20161109-广发证券_香港_-国银租赁-01606.HK-Profit_outlook_hinges_upon_asset_quality_control__initiate_at_Hold_with_TP_of_HK_2.10_11页_815kb

CDB Financial Leasing (1606 HK) Summary

Core Content

CDB Financial Leasing is a leading financial leasing company in China, listed in Hong Kong in June 2016. It is a majority-owned subsidiary of the China Development Bank (CDB), which provides strong financial and customer support. The company operates across four business segments: aircraft leasing, infrastructure leasing, ship, commercial vehicle & construction machinery leasing, and other leasing business. It offers comprehensive leasing services to quality medium and large corporate customers.

Key Business Segments

• Aircraft Leasing: One of the largest fleets in Asia, with 415 aircrafts as of end-2015. The segment contributes significantly to revenue and has a diverse portfolio of aircraft models.
• Infrastructure Leasing: Benefits from CDB's infrastructure loan resources and has a mature business model with reliable cash flows. It is a key growth engine due to strong government support and long-term financing opportunities.
• Ship, Commercial Vehicle & Construction Machinery Leasing: Has shown rising non-performing asset ratios, which is a concern.
• Other Leasing Business: Also faces challenges in asset quality due to economic downturns.

Financial Performance

• Stock Performance: As of November 8, 2016, the stock closed at HK$1.93. Daily trading volume is low, with an average of 177,000 shares over the past month.
• Market Cap: HK$24.4 billion.
• Revenue and Profit Trends:
  • Revenue: Rmb11,049m (2013), Rmb11,325m (2014), Rmb10,641m (2015), Rmb10,743m (2016E), Rmb12,007m (2017E), Rmb13,671m (2018E).
  • Net Profit: Rmb1,887m (2013), Rmb1,916m (2014), Rmb1,053m (2015), Rmb1,767m (2016E), Rmb2,039m (2017E), Rmb2,344m (2018E).
• Earnings Growth: Net profit is expected to grow by 68% in 2016, followed by 15% in 2017 and 2018, mainly due to the low base in 2015 and reduced asset impairment impact.

Valuation and Investment View

• Target Price: HK$2.10, representing 1.1x P/B and 13x P/E (2016E), or 1.0x P/B and 11x P/E (2017E).
• Rating: Hold (initiation).
• Valuation Basis: The company is compared to peers like BOC Aviation and Far East Horizon. Its ROE is lower than comparable peers, leading to a slightly lower valuation.

Key Risks

• Fleet Expansion Disappointment: Delays or cancellations of aircraft deliveries could impact growth.
• Lease Rate Decline: Increased competition may reduce lease rates, especially in the finance lease segment.
• Asset Quality Concerns: Rising non-performing asset ratios in non-aircraft segments pose a risk.
• Liquidity Risk: Low trading volume may affect stock liquidity and investor sentiment.

Asset Quality and Risk Management

• The company has focused on quality corporate customers, reducing the need for extensive business network development.
• However, asset quality in ship, commercial vehicle, and construction machinery leasing segments has deteriorated, with non-performing asset ratios rising from 0.65% in 2013 to 2.21% in 2015.
• The company has improved corporate governance and internal controls in 1H16, but the effectiveness of these measures remains to be tested.
• Senior management has mostly come from the CDB system, with limited experience in financial leasing, which may affect operational efficiency.

Strategic Position

• Government Backing: CDB's support is a major advantage, especially in infrastructure leasing.
• Diversified Fleet: The company has a balanced mix of narrow-body and wide-body aircraft models, with a higher proportion of Airbus and Boeing aircrafts.
• Global Operations: Leases are spread across China and other countries, providing flexibility in managing re-leasing risks.

Conclusion

CDB Financial Leasing is a well-positioned player in the financial leasing sector, with strong government backing and a diversified business model. Its aircraft and infrastructure leasing segments are expected to drive steady growth, while the other segments face challenges in asset quality. The company's current target price reflects its valuation based on P/B and P/E multiples, and its low trading volume introduces liquidity risk. Overall, the company is initiated at a Hold rating with the target price of HK$2.10.