines increasingly opt to lease aircraft. Based on data from Ascend Analytics and BOC Aviation, the proportion of the global airline fleet on operating leases has risen to 52% in September 2022 from 23% in 1990. We expect BOC Aviation’s market share to be stable, so its volume of leases should at least track global commercial fleet growth of about 2.9% per-year CAGR through 2033, based on Oliver Wyman data.

BOC Aviation’s role as an aircraft leasing firm is mainly to provide liquidity to global airlines, either through operating leases or financing arrangements, in their access to aircraft. Rather than lock up their capital in fixed assets, airlines increasingly opt to lease aircraft. Based on data from Ascend Analytics and BOC Aviation, the proportion of the global airline fleet on operating leases has risen to 52% in September 2022 from 23% in 1990. We expect BOC Aviation’s market share to be stable, so its volume of leases should at least track global commercial fleet growth of about 2.9% per-year CAGR through 2033, based on Oliver Wyman data.

We are initiating coverage on BOC Aviation with no moat and a fair value estimate of HKD 68, indicating a 2023 price/book ratio of 1.1 times. This is in line with its precoronavirus trading range and reflects pandemic-related industry uncertainties fading away. Our fair value estimate represents an upside of around 10% from the recent share price level.