BOC Aviation (HK) Review

I found BOC Aviation (HK) is a much better choice to invest in than its competitor - CALC. It is the largest listed aircraft operation lessor in Hong Kong, and it is the only aircraft operation lessor in Asia region in global top 5 aircraft operation lessor. Asia region is the fastest growing region of this industry. 

BOC Aviation is founded in Singapore, and was acquired by Bank of China in 2006. Bank of China acquired 100% of the issued share capital of Singapore Aircraft Leasing Enterprise Pte Ltd for US$965 million in cash (at the time of acquisition, SALE's total assets amounted to US%3.1 billion, total debt amounted to US$2.28 billion). Bank of China renamed the company as BOC Aviation, and it IPO at HKEX in June 2016. Currently Bank of China owns 70% interest of the group. According to its 2016 Annual Report, the group got 68 airline customers from 32 countries and regions. The group owns and managing 284 aircraft at the end of 2016, and the group increases its portfolio to 297 aircraft at the end of June 2017, with an average age of 3.1 years and an average remaining lease term of 7.8 years for the owned aircraft fleet. It is ordering 196 aircraft from Airbus and Boeing and delivery is scheduled over the period from 1 July 2017 to 2021. The group took delivery of 37 aircraft in the first half of 2017. 95% of orderbook deliveries scheduled in 2017 are placed with lessees, with more than 60% of scheduled 2018 deliveries also placed on lease. 

The group is growing steady. From its 2016 Annual Report, we can see that its net profit after tax increased 185% from 2012 to 2016, while its total assets increased 147% during the same period. I have identified some competitive advantages of the group. 

The group benefited from its low interest rate. BOC Aviation's average cost of capital is much lower than CALC. As the group is focusing on US dollar denominated lease contract and debt, the net profit is very sensitive to US interest rate. The group got A- rating from S&P and Fitch rating (while CALC got its credit rating from a China rating firm). BOC Aviation is able to issue low interest bonds and medium term notes due to its high international rating. The group issued a 5 year US$500 million bond at 2.375% interest rate, which is much lower than its competitor's cost of funds. As we can see from the graph below, the group is increasing the portion of fixed rate bonds. 43% of the total debts have fixed interest rate, while 54% of lease contracts have fixed lease rate. The fixed rate decreases the uncertainty of the outlook. The group's debt repayment profile is quite stable from 2017 to 2021, with around US$1,200 million - US$1,600 million per year. 

The group is also benefit from low income tax rate. As shown in the graph below, the effective tax rate in 2016 was only 11.8%. 46% of their income tax expenses occurred in USA, and the group's net profit will increase if USA lower their corporate tax rate. Singapore also renewed Aircraft Leasing Scheme for another five years from 1 July 2017, under the scheme the group only needs to pay 8% tax. Therefore the group is enjoying a much lower effective tax rate than CALC. 

When Bank of China acquired the company back in 2006, they didn't change all managers. Their current CEO was appointed as a managing director since 1998; the deputy managing director and CFO is working as a CFO in the group since 1999; and the CCO (Europe, Americas and Africa) was appointed since 2004. These seniors got great experiences. I believed that retention of these seniors is one of the reason why it is more successful than its competitors. 

The group is planning to expand the business at stable rate. The capital expenditure plan from 2018 to 2011 is around US$1,200 million to US$1,650 million per year. Although the group got a very high debt ratio, and they are planning to increase their debt ratio to 3.5 to 4.0, their long lease contracts should be able to support the group to repay their debts. There are around 150 airlines meet the target customer criteria, so the group is working hard to further expand its customer base. 

Although the group got many competitive advantages, the management also mentioned that they are operating in high competitive market, so in the future they might be harder to grow their balance sheet by winning Purchase-Lease-Back transaction. Their high operating margin is under pressure as well. 

At the point of writing, the share is trading at HKD$40.30, down 1.35% from previous trading day. It is trading at PE 7.37 and PB 1.01. I will invest in this counter before the end of year.

Thanks for reading! DYODD