Initiating Coverage of BOC Aviation

We are initiating coverage on BOC Aviation 02588 with no moat and a fair value estimate of HKD 68, indicating a 2023 price/book ratio of 1.1 times. This is in line with its precoronavirus trading range and reflects pandemic-related industry uncertainties fading away. Our fair value estimate represents an upside of around 10% from the recent share price level.

BOC Aviation is a pure-play aircraft leasing company with a truly diverse global customer base. BOC Aviation’s growth follows the trend of airlines globally increasingly seeking to lease aircraft instead of owning them outright, to reduce capital expenditure and improve operating efficiencies by accessing newer aircraft. Since its inception in the 1990s, BOC Aviation has grown to be the fifth-largest aircraft lessor by net book value after consistently focusing on balance-sheet growth and actively participating in purchase and lease-back transactions with airlines.

While we don’t believe BOC Aviation or the aircraft leasing industry enjoys a moat, we think BOC Aviation’s track record of solid management should enable it to continue to manage well through economic and business cycles. Despite intense competition among aircraft lessors, we are optimistic about BOC Aviation’s future ability to maintain its A credit rating, which helps it secure lower-cost funding sources, and to maintain its net yield lease above 8% via stringent and active aircraft portfolio management.