Bank of China, the country’s fourth-largest lender by assets, launched an initial public offering for its aircraft leasing business on Monday, targeting HK$8.7 billion ($1.13 billion) from the sale of both new and existing shares.
With shares tentatively scheduled to begin trading on June 1, BOC Aviation looks set to steal a march on rivals CDB Leasing and Minsheng Financial Leasing, which are both also preparing to list in Hong Kong later this year, according to bankers familiar with the situation.
BOC Aviation will be the second aircraft leasing company listed in Asia after China Aircraft Leasing Group (CALC) floated its shares in Hong Kong two years ago. BOC Aviation's fleet is nearly four times bigger than CALC's though, at almost 230 planes, while its expected market capitalisation is over six times greater.
The business is going public at a time when the Chinese economy is cooling after years of investment-led and debt-fuelled breakneck growth. The world’s second-biggest economy grew by 6.9% in 2015, the slowest rate in 25 years.
However, aviation leasing is generally regarded as a counter-cyclical business and lessors sometimes benefit when their airline customers experience higher levels of risk aversion, according to aviation specialists.
That is especially true for BOC Aviation which has tended to expand its fleet during market downturns, acquiring new aircraft at a lower cost with the implicit backing of state-owned Bank of China, which bought the business in 2006.
In 2009, in the wake of the global financial crisis for example, the company grew its portfolio by 62% to 118 aircraft, recording the highest growth per year since Bank of China’s acquisition.
Terms
BOC Aviation’s IPO consists of 208.2 million shares equally split between new shares and existing shares sold by Bank of China. The shares on offer equate to 30% of the company’s enlarged share capital on a pre-shoe basis.
There is a standard 15% greenshoe option that made up entirely of existing shares held by Bank of China, which could potentially increase the free float to 34.5% post-shoe.
The offer price is fixed at HK$42 per share and implies a post-listing market valuation of $3.76 billion, representing a discount of 20.8% and 19.1% to the fair value estimates given by BOC International and Goldman Sachs, joint sponsors of the IPO, respectively.
BOC Aviation will also be valued at 1.25 times its end-2015 book value, compared with pure-play aircraft lessors such as AerCap and Air Lease, which trade at 0.85 times and 0.96 times their respective book values.
Syndicate bankers said the premium for what is a highly capital-intensive business could be justified by BOC Aviation’s lower funding costs, given its state-backed banking parent. The company also owns a relatively young fleet with an average aircraft age of 3.3 years, which means lower depreciation costs and better fuel efficiency.
Senior management of BOC Aviation highlighted the high return on equity as another of the IPO's key selling points. The company has achieved an average ROE of 15% since 2008 compared with AerCap at 12.5% and Air Lease at 7%.
According to one of the bankers familiar with the situation, BOC Aviation aims to distribute 30% of its net profit as dividends, which would translate into a dividend yield of 3.1%, based on estimated earnings of $384 million for the 2016 financial year.
By comparison, Air Lease’s dividend yield was 0.7% while AerCap did not declare any dividend last year.
Cornerstones
Similar to other recent billion-dollar IPOs in Hong Kong, BOC Aviation has lined up cornerstone investors to subscribe for $583 million, or 52% of the deal before the order book was opened to public institutional and retail investors.
But instead of an all-Chinese lineup, BOC Aviation brought in a number of foreign institutions, which differentiates it from other heavily cornerstoned companies criticised as “friends and family” deals.
International funds including Oman Investment Fund, Boeing and Fullerton Fund Management, a wholly-owned subsidiary of Singaporean state investment fund Temasek Holdings, have pledged to invest a total of $118 million in the IPO.
The other Chinese cornerstone investors are CIC, Silk Road Fund, CDB International, China Life Franklin, Hony Capital, Elion Resources Group, Fosun International, and China South Industries Assets Management.
All cornerstone investors are prohibited from selling their shareholdings for six months.
BOC Aviation will take institutional orders until May 23 while the company's senior management conduct global roadshows in Hong Kong, Singapore, New York, and London. The Hong Kong public offering will run from May 19 to May 24.
Joint sponsors of the IPO are BOC International and Goldman Sachs. They are also joint bookrunners with BNP Paribas, Citigroup, Morgan Stanley, and China Securities International.
For more information on BOC Aviation, please refer to FinanceAsia’s coverage here.
