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Come fly with me

18 May 2016 By Peter Thal Larsen

Hong Kong is finally welcoming a Chinese-owned financial group whose listing can take off. BOC Aviation, the plane-hire group controlled by Bank of China, is taxiing towards a $1.1 billion initial public offering. As long as it remains under the state-backed lender’s wing, a premium valuation should be justified.

The 23-year old aircraft leasing company could hardly be more different from the Chinese banks and brokers that have recently landed in Hong Kong in search of investors. For one, BOC Aviation is solidly profitable, with return on equity above 15 percent in each of the past three years. Second, despite the name, its exposure to Greater China is fairly small, accounting for less than 17 percent of rental income in 2015.

BOC Aviation does, however, get a big financial uplift from the People’s Republic. Being part of Bank of China, which acquired the Singapore-based group for almost $1 billion a decade ago, allows it to borrow more at lower rates than standalone rivals. Debt was 3.7 times equity at the end of last year, yet average funding costs were just 2 percent. New York-listed Air Lease, which has a similar-sized fleet and balance sheet, paid 3.6 percent on its debt even though leverage is lower.

The question for prospective investors is whether BOC Aviation can maintain this altitude. Bank of China will own at least 65.5 percent of the company after the offering, and has supplied a $2 billion backstop credit line until at least 2022. Besides, the Chinese government has made developing the leasing industry a priority. However, Western banks and insurers were forced to jettison their leasing arms after receiving bailouts after the financial crisis. As bad debts rise on the mainland, Bank of China’s long-term support cannot be taken for granted.

The offering price of HK$42 per share values BOC Aviation at about 1.3 times last year’s book value, after taking account of new money, according to Breakingviews calculations. Other listed groups trade below book. A cluster of big Chinese investors – and, surprisingly, manufacturer Boeing – have already committed to buy half the offering. Yet unlike other recent IPOs, this is one Chinese financial group investors can consider boarding.




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