China Development Bank has begun testing investor demand for an initial public offering of shares in its leasing business, hot on the heels of BOC Aviation which completed its listing earlier this month.
The proposed IPO in Hong Kong of China Development Bank Financial Leasing (or CDB Leasing) could raise $1 billion and will comprise both new and existing shares, a banker familiar with the situation told FinanceAsia.
CDB Leasing had been tipped to pip BOC Aviation to the post, having filed its listing application two weeks earlier than its competitor. But by reminding senior management to gauge investor interest more carefully and price shares more conservatively, it could be to CDB Leasing's advantage to go second after shares in BOC Aviation tanked by as much as 8.4% at one point after their June 1 debut.
BOC Aviation's shares have yet to close above their offer price and remained 5% below that level as of Tuesday close.
The underperformance of BOC Aviation may also prompt CDB Leasing to focus its marketing effort on its infrastructure leasing business, the company’s most profitable business last year, instead of its aviation leasing segment. China Development Bank is China's largest provider of infrastructure financing.
BOC Aviation's share price has performed poorly because the IPO was priced too aggressively, several fund managers have told FinanceAsia, citing the company's 30%-plus valuation premium over public aircraft leasing companies in the US.
As such, CDB Leasing may be inclined to price its IPO more conservatively, particularly in view of the background global uncertainties, namely Britain's looming EU exit vote and the possibility of another US interest rate hike.
Joint sponsors for the IPO are Citic CLSA Securities, Bank of America Merrill Lynch and Deutsche Bank.
History and business
CDB Leasing, formerly known as Shenzhen Leasing, was established by the Shenzhen municipal government in 1984 and focused primarily in aircraft leasing. The company was acquired by China Development Bank in 2008 and became the lender’s sole leasing platform.
The policy bank is CDB Leasing’s majority shareholder with an 89% stake, while HNA Group owns 8.4% and Xi’an Aircraft Industry holds 1.6%.
Leveraging on its parent’s leading position in the infrastructure financing business, CDB Leasing naturally entered into infrastructure leasing a year after the acquisition.
CDB Leasing currently owns infrastructure assets ranging from toll roads and rail transit to energy and affordable housing projects. They are primarily leased to local governments and state-owned contractors through sale-and-leaseback contracts.
As of the end of last year, the company provided leasing services for 19 toll roads across 12 provinces in China. These accounted for 46.8% of the company’s infrastructure assets.
Aircraft leasing is another key business line. As of the end of 2015, CDB Leasing had a portfolio of 180 aircraft leased to 40 airlines in 23 countries. It also co-managed 11 aircraft on behalf of other airlines and has entered into purchase contracts to acquire another 224 new planes.
According to FlightGlobal, CDB Leasing’s fleet value of $4.95 billion was approximately half of BOC Aviation’s portfolio as of the end of last year. CDB Leasing has seen its fleet value fall 5.8% last year, while BOC Aviation grew by 7.6% in the same period.
That could be a signal that CDB Leasing is gradually decreasing its exposure to aviation leasing and instead switching to higher margin infrastructure leasing. According to the company’s prospectus, the infrastructure leasing segment reported a 35.6% in pre-tax profit margin compared with aviation leasing's 23.7%.
CDB Leasing also leases a number of other assets including ships, commercial vehicles, construction machinery, commercial properties, and electronics. However, the business reported a significant loss of Rmb1 billion ($152 million) last year and almost entirely offset the gain from the aviation leasing business.
Selling points
The low cost of financing was one of the key selling points when BOC Aviation marketed its public offering last month. That applies to CDB Leasing too given that it is backed by a policy bank.
In addition, it is able to access interbank market funding because it is one of the few leasing companies regulated by the China Banking Regulatory Commission.
Its ability to secure low cost funding is underscored by its quasi-sovereign A+/A+/A1 credit rating, the highest among all global lessors and two notches higher than state-backed BOC Aviation's rating.
The average cost of CDB Leasing’s interest-bearing liabilities was 4.32% in 2015, which was higher than 2% for BOC Aviation. Still, the gap could potentially narrow in the future as nearly 60% of CDB Leasing’s borrowings are renminbi-denominated, which means it could benefit as the Chinese central bank continues to reduce its benchmark interest rate in order to boost economic growth.
CDB Leasing also enjoys a more diverse growth profile compared with BOC Aviation, given its infrastructure leasing business, which is expected to grow rapidly alongside China’s huge investment in the sector as part of the One Belt, One Road initiative.
According to Wind Information, China’s outstanding balance of contracted leased assets grew at a compound annual growth rate of 51.3% between 2009 and 2015. Yet the penetration rate of the leasing industry was only 5.1%, which is significantly lower than in developed countries, where it tends to exceed 15%, according to Frost & Sullivan.
China’s State Council issued guidelines for the development of the leasing industry in September last year, underscoring Beijing’s intention to promote the industry to help improve capital efficiency for operating companies.
As a public company, CDB Leasing could enjoy advantages in terms of corporate governance and funding against major competitors like ABC Leasing, CCB Leasing, Bocom Leasing, and ICBC Leasing, which have yet to sound out any plans for a public listing.
