Asia’s equity capital markets could soon see a flurry of financial leasing company IPOs as China Development Bank filed an application to list its financial leasing unit in Hong Kong on Monday.
China Development Bank Financial Leasing (CDB Leasing) could be the first of a trio of financial lessors going public in Hong Kong this year as BOC Aviation, the aircraft leasing unit of Bank of China, and Minsheng Financial Leasing are also preparing IPOs.
All three companies operate in the highly capital intensive aircraft leasing business, which has been growing rapidly in recent years because of the rise of low-cost carriers, which tend to lease planes instead of owning them to minimize capital expenditure.
The company's fleet of 371 aircraft as of the end of September last year falls short of BOC Aviation’s 511 planes but it engages in a wider range of leasing business that includes infrastructure, shipping, commercial vehicle and construction machinery.
In the first nine months of last year, CDB Leasing derived 43.4% of revenue from its aircraft leasing business while its infrastructure leasing contributed to 32.8%.
The company mandated Deutsche Bank, Bank of America Merrill Lynch and Citic CLSA Securities as joint sponsors for the planned IPO, according to filings with the Hong Kong stock exchange.
Fair value
CDB Leasing is one of five wide-ranging financial leasing companies backed by Chinese banks. It competes with CCB Financial Leasing, Bocom Financial Leasing, ICBC Financial Leasing and Minsheng Financial Leasing, as well as other non-bank affiliated financial lessors.
The fact that financial leasing is a relatively new sector to stock market investors in Asia mean there is not much reference as to determining the fair value of these companies at the time of their IPOs.
However, China Aircraft Leasing, backed by state-owned financial conglomerate China Everbright Group, is one of Asia's two listed financial leasing companies. Its shares closed at HK$6.28 on Monday, giving it a market capitalization of HK$3.8 billion ($490 million), equating to 1.95 times net asset value.
Another reference is Shenzhen-listed Bohai Leasing, which trades at the equivalent of 2.2 times book value. The company announced last month the completion of a $2.51 billion acquisition of Irish aircraft lessor Avolon in a deal fixed at 1.72 times the latest reported book value.
Should CDB Leasing sell its IPO shares at two times book value, it will have a market capitalization of $4.5 billion based on its net asset value of Rmb14.6 billion ($2.23 billion) as of the end of September last year. At that valuation the IPO could raise a little more than $1 billion assuming a standard 25% free float.
Promising prospects
Financial leasing companies have been growing rapidly in China because of rising market demand and a more supportive regulatory environment, according to Chris Lee, an associate director in the Financial Services practice at Standard & Poor's Ratings Services.
The number of financial leasing companies surged to 2,202 as of the end of 2014 from 80 in 2007, while total leasing assets increased more than 12 times to Rmb3.2 trillion from Rmb24 billion in the same period.
The market is growing particularly for aircraft lessors because more carriers are increasingly turning to a light asset model amid fears of a global economic slowdown. The emergence of new low-cost carriers in recent years has also boosted demand for aircraft lessors.
Air China, the country’s flag carrier, leases 73 aircraft from the likes of Bocom Leasing and ICBC Leasing. The proportion of leased aircraft accounts for about 20% of its 356-strong fleet.
The figure is higher for budget airlines. Spring Airlines, China’s largest low-cost carrier by fleet size, leases more than half of its 57-strong fleet. According to aviation database Planespotters, the Shanghai-based airline owns 23 planes and rents 34 from aircraft lessors globally.
AirAsia, the largest budget airline in Asia by fleet size, announced in July last year it intended to sell 120 aircraft to aircraft lessors under a sale-and-lease-back program in an attempt to reduce its debt level.
Good prospects for the aviation leasing industry have attracted investment from business tycoons including Li Ka-shing, Asia’s richest man, whose flagship listed entity Cheung Kong Holdings bought a portfolio of aircraft for about $1.9 billion in 2014.
