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1、Global Research18 August 2020Initiation of CoverageHerbert LUAnalyst +86-21-3866 8873Herbert LUAnalyst +86-21-3866 8873Eric LinAnalyst +86-21-3866 8865APAC Aircraft LeasingWhich sector is least cyclical in the aviation value chain?Market overlooks stability of aircraft leasing; initiate coverage of
2、BOCA at Buy We are positive on aircraft leasing as we think it is less cyclical than airlines and pays decent dividends. We forecast global air travel demand to recover in 2021, driving an ROE recovery for lessors. Even if a recovery takes longer, we think long lease-terms and fixed lease rates prov
3、ide a moat for aircraft lessors, and we believe a low interest-rate outlook and potential less competition will help drive a recovery. After retreating 30%, BOC Aviations (BOCA) share price reflects overreaction to COVID-19, in our view, as it is trading more than 1 SD below the historical average P
4、/BV, with ROE of 13%/14% in 2020E/2021E and 15% in 2022E. Thus, we think the market is overlooking the stable business model of lessors and the superior returns of BOCA even during a downcycle.Aircraft leasing a less cyclical model in the aviation chainWe think aircraft leasing is the least cyclical
5、 subsector within aviation, given: 1) rising penetration (from 0.5% in the 1970s to c.50% recently) on airlines increasing demand for fleet flexibility and liquidity; 2) long lease contracts with airlines customers (average remaining lease term: seven years) and most are fixed-rate leases; 3) lease
6、payments collected on a monthly or quarterly basis from airlines customers; 4) no direct impact from oil price or foreign exchange; and 5) senior creditor to airlines. Thus, in the aviation chain, we think aircraft leasing is less impacted by COVID-19 and we think an earlier-than-expected air travel
7、 demand recovery or aircraft manufacturers capacity cuts could bring upside for lessors.BOCA - the industry leader with superior returnsWe believe BOCA can deliver stable and higher returns than most peers, due to: 1) lower funding costs, benefiting from the support of parentco Bank of China and hig
8、her credit rating; 2) it has the youngest fleet with the longest remaining lease term; 3) higher exposure to the China market than global peers; 4) experienced management team with a record of dealing with crises and delivering superior returns; and 5) favourable acquisitions during the downcycle. W
9、e forecast ROE to fall to 13% in 2020E but recover from 2021E, with long-term ROE of 15%, higher than the cost of equity.Initiate coverage of BOCA with a Buy ratingGlobal aircraft lessors share prices have retreated 20-60% since the COVID-19 outbreak and we think the market is overlooking the relati
10、ve defensiveness and stable profitability of aircraft lessors. We therefore like BOCA given its expected superior returns and good record dealing with crises.Figure 1: APAC aircra代 lessors comparison tableNote: BOCA data is UBS-S estimates; *others are Thomson Reuters consensus. Pricing data as of 1
11、7 August. Lease term and fleet age data as of end-2019. Source: Thomson Reuters. UBS-S estimatesReutersMarket capRatingPrice targetCurrent priceRemainingAverageP/BV (x)Div. yield (%)ROE (%)Gearing (%)CompanytickerUS$ bn(LCY)(LCY)lease termfleet age2020E202 IE2020E202 IE2020E202 IE2020E202 IEBOC Avia
12、tion2588.HK4.4Buy67.5049.508.43.10.90.84.95.913.114.3369361CDB Leasing*16O6.HK1.7NANA1.087.24.40.40.47.49.711.211.9NANACALC*1848.HK0.6NANA6.588.24.61.00.910.413.123.924.3754799This report has been prepared by UBS Securities Co. Limited. We would like to thank Myles Walton () forsome of this new capi
13、tal is backed by Asian financial institutions, sovereign wealth or private equity funds with strong balance sheets and cheap cost of funding.Going forward, we believe the industry average lease yield could drop to around 8%, as global airlines are struggling amid industry turmoil and requesting temp
14、orary concessions or preferential pricing. This unfavourable situation may last into 2021, but will likely improve from 2020 amid a more meaningful recovery in global air travel demand, in our view. On the other hand, given COVID-19 has been negatively affecting the global economy, UBS Macro economi
15、sts expect a low-interest-rate environment and largely stable spread of investment-grade bonds for the next few years. We think this macro background will help lessors lower their funding costs. On a net basis, we think net spreads will go down in 2020, and then start to recover to a stable level fr
16、om 2021.Figure 7: Lease yields for different types of aircrafts12.0%6.0%89B08fd432099LOO99d4go,Bo660。LLNZ8CO 寸寸 9S99W8866c 。LLLLLLLT- r-LLLL LdGd。dUd。dOdCJ dUd。Q.OOOOOOOOO4 082S4 -亘de。叶4a -XMeusos alenbs uosipg-$B1lse。c - 。seal JChina domesticAsia PacificGlobalNote: Data as of May 2020. Source: CALC
17、, CH-aviationNote: Asia Pacific and global data are RPKs, and China domestic is the number of air passengers.Source: IATA, CAACCompetition from new capital may ease due to COVID-19With the higher penetration of leased aircrafts, the leasing sector became more fragmented. The top 10 lessors market sh
18、are decreased from over 70% in 2002 to around 50% now. During the Global Financial Crisis, many banks in developed markets exited the aircraft financing industry, which helped the sector gain a bit of temporary concentration. But after the financial crisis, the widening net spread from low interest
19、rates attracted new capital to this sector. Some of the newcapital is backed by Asian (especially Chinese) financial wealth or private equity funds with cheap cost of funding.institutions, sovereignFigure 18: Share of global funding source for aircraft leasesFigure 17: Fragmentation in the aircraft
20、leasing sectorNumber of the lessorsTop 10 market shareSource: Boeing100%90%80%70%60%50%40%30%20%10%0%Lessors direct purchasePurchase-leaseback ChinaAsia excl. China Central Asia Middle East Europe Africa North America Latin AmericaSource: BoeingHowever, we think concern over air travel demand and tr
21、auma from COVID-19 may hamper more new capital entering this sector, or even prompt some capital to exit, which could marginally alleviate the competition situation and benefit the remaining companies. According to Airfinance Journal, aircraft lessors funding size has dramatically contracted this ye
22、ar. As of 16 July 2020, total funding by air lessors only recorded US$1 Obn, representing 1/5 of the 2019 level.Figure 19: Aircraft lessors funding sizeNote: Data as of end-June 2020. Source: Airfinance JournalFunding cost trending downTo mitigate the negative economic impact of COVID-19, the worlds
23、 central banks enacted monetary stimulus measures. The chart below shows rate cuts/QE since January 2020 by central banks.Source: UBS, HaverFigure 20: Rate cuts and QE since January 20205 $- CZI ,C1 opu-Given monetary easing, UBS credit team forecasts the US Treasury yield at 0.75%/1% at year-end 20
24、20/21. On the other hand, unlike the Global Financial Crisis, the team forecasts a relatively stable spread of investment-grade corporate bonds over the benchmark. This implies a low funding cost for investment-grade corporate bonds. This is good for aircraft lessors as US$ debt is the common source
25、 of lessors funding.Figure 21: Yields for US Treasury note and investmentgrade corporate bonds10%AAABBSInvestment-gradeNote: Yields for corporate bonds in 2020 are data as of July 2020; Yields for 10- year US Treasury yield in 2020 and 2021 are UBS estimates.Source: UBS estimatesFigure 22: Spread of
26、 investment-grade corporate bonds800bpsULCUC lljoeozAA山 ose 6L0Z 8OZ 二 03 9L02 Inoz tHOZ zoz 二 03 202 6002ULCUCAAAA BBB Investment-gradeNote: The spread is option-adjusted spread; Spreads for the corporate bonds in 2020 are data as of July 2020, while the average of investment grade bonds in 2020 and 2021 are UBS estimates.Source: UBS estimatesUBS-S ResearchUBS-S Researchreturn 个APAC Aircraft LeasingPIVOTAL QUESTIONSQ: Will COVID-19 increase t