Sustaining profitability; initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia Singapore Banking / Finance Other Financial Services Company BOC Aviation Date 5 December 2016 Initiation of Coverage Sustaining profitability; initiating with Buy Reuters Bloomberg Exchange Ticker 2588.HK 2588 HK HSI 2588 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 The 5th largest global aircraft lessor about to re-lever up; Buy with HK$48.5 TP ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong 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. Price at 1 Dec 2016 (HKD) 39.00 Price target - 12mth (HKD) 48.50 52-week range (HKD) 43.30 - 36.58 Straits Times Index 2,905 Jacky Zuo Research Associate (+852 ) 2203 6255 jacky.zuo@db.com Hans Fan, CFA Research Analyst (+852 ) 2203 6353 hans.fan@db.com Price/price relative 363839414244456/16BOC AviationStraits Times Index (Rebased) Performance (%) 1m 3m 12m Absolute -9.9 -3.7 – Straits Times Index 3.3 3.1 1.2 Source: Deutsche Bank 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 large order book (~100% of the existing fleet), high Asian exposure (55% of lease portfolio), strong funding capability (2% funding cost) and young fleet (3.3 years). We forecast the lessor to sustain pre-IPO profitability with average ROE of 14.5% in 2016-18E. We initiate with Buy and a target price of HK$48.5. We believe the stock may play catch-up after the recent rally of its US peers. A new phase of growth BOCA targets to raise leverage back to the pre-IPO level, i.e. 3.5-4.0x debt-to-equity by the end of 2018. We forecast that the lessor will add over 130 aircraft 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 owned 226 aircraft and managed 39 aircraft as of June 2016. The lessor had 218 aircraft on order as of 1H16, with 40 deliveries per year on average in the next five years. 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. Distributed on: 04/12/2016 20:05:00 GMT 5 December 2016 Other Financial Services BOC Aviation Page 2 Deutsche Bank AG/Hong Kong Model updated:01 December 2016 Running the numbers Asia Singapore Other Financial Services BOC Aviation Reuters: 2588.HK Bloomberg: 2588 HK Buy Price (1 Dec 16) HKD 39.00 Target Price HKD 48.50 52 Week range HKD 36.58 - 43.30 Market Cap (m) HKDm 27,066 USDm 3,489 Company Profile BOC Aviation is a leading global aircraft lessor headquartered in Singapore founded in 1993, and the company ranked No.1 in Asia and No.5 globally in terms of value of owned aircraft in 2015.