Bank of China Plane Unit’s $1.1 Billion IPO Shows Asia Shiftby
BOC Aviation, bank offering 208.2 million shares in Hong Kong
Share listing on June 1 will be Asia’s second-biggest this yr
The skies above Asia will get more crowded during the next 20 years as airlines acquire planes to fly more passengers from developing economies. That timing couldn’t be better for aircraft leasing company BOC Aviation Ltd.
BOC Aviation, an arm of Bank of China, is scheduled to debut on the Hong Kong exchange Wednesday after raising HK$8.7 billion ($1.1 billion) in an initial public offering. The company sold new and existing shares at HK$42 apiece in Asia’s second-biggest IPO this year, and it plans to use the proceeds to help pay for new planes.
As airlines serving Asia-Pacific move to triple their fleet, they’re finding it can be cheaper to lease jets instead of buying them from Boeing Co. or Airbus Group SE. And for BOC, the leasing business can be more lucrative than running an airline, helping explain why conglomerates led by Hong Kong billionaires Li Ka-shing and Cheng Yu-tung are entering the field.
“The Chinese are getting into leasing as they see huge potential in their own market, as well as Asia-Pacific,” said Shukor Yusof, founder of Endau Analytics in Malaysia. “They are flush with cash.”
The share offer has attracted such investors as Boeing and sovereign wealth fund China Investment Corp., according to terms of the deal obtained by Bloomberg.
Airlines in Asia will fly more than 16,000 planes within 20 years, almost tripling the current number, according to estimates by Boeing. BOC Aviation, the biggest lessor in the region, has 270 planes, underscoring the growth prospects in what is set to be the world’s largest aviation market.
In the past 30 years, the number of aircraft owned by operating lessors jumped 11 percent annually, according to Singapore-based Phillip Capital Pte. That’s double the pace of growth in the commercial fleet, where 40 percent of jets are leased.
At the end of last year, BOC Aviation had 241 planes on order.
“In Asia Pacific, we’re seeing very good demand for aircraft,” Robert Martin, chief executive officer of the Singapore-based company, said in a May 18 interview. “When we talk to investors, what they said to us is that they really want an Asian champion to come to the market.”
The leasing business traditionally was dominated by companies including General Electric Co.-backed GECAS and ILFC. A new breed of Asian companies are coming in to challenge them. Among them are BOC and Sumitomo Corp.-backed RBS Aviation.
“There is no reason Asian growth should not be married with Asian financing,” said Will Horton, a Hong Kong-based analyst at the CAPA Centre for Aviation. “Dominance and forcing a pivot away from North America and Europe can follow.”
BOC’s customers include IAG SA’s Vueling Airlines SA, Iberia, Southwest Airlines Co., Aeroflot PJSC, EVA Airways Corp., Singapore Airlines Ltd.’s India affiliate Vistara and WestJet Airlines Ltd., according to Bloomberg Intelligence.
BOC Aviation is poised to benefit from rising demand in China, India and Southeast Asia, where higher incomes prompt more people to fly. India was the fastest-growing air travel market last year, expanding more than 20 percent, according to Montreal-based IATA. That compares with 10 percent for China and less than 5 percent for the U.S.
BOC Aviation purchases aircraft from manufacturers and then leases them to airlines for a monthly fee. After a certain period, the airline returns the aircraft, which typically is leased to another carrier.
Support from Bank of China makes financing cheaper by providing low-cost capital, giving BOC Aviation a “sharp competitive edge,” Fan Guohe, an analyst at Phillip Capital, said in a May 19 research note.
BOC’s cost of debt was about 2 percent in 2015, the lowest among its publicly traded peers, according to Bloomberg Intelligence. Based on its IPO price of HK$42, it will trade at 1.6 times book value, or “well in excess of currently listed lessors,” George Ferguson, an analyst with Bloomberg Intelligence, said in a May 26 note.
Tim Ross, the company’s head of investor relations, said Monday the price-to-book ratio will be lower than 1.25.
“BOCA stock will be very attractive,” Yusof said. “The company has low gearing, is nimble and cash rich, has excellent management and is able to procure aircraft at very good prices.”
Leasing a plane can be more lucrative than flying one. Operating margins at AerCap Holdings NV, the biggest listed lessor, averaged 34 percent the past three years, according to data compiled by Bloomberg. That compares with 7.8 percent for the Bloomberg World Airlines Index.
The BOC Aviation offering comes as IPO listings in Hong Kong are at their slowest pace in three years, according to data compiled by Bloomberg. So far this year, $5.5 billion has been raised, compared with $12.4 billion a year earlier.
China’s government is encouraging companies with aircraft-leasing businesses to look for opportunities overseas for expansion. China Aircraft Leasing Group Holdings debuted in Hong Kong in July 2014.
“Beijing’s ideal evolution is for Chinese lessors to lease to Chinese airlines, then foreign airlines, and then lease Chinese-made aircraft to the world,” Horton said.