Preannounced 2021 earnings up 55% YoY
China Aircraft Leasing has preannounced that its 2021 net profit rose 55% YoY to around HK$520mn, which we attribute to an easing of unrealized non-operating loss. It estimates 2H21 net profit fell 29% HoH to around HK$220mn. We think the earnings decline was mainly driven by falling revenue from aircraft transactions.
Trends to watch
Aircraft fleet steadily expands; sound fleet structure effectively offsets impact from COVID-19 conditions. According to the firm’s website, the firm had 150 aircraft as of December 8, 2021 (+22 vs. early-2021 and +21 in 2H21). Despite the global spread of the Delta and Omicron variant, the firm remained resilient thanks to its sound fleet structure (narrow-body aircraft accounted for 89% of the fleet as of 1H21, and 78% of self-owned aircraft were leased to Chinese Mainland airlines). As of 1H21, its aircraft utilization rate was 100% and rental collection rate was 99.7%, better than those of the sector. 8M21 aircraft grounding rate was 11%, the best in the sector according to Cirium. We believe that 2021 operation remained solid, and core leasing income fell slightly by 6% YoY to HK$2.34bn.
Significant YoY narrowing of unrealized non-operating loss drives earnings recovery. The firm incurred HK$511mn non-operating loss such as investment loss provision and FX loss in 2020. This led to a 62.7% YoY decline in 2020 attributable net profit (operating profit down 2.0%). However, the firm has improved hedging against interest rates and foreign exchange risks since 2021. As of 1H21, only six out of its 104 self-owned aircraft were not hedged against interest rate risks, and only about Rmb500mn renminbi bonds were not hedged against FX risks (the firm estimates a 5% change in FX will result in an around HK$30mn change in earnings). We expect the negative impact from non-operating loss to sharply ease in 2021, driving a recovery in earnings. The firm booked HK$45.70mn impairment for accounts receivable in 1H21, and had charged impairment provision for about 23% of operating and leasing accounts receivable. We believe the provision was sufficient, and estimate a stable provision ratio in 2021.
We remain upbeat about the aircraft leasing sector as COVID-19 conditions ease, and believe the firm’s full value chain model will help it capture incremental business opportunities. In 12M21, global revenue passenger kilometer recovered to 55% of the 2019 level, and improved 79.5% YoY. We foresee positive catalysts from a peaking of the Omicron wave, progress in vaccination and COVID-19 medicines, further reopening of borders globally and normalizing COVID-19 containment measures in China and abroad. As COVID-19 conditions ease, the aircraft leasing sector will likely benefit from recovering demand, limited supply constraint and low funding cost (for details, please refer to our report Aircraft leasing: Expect favorable cycles as COVID-19 eases published on December 17, 2021). We think that earnings and valuations of leading firms will improve, driven by steady fleet expansion and easing impairment charges for rental income. As retirement of older aircraft speeds up and demand for aircraft dismantling and disposal grows, we expect the firm to capture incremental business opportunities by leveraging its full value chain capabilities in fleet management and asset disposal.
Valuation and recommendation
Considering falling prices and volume of aircraft transactions amid global COVID-19 resurgence, we cut our earnings forecast 31% to HK$516mn for 2021 and 27% to HK$668mn for 2022, and introduce a 2023 forecast of HK$857mn. The stock is trading at 0.9x 2022e P/B. Given a possible sector recovery as COVID-19 conditions ease, we maintain OUTPERFORM and a TP at HK$7.5 (1.2x 2022e P/B with 34% upside).
Risks
Unexpected COVID-19 resurgence; disappointing demand recovery and/or aircraft transactions; uncertainty in asset quality.