Leading financial leasing company Benefiting from strong shareholder support from the CDB,the company has experienced rapid asset expansion, forming its four business segments of 1）aircraft leasing, 2） infrastructure leasing, 3） ship, commercial vehicle & construction machineryleasing and 4） other leasing business, through which it provides comprehensive leasing services toquality medium and large corporate customers. Aircraft leasing and infrastructure leasing are thetwo key business growth engines for the company.
　　Steady growth in aircraft leasing As of end-2015, CDB Financial Leasing had a fleet of 415aircrafts, which is one of the biggest among Asian leasing companies. 126 Boeing and Airbusaircrafts are on order, translating into annual delivery of 21 aircrafts over the next six years. Thecompany operates its aircraft leasing business on a global basis. As of end-2015, its aircraft leasingcustomers include 12 airlines from China and 28 airlines from 22 other countries. However, it isfacing considerable re-leasing pressure judging by its aircraft delivery and lease expiry schedules.
　　Strong infrastructure leasing capabilities As a majority-owned subsidiary of the CDB, thecompany has benefited from various resources for infrastructure leasing business development. Ithas established sound relationships with local governments as well as a mature business model.
　　The company’s infrastructure leasing business benefits as: 1） assets underlying the CDB’sRmb6trn infrastructure loans facilitate its project development; 2） the nature of its leases meanssufficient cash flows are ensured to cover lease payments; 3） continued strength in infrastructureinvestment in China will bring substantial market space; and 4） financial leasing is an effectivealternative financing channel.
　　Asset quality control ability yet to be verified CDB Financial Leasing has focused on qualitymedium and large corporate customers, saving itself the spending on business networkestablishment and customer development. However, the company has seen the non-performingasset ratio rising quickly in its ship, commercial vehicle and construction machinery leasing andother leasing business segments over the past two years amid the economic downturn. Thecompany reported finance lease business non-preforming asset ratios of0.65%/1.67%/2.21%/1.45% in 2013/14/15/1H16. The company continued to improve its corporategovernance and internal controls during 1H16, while several members of its senior managementteam only joined the company after 2014. Its ability to control asset quality remains yet to be tested.
　　Initiate at Hold with TP of HK$2.10 Given stable operating performance and sound lease assetquality, we believe the company’s aircraft leasing and infrastructure leasing segments are likely togrow steadily. With the disposal of non-performing assets, the negative impact of impairmentlosses on net profit should diminish. We estimate revenue growth of 1%/12%/14% and net profitgrowth of 68%/15%/15% in 2016/17/18. Given the liquidity risk caused by its low daily tradingvolume, initiate at Hold with target price of HK$2.10, representing 1.1x P/B and 13x P/E （2016E）， or1.0x P/B and 11x P/E （2017E）。 With the continued input of newly raised funds in its aircraft leasingand infrastructure leasing segments, as well as an improvement in its asset quality controlcapabilities, the company is likely to post stronger-than-expected business and earnings growth,which should provide upward momentum for its share price.
　　Key risks include disappointments from the company’s fleet expansion, a decline in the aircraftlease rate factor due to intensified competition, worse-than-expected defaults on the company'sfinance leases, a smaller-than-expected reduction in its financing costs, and the negative impact oflow trading volume on the stock’s liquidity.