Robust Aircraft dragged by Infrastructure uncertainties; Hold with HK$2.05 TP
CDBL’s dual-engine growth story is supported by aircraft and infrastructureleasing. However, despite a robust aircraft segment driven by a large Chinaexposure, we are concerned about infrastructure leasing growth, which maybe affected by municipal bond issuance and competition from banks. Also,provisioning pressure remains to fulfill the 2.5% provision-to-loan ratio after theNPA disposal in the SME portfolio. We expect CDBL’s net profit to recoverfrom a low base in 2016E and grow by 12-14% yoy in 2017E-18E. Due to theuninspiring ROE prospects (11-12% vs. 14%-15% for FEH and BOCA), weinitiate with Hold and a target price of HK$2.05.
Aircraft – decent profitability on a high leverage model
CDBL’s aircraft leasing was ranked No.10 globally by fleet value in 2014 and ithad a total owned fleet size of 184 as of June 2016 (with 214 more aircraft onorder). We think CDBL’s aircraft leasing will benefit from strong demand inChina (12.5% CAGR in 2014-19E). We forecast segment assets to grow 20-22% yoy in 2016-18E with an average pre-tax ROE of 22% driven by higherleverage (7.0-8.0x vs. 5x for global peers).
Infrastructure – uncertain growth prospects
Although China is expanding its fiscal budget to boost infrastructure, we seeuncertain growth in infrastructure leasing, as local governments tend toreplace higher-cost leasing loans (5.7% for CDBL in 1H16) with municipalbonds (~3%) and bank borrowing (more via PPP projects with cost ~4.7%).This is evidenced by zero asset growth in CDBL’s infrastructure segment in1H16. In addition, segment yield may be under pressure due to competition(down 106bps in 1H16 from 2015). We forecast segment assets to grow 10-12% yoy in 2016E-18E with an average ROE of 13% (vs. 20% ROE in 2015).
Valuation and risks
We use a sum-of-the-parts valuation to derive our HK$2.05 target price, whichimplies a target 2017E P/B of 1.0x and P/E of 9.4x. Key upside risks: betterthan-expected infrastructure segment growth. Key downside risks: aircraftyield compression on intensifying competition and stricter provisioning rules.