2018 financial leasing sector outlook - gfgroup.com.hk · leasing is still an attractive sub-sector...

2018 Financial Leasing Sector Outlook

Nov 16, 2017 Equity Research | Financials

NIS to remain a concern in 2018

Wang Wen SFC CE No. BGL298 [email protected] +86 755 8826 1286 GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong

Sector view Neutral

The number of leasing companies continued to grow in 2017, but new lease value dropped for two consecutive quarters, mainly due to a surge in financing costs and strengthened supervision of local government financing and the financial system.

Borrowing costs increased significantly in 2017 and are expected to rise steadily in 2018, which will put pressure on leasing companies’ financing capabilities.

The economic recovery improved asset quality for leasing companies and led to a rebound in leasing asset yields in 1H17, resulting in improved NIS in 2017.

Key themes

Market interest rates to continue to rise Given a rise in interest rates globally, neutral

monetary policy and continuous financial deleveraging, we expect market interest rates to continue to rise. Leasing companies generally gain a larger NIS amid rising interest rates and mild inflation. However, with the implementation of supply-side policies, the negative consequences on economic growth may prevent a significant increase in leasing asset yields. We expect leasing companies to achieve relatively stable NIS in 1H18. Possible tightening of industry regulation There have been market rumors that the CBRC

may replace the MOC in the supervision of leasing companies. Given highly homogeneous business models, we see a trend towards the integration of regulation, against the backdrop of tightening regulation. Possible impacts include leasing businesses becoming subject to more strict regulation to prevent them involving local government financing platforms & channel business. In addition, industry concentration could increase substantially as regulation tightens, and some leading leasing companies may become more competitive.

Valuation analysis

HK-listed leasing companies are trading below historical average valuations, reflecting

market concerns about a deterioration in NIS. The industry is trading at 9.5x 2016E P/E, compared with a 2-year average of 11.5x; industry P/B is at 1.3x, compared with a 2-year average of 1.4x.

Investment strategy

Under the pressure of narrowing NIS as market interest rates continue to increase while the China economy slows moderately, we remain positive on leasing companies with diversified business operations such as Universal Medical and Far East Horizon. In addition, aircraft leasing is still an attractive sub-sector given its long lease durations, the large proportion of prepaid interest, predictable cash flows, relatively stable lease rates, and given the security deposit aircraft leasing companies hold even if airlines default. We recommend BOC Aviation for long-term investors given its promising fleet expansion, steady earnings growth outlook, and relatively cheap valuation.

Top picks

Universal Medical (2666 HK, Buy) With China General Technology as its major shareholder

and CITIC Capital as its strategic partner, Universal Medical has extensive global resources and medical service experience. We believe the company will maintain steady growth in its leasing business and good asset quality, and we see strong potential in its hospital operation business through PPP projects and active participation in SOE-affiliated hospital reform. We maintain our Buy rating and target price of HK$8.60, based on 10x 2018E P/E and 1.7x 2018E P/B.

Risks

Upside risks: Stronger-than-expected policy support; sharp fall in financing costs. Downside risks: Surge in non-performing assets at leasing companies on a deteriorating

domestic economy; sharper-than-expected rise in borrowing costs.

mailto:[email protected]

Nov 16, 2017

2

2018 Sector Outlook

Increased competition amid economic recovery

Industry competition continues to intensify

The number of leasing companies continued to grow in 1H17 The number of financial leasing

companies in China continued to increase in 2017, from 7,136 at the end of 2016 to 8,580 at the

end of 3Q17. However, QoQ growth slowed to 7%, 8% and 4% respectively in 1Q/2Q/3Q17, the

first time it has been below 10% in the past three years. Among the newly established leasing

companies, 7 have received a financial leasing license from the China Banking Regulatory

Commission (CBRC) as of end-1H17, 19 have been registered as domestic-funded leasing

companies, while the rest are registered as foreign-funded leasing companies. The foreign-funded

companies accounted for 96% of the total, mainly due to it being easier to obtain this type of

license given the less stringent registration requirements. This continued growth means the

industry has been filled with new entrants, and has seen intensifying competition and the

weakening of the overall bargaining power of leasing companies.

Despite continued growth in outstanding lease balance, new lease value dropped in 3Q17

Outstanding lease balance amounted to Rmb5,750bn at the end of 9M17, up 16% YoY. However,

quarterly new lease value was reported at Rmb420bn as of end-3Q17, down 18% YoY.

Specifically, new lease value recorded strong growth in 1Q17 amid a recovery in corporate

financing, but dropped for the next two consecutive quarters, mainly due to a surge in financing

costs and strengthened supervision of local government financing and the financial system.

Figure 1: Number of leasing companies continues to rise Figure 2: Quarterly new lease value (Rmb bn)

Sources: Wind, GF Securities (Hong Kong)

Raised borrowing costs

Loans and bonds are the main two forms of financing for leasing institutions. Besides this, leasing

companies regulated by the CBRC can turn to the interbank financing market for short-term

liquidity. Many leasing companies have raised their proportion of direct financing to take

advantage of the low interest rates in both onshore and offshore bond markets in the past two

years. However, with the Fed rate hike in March and June, interest rates continued to rise for US

dollar financing. Meanwhile, with regulation tightening and deleveraging among Chinese financial

institutions, financing costs in China also increased substantially. The issuance rate of 1Y bills

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CBRC regulated leasing companies Domestic funded leasing companies

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Nov 16, 2017

3

2018 Sector Outlook

with AAA ratings increased 215bps from the end of Sept 2016 to the end of Sept 2017. Although

the PBoC maintained stable benchmark lending rates, stringent regulation has put pressure on

credit creation by banks and forced a roll-back in off-balance-sheet financing, resulting in a surge,

and volatility, in interbank borrowing costs as well as increasing renminbi loan rates. Raised

borrowing costs put pressure on leasing companies’ financing capabilities and push leasing

companies to seek projects with better returns.

Figure 3: Declining corporate bond financing vs surge in bill issuance Figure 4: Rmb loan rate rebounded


Rebound in leasing asset yield and improved asset quality

Rebound in leasing asset yield amid economic recovery China posted relatively strong

economic growth in the first half, mainly due to: 1) an upward inventory cycle: industrial inventory

rebounded from a trough, together with supply side contractions led by regulation, driving the

price of industrial products up and promoting corporate earnings to recover, which in turn

strengthened this positive cycle by continuing to replenish inventories; 2) the global economy

continued to recover which impacted exports positively from 2016; 3) Real estate investment has

also recovered since 2016 and supported strong demand for products related to the real estate

industry chain; 4) PPI has surged rapidly since 2016, significantly improving the profitability of

upstream enterprises. The stronger-than-expected economic recovery helped leasing companies

transfer their increased costs to clients in 1H17. As their interim results indicated, Universal

Medical, CDB Leasing and Far East Horizon all posted an improved NIS compared with that in

2016. Despite GDP growth dropping below 7% to 6.8% in 3Q17, along with decreasing industrial

value-added and property sales volume, annual GDP growth of above 6.7% is already a foregone

conclusion given GDP growth of 6.9% YoY as of end-9M17. In fact, the IMF raised its GDP

forecasts to 6.8% and 6.5% for 2017/18 respectively, indicating a more optimistic expectation. We

expect the economic recovery and better profitability at companies to provide support for the

annual leasing asset yield and to result in an improved annual NIS for leasing companies

compared with 2016.

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Weighted average RMB loan rate(%)

Benchmark lending rate（1-3Y,%）

Nov 16, 2017

4

2018 Sector Outlook

Figure 5: Quarterly GDP & PMI Figure 6: NIS of listed leasing companies rebounded in 1H17


Pace of NPA formation slowing Based on quarterly data on commercial banks released by the

CBRC, NPL ratios at commercial banks in China remained at 1.74% for 3 consecutive quarters.

Meanwhile, special mention loans have significantly decreased since 3Q16 and pass loans

continued to increase, indicating overall asset quality improvements. Based on the data released

by listed banks, the overall NPL ratio for listed banks was 1.64% as of end-Sept, down by 2bps

from end-June. The pace of NPL formation slowed significantly as the proportion of newly

generated NPLs (write-offs added back) decreased by 27bps QoQ to 0.47%. Based on the interim

results from Far East Horizon, Universal Medical and CDB Leasing, there are signs of the NPA

ratio at leasing companies leveling off, as the ratio edged down from 0.99% at end-2016 to 0.95%

at end-1H17 for Far East Horizon, and 0.81% to 0.78% for Universal Medical. The ratio for CDB

Leasing increased slightly from 0.98% to 1.11%, but if write-offs are added back, the newly

generated NPA decreased as well. Given the NPA at listed (equipment) leasing companies is

typically lower than the average NPL ratio for commercial banks, we expect the pace of NPA

formation to continue to slow in the second half of 2017.

Figure 7: NPL ratio and proportion of loans labeled as “special mention” at commercial banks

Figure 8: Leasing companies’ NPA ratio


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NIS: Universal Medical NIS: CDB Leasing

NIS: Far East Horizon

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NPL ratio (%) "Special mention" loans (%)

"Pass" loans (%)

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NPA ratio: Far East Horizon NPA ratio: CDB Leasing

NPA ratio: Universal Medical

Nov 16, 2017

5

2018 Sector Outlook

Aircraft leasing market maintains steady growth

The fundamentals and outlook for the aircraft leasing industry remain stable. Growth in the air

transport industry is the key driver of aircraft leasing demand, and fleet expansion at listed aircraft

leasing companies is quite promising as aircraft deliveries typically lag orders by 1-3 years.

Furthermore, aircraft leasers have stronger pricing power over the leasing yields of operating

leases than other equipment leases as a result of higher entry barriers.

Despite weakness in the global economy, the air transport industry has maintained relatively

strong performance. YoY available seat kilometers (ASK) and revenue passenger kilometers

(RPK) growth have remained stable at around 6%, with the ASK-RPK gap implying a supply-

demand equilibrium. The market value of an aircraft cyclically fluctuates around its base value

which declines gradually over time. The ratios of market value to basic value for the best-selling

737 and A320 models have recovered from their lows and remained at a prospering range,

indicating strong aircraft demand and suggesting that leasing companies can sell their aircrafts at

favorable prices.

In China’s air transport market, steady growth in passenger volume and turnover (calculated as

passenger volume multiplied by traveling distance) have provided strong support for the domestic

aircraft leasing business. Air passenger volume totaled 409.5m in 9M17, up 12.5% YoY, while

passenger turnover totaled 705.6bn passenger-kilometers in the same period, up 13%.

Figure 9: Stable YoY growth in ASK and RPK Figure 10: Aircraft market value to base value ratio at cyclically high level


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Nov 16, 2017

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2018 Sector Outlook

Figure 11: YoY passenger volume and turnover growth in China


Long-term prospects

Leasing penetration rate will continue to increase

According to the Global Leasing Report issued by White Clarke Group, annual leasing volume in

China has surpassed Germany, the UK and Japan to become the world’s second largest leasing

market, with the US remaining the largest. However, the leasing penetration rate of 4% in China in

2015 is still far below those of developed countries, which range from 9.6% to 40%. The leasing

penetration rate was calculated in the report based on total new leasing business volume divided

by total investment, excluding real estate. If we take newly-added leasing contract amount divided

by equipment purchasing in fixed assets investment (固定资产投资完成额:设备工器具购置), the

penetration rate was 8% in 2016, meaning there is still potential for a continuous rise.

Figure 12: Leasing penetration rates by country (%)


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Nov 16, 2017

7

2018 Sector Outlook

Direct lease and operating lease mix to improve

Financial leasing accounts for the majority of leasing business in China at the moment with

operating leases accounting for less than 10% (according to media reports). Furthermore, sales-

and-leaseback makes up over 85% while direct leases less than 15% in the financial leasing

business. As the number of leasing companies continues to increase, price competition has

intensified in the sales and leaseback business with a similar financing nature as with bank loans.

However, direct lease and operating lease businesses represent the future development trend as:

1) the leasing company could provide diversified leasing services in direct lease and operating

lease, which have higher entry barriers, with direct leasing requiring the leaser to have

professional knowledge of the lease subject and operating lease further requiring asset

management and residual disposal capabilities. 2) Direct lease and operating lease could better

support the real economy with more focus on leased assets. As the 19th CPC National Congress

report stated, the government will deepen financial system reform to enhance the financial

institutions’ capabilities to serve the real economy.

Key themes for the next 3-6 months

Market interest rates to continue to rise

Given a rise in interest rates globally, neutral monetary policy and continuous financial

deleveraging, we expect market interest rates to continue to rise in the next 3-6 months.

Rise in global interest rates As the global economy continues to recover, central banks have

started to gradually adjust their monetary policy to quit the unprecedented easing, driving a

rebound in interest rates. Canada has twice raised its benchmark interest rates this year and the

UK also announced an interest rate hike of 25bps in Nov in response to its rising inflation rate

(above 3% since Sept). Mark Carney, the chairman of the Bank of England, said there may be 2

more interest rate rises in the next 3 years. The ECB announced it will cut its bond purchases in

half from Jan 2018. In the US, steady economic growth has urged the Fed to push forward rate

hikes and normalize its balance sheet – a Dec Fed rate hike currently has a probability of over

90%, according to market expectation. Rebounding global market interest rates have a positive

impact on interest rates in China. After the Fed rate hike in Dec 2016 and March 2017, the PBoC

increased its open market operation rates (repurchase rates) and SLF rates in Jan and March

2017. Although this pattern did not occur after the Fed hiked rates in June 2017, the market is still

concerned that the PBoC may follow the Dec Fed rate hike.

Nov 16, 2017

8

2018 Sector Outlook

Figure 13: Some government bond rates have risen since Sept Figure 14: Government bond rate spread between China and the US

Sources: Wind, GF Securities (Hong Kong) Sources: Wind, GF Securities (Hong Kong)

Neutral monetary policy As property sales volume has declined and industrial value-added has

decreased along with ongoing supply-side constraints, Chinese economic growth slowed in the

second half of 2017, but was still better than expected. The steady economic recovery provided

the basis for neutral monetary policy. In terms of inflation, PPI remained high while CPI was

continuously below the target rate of 2%. The market expects an upward spiral in raw material

costs to slowly transfer to the downstream industry chain, thus in turn pushing up non-food

products CPI and making a continued rise in CPI possible in 2018. In such case, the neutral

somewhat tight monetary policy stance should continue.

In addition, the PBoC rephrased its description of the economic situation from “generally steady”

(总体平稳) to “steady and sound” (稳中向好) during the 3Q17 monetary policy regular meeting.

Based on this judgment, the PBoC is likely to target broadly stable liquidity through its “cut the

peaks and fill in the valley” operation.

Figure 15: CPI and PPI


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Nov 16, 2017

9

2018 Sector Outlook

Ongoing financial regulation and deleveraging In 1H17, deleveraging in the financial system

led to a rapid rise in interbank interest rates. According to the report from the 19th CPC National

Congress as well as speaking with key regulatory officials, the strict regulatory environment will

continue to be the main tone in the near future. As the 19th CPC National Congress report stated,

the government will deepen the financial system, aiming to better support the real economy,

explore the “double pillar” regulatory framework of monetary policy and macro-prudential policy,

deepen market-oriented reform in interest rates and exchange rates, and improve the financial

regulatory system in order to keep the bottom line of no systemic financial risks. Guo Shuqing, the

chairman of CBRC, also said that more strict financial supervision is the overall trend, signaling

that risk control is a top priority. In other words, the main purpose of regulation is to guard against

risks and stabilize the market, which inevitably impacts liquidity negatively. As shown in Figure 16,

the PBoC has established an interest rate corridor through open market operations (OMP rate) as

well as innovative liquidity management tools such as SLF, thus successfully keeping the DR007

target rate (interest rate for the 7-day pledged reverse repo in depository financial institutions)

fluctuating within the interest rate corridor, demonstrating a stable and neutral monetary policy

stance. However, under the combined effect of tightening regulation and financial deleveraging,

the R007 (7-day interbank pledged repo rate) has been more volatile, which could better reflect

overall market liquidity as it includes depository financial institutions and non-banking financial

institutions.

Figure 16: Interest rate corridor


NIS could remain stable Leasing companies generally gain a larger NIS amid rising interest

rates and mild inflation, as the growing economy enables companies to bear higher financing

costs. However, economic growth may continue to slow given the negative impact which has

resulted from supply-side policies aimed at reducing inefficient investment and promoting growth

rebalancing, including property policy tightening, manufacturing capacity cuts, financial

deleveraging, the proposed deleveraging of local governments and state-owned enterprises by

the National Financial Work Conference, and the recent environmental inspection. With

implementing these policies, we could see negative consequences on economic growth, which

may prevent a significant increase in leasing asset yields, together with rising mild inflation

expectations, and we believe leasing companies may achieve relatively stable NIS in 1H18.

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1DR007 R007OMP rate(Reverse Repo: 14 days) OMP rate(Reverse Repo: 7 days)SLF rate:overnight SLF rate:7 days

Nov 16, 2017

10

2018 Sector Outlook

Possible industry regulation tightening

Licenses for companies in the financial leasing business can be categorized into the CBRC-

administered “Financial Leasing” license (capitalized to distinguish from “financial leasing” in the

general sense, same hereinafter), and the MOFCOM-administered “Foreign-Funded Leasing” and

“Domestic-Funded Leasing” licenses. Companies with the “Financial Leasing” license tend to

have greater capital strength given the nature of non-banking financial institutions while the

leasing companies regulated by MOFCOM are general industrial and commercial enterprises.

There have been market rumors since July that the CBRC may replace the MOC in supervising all

leasing companies in the future.

MOC-regulated leasing companies carry out similar business as financial leasing companies but

have an easier license application and fewer regulatory requirements. As Li Keqiang, the premier

of the State Council, pointed out at the National Financial Work Conference, all financial business

should be supervised in order to enhance financial regulation. Given highly homogeneous

business models regardless of the type of business license, we see a trend towards the

integration of regulation against the backdrop of tightening regulation.

However, we are unlikely to see a regulation shift immediately due to the difficulties of

implementation. The number of domestic and foreign-funded leasing companies regulated by the

MOC was over 8,000 as of end-1H17, with a leasing contract balance of Rmb34,85bn. The CBRC

would be severely understaffed in supervising over 8,000 leasing companies given only 66

Financial leasing companies need to be covered now. There are some guesses that the

government may take measures to strengthen regulatory requirements, clean-up zombie

companies and promote industry mergers then do the transfer of regulation authority. It is also

possible that the CBRC issues leasing industry practices, standards and regulation requirements

but entrusts the local financial services office to carry out daily management.

No matter what form of regulation is adopted, supervision is sure to be strengthened for the over-

8,000 leasing companies regulated by the MOC. Possible impacts include: 1) leasing business

operations will be subject to more strict regulation to prevent leasing businesses involving local

government financing platforms and channel businesses which act as shadow banking; 2) overall

risk control will be strengthened through specific requirements on capital, liquidity and internal

controls; 3) qualified leasing companies may obtain financing support from the regulation change.

For example, they may be allowed to enter the interbank financing market for short term liquidity

or issue financial bonds with the approval of the CBRC. 4) Industry concentration could increase

substantially with regulation tightening while some leading leasing companies may become more

competitive.

Nov 16, 2017

11

2018 Sector Outlook

Figure 17: Comparison of three types of leasing company


Valuation analysis

Market performance review for the leasing sector Listed leasing company performance was

relatively weak in 1H17, with the shares of Far East Horizon, CDB Leasing, CALC, BOC Aviation

and Universal Medical rising by 16.6%, -6.0%, 3.2%, 14.2% and 30.5% respectively, compared to

33.6% for the HSI. Listed leasing companies mostly underperformed in 2Q17, mainly due to

deteriorating NIS expectations amid rising interest rates. Share price performance of listed leasing

companies later diverged significantly following interim results announcements. CALC continued

to decline due to its disappointing 1H17 results while Universal Medical and Far East Horizon

rebounded on steady growth.

Figure 18: 10M17 performance for Far East Horizon (3360 HK) Figure 19: 10M17 performance for CDB Leasing (1606 HK)


66

2,115

224

1,730

7,928

1,755

0% 20% 40% 60% 80% 100%

No of companies

Leasing contractbalance(bn rmb)

CBRC regulated leasing companies Domestic funded leasing companies

Foreign funded leasing companies

6.00

6.50

7.00

7.50

8.00

8.50

9.00

Far East Horizon HSI(Comparable)

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

CDB Leasing HSI(Comparable)

Nov 16, 2017

12

2018 Sector Outlook

Figure 20: 10M17 performance for CALC (1848 HK) Figure 21: 10M17 performance for BOCA (2588 HK)


Figure 22: 10M17 performance for Universal Medicine (2666 HK) Figure 23: Yields (including dividends)


Valuation HK-listed leasing companies are now trading at relatively cheap valuations, except

Universal Medical, either on a P/B or P/E basis, reflecting market concerns about deterioration in

NIS at leasing companies. The industry is trading at 9.5x 2016 P/E (using closing prices on Nov

10, 2016), compared with a 2-year average of 11.5x; industry P/B is at 1.3x, compared with a 2-

year average of 1.4x. The industry P/E and P/B were calculated as the average of the five listed

leasing companies: Far East Horizon, CDB Leasing, Universal Medical, CALC and BOC Aviation,

which recorded 2-year average P/E ratios of 8.5x, 15.9x, 12.3x, 11.6x and 9.2x respectively, with

2-year average P/B ratios of 1.1x,1.1x, 1.5x, 2.2x and 1.1x.

8.00

8.50

9.00

9.50

10.00

10.50

11.00

11.50

CALC HSI(Comparable)

37.00

39.00

41.00

43.00

45.00

47.00

49.00

51.00

BOCA HSI(Comparable)

6.00

6.50

7.00

7.50

8.00

8.50

Universa Medical HSI(Comparable)

Rating 1H17 % chg YTD % chg

Far East Horizon 3360 HK Buy 9.4 16.6

BOC Aviation 2588 HK Buy 12.6 14.2

CDB Leasing 1606 HK Hold -5.0 -6.0

CALC 1848 HK Hold 11.7 3.2

Universal Medical 2666 HK Buy 1.5 30.5

HSI HSI HI 18.2 33.6

Nov 16, 2017

13

2018 Sector Outlook

Figure 24: P/E valuations for HK-listed leasing companies Figure 25: P/B valuations for HK-listed leasing companies

Sources: Wind, GF Securities (Hong Kong) Sources: Wind, GF Securities (Hong Kong)

Investment strategy

A stronger-than-expected economic recovery helped leasing companies to improve asset quality

and drove leased asset yields in 1H17. However, the rapid rise in market interest rates has led to

an increase in funding costs and thus put pressure on NIS for FY2017. Looking into 2018, NIS

movements remain a major concern, and will depend on a combination of economic growth and

inflation, as well as monetary policy stance.

As discussed above, market interest rates are likely to rise continuously both in US dollar

financing and Rmb financing. Specifically, for the major two financing methods: 1) interest rates

for commercial loans should be reset at the beginning of 2018; 2) issuance rates for bonds are

expected to increase moderately. In addition, leasing companies regulated by the CBRC could

turn to the inter-bank market for short term liquidity. Inter-bank market interest rates suffered most

under tightening regulation and financial deleveraging, which is expected to continue in 1H18.

Leasing companies generally gain a larger NIS amid rising interest rates and mild inflation, as

economic growth enables companies to bear higher financing costs. However, economic growth

may continue to slow in 1H18 given the negative impact from supply-side policies. With the

implementation of these policies, there may be negative consequences on economic growth going

forward, preventing a significant increase in leasing asset yields. Together with a mild rise in

inflation expectations, we expect leasing companies to achieve relatively stable NIS in 1H18,

compared with 2H17.

Under the pressure of narrowing NIS as market interest rates continue to increase while the China

economy slows moderately, we remain positive on leasing companies with diversified business

operations such as Universal Medical and Far East Horizon.

In addition, aircraft leasing is still an attractive sub-sector given its long lease durations, the large

proportion of prepaid interest, predictable cash flows, relatively stable lease rates, and given the

security deposit aircraft leasing companies hold even if airlines default. As most fleets consist of

0.0000

5.0000

10.0000

15.0000

20.0000

25.0000

Far East Horizon CDB Leasing Universal Medical

CALC BOC Aviation

0.0000

0.5000

1.0000

1.5000

2.0000

2.5000

3.0000

3.5000

Far East Horizon CDB Leasing Universal Medical

CALC BOC Aviation

Nov 16, 2017

14

2018 Sector Outlook

aircraft produced by the two main manufacturers, aircraft assets can be conveniently reallocated

to other locations. The global nature of the aircraft leasing business, with the majority of

transactions denominated in US dollars, means that leasing companies in other countries are also

comparable. In fact, the P/E valuations of HK-listed aircraft leasing companies have been cheaper

than their A-share and even US-listed counterparts. We recommend BOC Aviation for long-term

investors given its promising fleet expansion and steady earnings growth outlook.

Figure 26: Peer comparison

Sources: Bloomberg, GF Securities (Hong Kong) estimates Note: Updated as of Nov 10, 2017

(HK$ bn) 2016 2017E 2016 2017E 2016 2017E

3360 HK Far East Horizon 28.7 227 30.4 10.3 1.9 8.0 7.4 1.0 1.0 13.0 13.7

1606 HK CDB Leasing 22.8 199 26.3 6.7 1.5 12.9 9.6 1.0 0.8 8.4 9.3

2666 HK Universal Medical 13.8 37 7.9 1.9 0.7 11.2 6.4 1.5 1.6 14.0 15.7

URI N United Rentals 96.5 104 15.2 23.0 2.0 17.6 14.4 5.4 5.3 36.2 40.5

CAR O AVIS BUDGET GROUP 21.2 163 1.2 31.8 -0.8 15.1 12.7 14.3 8.0 49.4 73.2

R N Ryder System 32.6 87 16.4 27.6 0.7 14.6 17.5 1.9 2.0 13.0 11.7

AAN N AARON' S INC 20.2 20 12.0 13.0 0.7 15.5 15.0 1.5 1.6 9.8 10.6

MGRC O MCGRATH RENTCORP 8.6 9 3.1 1.6 0.2 31.9 23.9 2.4 N/A 9.9 11.3

HEES O H&E EQUIPMEN T SERVICE 9.4 10 1.1 3.7 0.1 50.8 22.4 5.8 3.7 26.1 25.5

19.8 14.4 3.9 3.0

(HK$ bn) 2016 2017E 2016 2017E 2016 2017E

1848 HK CALC 5.6 34.0 3.1 0.9 0.2 8.4 8.5 1.9 1.7 24.4 21.0

2588 HK BOC Aviation 29 112 28 5 1.9 7.7 7.7 1.0 1.0 14.4 13.7

000415 CH Bohai Financial 47 356 44 23 1 19.3 14.7 1.4 N/A 7.8 8.9

AL N Air Lease 35 116 28 6 1.5 10.1 12.6 1.0 1.2 11.7 11.6

AYR N AIRCASTLE LTD 14 55 14 3 0.3 11.0 11.5 0.9 1.0 8.3 8.4

AER N Aercap 71 320 67 20 4.2 6.1 8.3 0.9 0.9 12.4 12.3

10.4 10.5 1.2 1.2

P/E P/B ROE (%)

Average

P/E P/B ROE (%)

Average

Net profit

Net profit

Aircraft Leasing Market

Cap

Total

assetsEquity Revenue

Equipment Leasing Market

Cap

Total

assetsEquity Revenue

Nov 16, 2017

15

2018 Sector Outlook

Universal Medical (2666 HK)

Buy (maintained)

Target price: HK$8.60

Fast growing medical services provider

Figure 27: Stock performance Figure 28: Key data

Sources: Bloomberg

Figure 29: Stock valuation

Sources: Bloomberg, GF Securities (Hong Kong)

Fast growing medical services provider With China General Technology as its major

shareholder and CITIC Capital as its strategic partner, Universal Medical has extensive global resources and medical service experience. Its three major business segments are financial leasing, medical equipment & financing advisory services, and clinical department upgrade services. The company has maintained rapid growth in assets, revenue and net profit since 2012, with a CAGR of ~46% for both its assets and revenue during 2012-16. Total assets increased from Rmb28.9bn as of end-2016 to Rmb33.4bn as of end-3Q17, up 16%. 9M17 operating income amounted to Rmb2.4bn, an increase of 25% YoY; profit before tax was reported at Rmb1.2bn, up 30% YoY. Efficient platform for integrating healthcare resources Relying on the support from its major

shareholder China General Technology, Universal medical has: 1) established strategic partnerships with 68 leading international healthcare institutions and more than 200 experts across various fields; 2) developed strong global medical equipment importing capabilities, acting as the exclusive agent for 19 medical device categories in China, covering a total of over 200 medical products, and; 3) built a large client base of more than 1,400 hospitals. Its stroke unit upgrade service model has become an example for promoting business development through resource integration. Steady growth in its financial leasing business Financial leasing is the company’s core

business with a gross profit contribution of over 60%; most assets are allocated in the healthcare and education industries. Thanks to its strong pricing power and improving financing structure, the company has maintained a higher-than-peers leasing asset yield. The quality of its leasing assets is solid with a non-performing asset ratio below 1% and a zero historical write-off ratio. Hospital operation business to take off In Aug 2016, the company signed a contract with the

First Affiliated Hospital of Xi’an Jiaotong University to co-establish an International Land Port Hospital under the PPP model. Total investment is expected to be no more than Rmb2bn, and the company will be able to generate new revenue sources from its construction & operation rights and supply chain business. We estimate that the revenue and net profit of the project will increase rapidly and that the project will become an important source of revenue and profit for the company

6.00

6.50

7.00

7.50

8.00

8.50

Universa Medical HSI(Comparable)

Nov 10 close (HK$) 8.02

Shares in issue (m) 1716

Major shareholders China Gen Tech (37.73%)

Market cap (HK$ 100m) 138

3M avg. vol. (m) 11.1

52W high/low (HK$) 8.24/6.05

Revenue

(Rmb m)

Net profit

(Rmb m)

EPS

(Rmb)

EPS

YoY

P/E BPS

(Rmb)

P/B ROE

2015 2193 659 0.38 -79% 18.5 3.4 2.1 15.9%

2016 2701 872 0.51 32% 14.0 3.8 1.9 14.0%

2017E 3539 1100 0.64 26% 11.1 4.3 1.7 15.8%

2018E 5027 1301 0.76 18% 9.4 4.6 1.6 17.2%

2019E 6641 1506 0.88 16% 8.1 4.9 1.5 18.6%

Nov 16, 2017

16

2018 Sector Outlook

from 2020. In addition, the project with Handan First Hospital and ongoing reform of SOE-affiliated hospitals will further promote the development of the company’s hospital operation business in the near future. Maintain Buy rating with TP of HK$8.60 Due to intensifying competition and rising market

interest rates, the company’s NIS has come under pressure in 2H17. Its hospital operation business will begin to generate revenue in 2H17 and is expected to be a significant business segment from 2020. We expect revenue growth of 31%, 42% and 32% and net profit growth of 26%, 18% and 16% in 2017/18/19. As the contribution of its hospital operation business increases, we expect the company’s P/E valuation will pick up to reflect the business nature change as well as an ROE recovery over the next three years. We maintain our Buy rating and target price of HK$8.60, based on 10x 2018E P/E and 1.7x 2018E P/B. Risk factors include disappointing growth in the company’s financial leasing business, slower-

than-expected progress in its hospital operation projects, and changes in healthcare policies.

Figure 30: Financial statements

Sources: GF Securities (Hong Kong)

Year ended 31 Dec (Rmb m) 2015 2016 2017E 2018E 2019E Year ended 31 Dec (Rmb m) 2015 2016 2017E 2018E 2019E

Cash and cash equivalent 1,866 1,272 848 1,000 986 Revenue 2,193 2,701 3,539 5,027 6,641

Restricted deposits 154 660 1,047 831 980 Cost of sales -885 -966 -1,400 -2,491 -3,655

Inventories 3 2 7 8 10 Gross profit 1,309 1,735 2,139 2,535 2,987

Loans and accounts receivable 21,317 26,761 32,243 38,327 45,225 Other income and gains 59 29 40 47 55

Prepayments, deposits and other receivables 143 41 70 83 98 Selling and distribution costs -214 -277 -328 -386 -451

PPE 90 99 104 107 105 Adiministrative expenses -246 -277 -296 -349 -444

Derivative financial assets 0 8 7 8 10 Other expenses -7 -3 -35 -50 -66

Goodwill 0 0 9 9 9 Interest expenses 0 0 0 0 0

Intangible assets 0 0 441 1,011 1,410 Profit Before tax 900 1,206 1,520 1,798 2,081

Available-for-sale investments 65 65 48 57 68 Income tax epxense -242 -334 -420 -497 -575

Deferred tax assets 22 54 74 88 104 Profit for the year 659 872 1,100 1,301 1,506

Other assets 0 3 4 5 6 Attributable to owners 659 872 1,100 1,301 1,506

Total assets 23,658 28,965 34,902 41,534 49,010 Attributable to non-controlling interests 0 0 0 0 0

Trade payables 95 194 263 321 386

Other payables and accruals 2,093 2,576 2,824 3,444 4,142

Interest-bearing bank and other borrowings 15,458 19,485 24,359 29,711 35,730 Year ended 31 Dec (Rmb m) 2015 2016 2017E 2018E 2019E

Tax payable 65 69 55 67 81 Cash flow from operating activities

Derivative finanical l iabil ities 0 0 0 0 0 Net income 659 872 1,100 1,301 1,506

Defferred tax l iabilities 0 0 0 0 0 Add: Deprecation of PPE 15 22 33 58 82

Other l iabilities 65 65 49 59 71 Net working capital changes -6,088 -4,304 -5,423 -5,324 -6,450

Total l iabil ities 17,777 22,390 27,550 33,602 40,409 Others 94 1,028 220 260 301

Equity 5,881 6,574 7,353 7,932 8,600 Cash generated from operations -5,321 -2,382 -4,069 -3,705 -4,561

Equity attributable to owners 5,881 6,574 7,344 7,810 8,398 Cash flow from investing

Share capital 4,328 4,328 4,328 4,328 4,328 Net purchase of PPE 29 20 30 30 30

Reserves 1,553 2,247 3,017 3,482 4,071 　　Minus: Net investment 44 441 450 600 450

　Minor interests 0 0 8 122 202 Others 1 1 0 0 0

Net cash flows used in investing -72 -460 -480 -630 -480

Cash flow from financing

Year ended 31 Dec 2015 2016 2017E 2018E 2019E Net changes of debt 4,483 2,267 4,386 4,816 5,417

Drivers Share issuance 2,776 0 0 0 0

NIS(Recaculated) 1.4% 2.6% 3.1% 3.0% 2.9% Minus: share repurchase 0 0 0 0 0

NIM(Recaculated) 3.3% 4.2% 4.5% 4.3% 4.2% 　 dividend paid -8 -188 -261 -330 -390

Credit cost 0.18% 0.24% 0.17% 0.14% 0.13% Others -582 97 0 0 0

Asset quality Net cash flows from financing 6,668 2,175 4,125 4,486 5,027

Non Performing assets ratio 0.8% 0.8% 0.9% 0.9% 0.9% Net cash flows:

Provision coverage ratio 171.5% 183.9% 180.0% 180.0% 180.0% FX adjustment 137 73 0 0 0

Profitability 0.0% 0.0% 0.0% 0.0% 0.0% Other adjusts 0 0 0 0 0

ROE 15.9% 14.0% 15.8% 17.2% 18.6% Net (decrease)/increase in cash and cash equivalents 1,412 -593 -424 152 -14

ROA 3.3% 3.3% 3.4% 3.4% 3.3% 　　Cash and cash equivalents at beginning of year 454 1,866 1,272 848 1,000

Leverage(A/E) 4.0 4.4 4.7 5.2 5.7 　　Cash and cash equivalents at end of year 1,866 1,272 848 1,000 986

Valuation

P/E 18.5 14.0 11.1 9.4 8.1

P/B 2.1 1.9 1.7 1.6 1.5

Dividend yield(%) 1.5 2.1 2.7 3.2 3.7

Blance sheet Income statement

Cash flow statement

Financial Ratios

Nov 16, 2017

17

2018 Sector Outlook

Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months

Company ratings

Buy Stock expected to outperform benchmark by more than 15%

Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15%

Hold Expected stock relative performance ranges between -5% and 5%

Underperform Stock expected to underperform benchmark by more than 5%

Sector ratings

Positive Sector expected to outperform benchmark by more than 10%

Neutral Expected sector relative performance ranges between -10% and 10%

Cautious Sector expected to underperform benchmark by more than 10%

Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report.

Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited (“GF Securities (Hong Kong)”) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report.

Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities (Hong Kong). The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. No representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness of the information contained in the research report. GF Securities (Hong Kong) accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities (Hong Kong) or its affiliates. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the report. Copyright © GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. © GF Securities (Hong Kong) Brokerage Limited. All rights reserved. 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: +852 3719 1111 Fax: +852 2907 6176 Website: http://www.gfgroup.com.hk

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