BOC prepares IPO of largest Asian aircraft lessor

BOC Aviation joins CDB Leasing in the IPO pipeline as Chinese entities muscle their way towards the top of the global aircraft lessor rankings.

Bank of China (BOC), the country’s fourth-biggest lender by assets, has approved the initial public offering of its wholly owned aircraft leasing unit in Hong Kong. 

BOC Aviation joins CDB Leasing in the IPO pipeline in what is shaping up to be an important new sector for Asia equity capital markets. To date, only China Aircraft Leasing Corp (CALC) has listed in the city, raising HK$728.9 million ($94 million) from a 131.78 million share IPO in July 2014.

There is also one A-share listed company, Bohai Leasing, which is traded in Shenzhen and has a market capitalisation of $4.4 billion. In early September, the HNA group subsidiary agreed to pay $2.51 billion for Irish aircraft lessor Avolon, in a deal fixed at 1.72 times book value.

This transaction underscored the rapid progress Chinese entities are making as they push their way up the global industry rankings through a mixture of organic expansion and M&A. According to figures from Flightglobal ACAS, there are now five Chinese groups in the top 20, of which BOC Aviation is the largest followed by Aviation Industry Corp of China (AVIC), ICBC Leasing, CDB Leasing and Bohai Leasing.

Industry players say all five are actively looking for international acquisition targets. AVIC, for example, lost out on Avolon to Bohai, while CDB Leasing and ICBC Leasing are both keen to find international platforms to grow their businesses. 

Analysts have previously suggested that US listed companies Air Lease and AerCap, the world's largest operator by fleet value, could both be targets.

BOC Aviation now ranks fifth globally behind Dutch-based AerCap, Japan's SMBC Aviation and US groups GE Capital Aviation Services and Air Lease. 

An IPO is a logical next step for the group and its peers given their large capital expenditure plans and global ambitions. For BOC Aviation, raising equity will not only help to bring its debt-to-equity levels back down towards the sector average but will also provide it with much greater visibility as it tries to stamp a larger international footprint. 

Sector valuations

Preliminary estimates suggest its IPO could fetch an overall valuation of $5 billion to $6 billion based on 2014 net profits of $308.6 million and a trailing twelve-month p/e range of 15 to 20 times earnings. Earlier this year, CDB Leasing said it hoped to raise about $1 billion to $1.5 billion from its own IPO.

BOC Aviation figures are based on the current trading level of CALC, which is much smaller than BOC Aviation and is also independent so does not benefit from Bank of China's implicit state support. It is currently trading at 15.15 times trailing earnings and is down 24% year-to-date. 

Bohai Leasing, meanwhile, was trading on Monday at 25.9 times trailing twelve-month earnings, half the level of its June peak. 

Global players such as AerCap and Air Lease trade at much lower valuations. On Monday, AerCap was valued at 6.82 times 2014 earnings and is up 1.39% year-to-date, while Air Lease was at 12.81 times 2014 earnings and is down 4.27% since the beginning of January.

In a statement filed with the Shanghai Stock Exchange on Monday, BOC Aviation said it plans to sell up to 40% of its enlarged share capital. The deal will comprise a mix of new and old shares, with each portion capped at 20%.

There will be the standard 90%/10% split between institutional and retail investors. 

Rapid expansion

The company plans to use the proceeds raised from its IPO to acquire new aircraft and replenish its coffers. 

According to the offering memorandum for a recent $808 million aircraft securitization, the group is committed to acquiring 195 aircraft. Deliveries have been spaced out so the group will buy about 30 aircraft per year through to 2021.

In August, it sealed an $8.8 billion deal with Boeing to purchase 80 medium-haul planes, the biggest order in its 20-year history.

As of end June, it had a portfolio of 256 aircraft leased to 61 airlines in 30 countries. Total assets amounted to $12 billion.

Adding in existing commitments brings its overall fleet value up to about $20 billion. AerCap has a fleet value just shy of $60 billion.

Bank of China acquired BOC Aviation from a group of Singapore government-owned entities for $965 million in 2006. The transaction ranked among the first batch of major outbound acquisitions from Chinese banks and valued the leasing company at a hefty 27.8 times earnings. 

But it nevertheless proved to be a good deal since BOC Aviation’s net income has risen nearly nine-fold since the buyout, outpacing its parent’s earnings growth of about four times over the same period. 

Its average fleet age is 3.5 years, one of the youngest among major jet lessors. Bohai Leasing runs the youngest fleet in the world at 2.6 years.

Earlier this year, the company also executed its inaugural $750 million five-year bond and has an A- rating from both Fitch and Standard & Poor's.

Chinese banks diversify

In recent years, many Chinese banks have been diversifying beyond their traditional lending businesses in an effort to combat slowing profit growth.

In March, China Everbright Bank said it planned to spin off its wealth management unit. Two months later, Shanghai Pudong Development Bank announced plans to set up an asset management unit.

CICC analysts noted in a report in March that the spin-off of banks’ assets and their listings fit the context of the mixed ownership reform on Chinese lenders.

Moving into the aircraft leasing business has also been driven by the industry's strong growth profile, particularly in Asia.  Aircraft leasing now represents 41% of the world's global airline fleet, up from 2% in 1980. Boeing forecasts that it will hit 50% by the end of the decade.

Air traffic demand also continues to outpace global GDP growth and, while the overall airline business is inherently cyclical, aircraft leasing tends to be more stable because contracts are fixed for relatively long terms.

Additional reporting by Jackie Horne

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