Guojin Securities initiated coverage on BOC Aviation (02588) with a "Buy" rating, forecasting net profit attributable to shareholders of $750 million, $850 million, and $950 million for 2025-2027, representing year-on-year growth rates of -19%, 13%, and 13%, respectively. The projected profit decline in 2025 is primarily due to a high base effect caused by a one-time reversal of impairment provisions related to Russian aircraft in 2024. With the aircraft leasing industry's fundamentals improving, the company benefits from high operational efficiency and low financing costs. The valuation is based on a 2026 price-to-book (PB) ratio of 1.15x, corresponding to a target price of HK$95.11. Guojin Securities' key views are as follows.
The company is a globally leading aircraft operating lessor, which listed on the Hong Kong Stock Exchange in 2016. According to Cirium, it ranked fifth in the industry by aircraft asset value as of the end of the second quarter of 2025. Aircraft supply is struggling to meet demand, pushing up aircraft values and lease rates. On the demand side, air travel demand continues to recover; data from IATA shows that global airline Revenue Passenger Kilometers (RPK) and Available Seat Kilometers (ASK) in October 2025 recovered to 112% and 109% of October 2019 levels, respectively, driving demand for new aircraft purchases and leases. Airbus forecasts 43,420 new aircraft purchase requirements over the next 20 years. The company disclosed that as of the end of January 2025, the proportion of parked aircraft had decreased to just over 10%, indicating reduced flexibility to manage demand fluctuations by adjusting parked aircraft. On the supply side, aircraft delivery speeds remain slow, with major manufacturers like Boeing and Airbus holding substantial order backlogs. By the end of 2024, global mainline passenger aircraft deliveries had only recovered to approximately 75% of 2018 levels. This supply-demand imbalance is expected to drive up aircraft valuations and lease rates for all aircraft types, with lease rates for both wide-body and narrow-body aircraft at the start of 2025 already exceeding those at the end of 2019. Leading aircraft lessors enjoy higher market concentration, giving them an advantage in securing aircraft deliveries.
The company demonstrates robust operations, with both yields and aircraft asset scale poised for growth. 1) Operating lease yield: Benefiting from rising lease rates driven by industry factors and the company's strong operational capabilities, the operating lease yield increased from 9.2% in 2022 to 10.3% in the first half of 2025. 2) Net book value of aircraft assets: While the company's fleet size continues to expand, reaching 462 owned aircraft by the end of 2025, the net book value of its aircraft assets declined after 2021, mainly due to impairment charges for Russian aircraft and an increased focus on sale-leaseback transactions. However, by the end of the first half of 2025, the net value of aircraft assets had recovered slightly, showing a 1% increase from the beginning of the year. The impact of Russian aircraft has now been eliminated, and with the steady delivery of order book aircraft, the net book value of the company's aircraft assets is expected to steadily rebound.
The company maintains low financing costs with potential for further reduction. 1) Strong shareholder support: Backed by its major shareholder, Bank of China, the company benefits from a credit rating advantage, with a Fitch rating of A- as of the first half of 2025. 2) Low cost of funds: Thanks to its favorable credit rating, the company's cost of funds is lower than some peers, with an average cost of funds of 4.6% in the first half of 2025. Approximately 30%-40% of its liabilities are floating rate, and its US dollar-denominated liabilities mean its funding costs closely follow US Treasury yield trends. With the US Federal Reserve implementing three interest rate cuts in 2025, the cost of its floating-rate liabilities is expected to decline further.
Risk factors include a slower-than-expected recovery in air travel demand, interest rate volatility, and geopolitical risks.
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