Most of China’s bank-affiliated leasing companies started as onshore businesses and then expanded into the offshore leasing market in the past few years. The exception is BOC Aviation, which was founded in Singapore and acquired by Bank of China in 2006. Although the overall rate of asset growth has slowed down significantly from the peak level in 2016, the sector has maintained a relatively fast pace in the offshore market, mainly in aircraft and ship leasing.  

The level of USD bond issuance by these companies has stabilised in the past few years, with annual net issuance of USD5.5-7bn during 2017-19. In the first eight months of this year, gross and net issuance amounted to USD7.95bn and USD4.25bn, respectively, equal to 70% and 64% of last year’s total gross and net issuance. Although most of these companies have reduced their capex this year, their capital needs remain high due to decreased operating cash flows. We expect another USD3-4bn bonds to be issued in the rest of the year, leading to a fullyear gross issuance of USD11-12bn, similar to last year. 

The COVID-19 outbreak has put pressure on profitability, mainly due to high impairment costs. However, we believe the overall credit risk remains low. Funding costs have dropped this year, which should help improve profitability. And from as asset quality perspective, as most of the financial leasing assets are concentrated in mainland China, the broader credit risk is contained by strong policy support. For the aircraft operating leasing business, the asset and credit impairment costs should stay within manageable levels considering the companies’ young fleet portfolios, strong customer base, and a relatively small asset concentration in offshore aircrafts. In addition, the leasing companies are well supported from a funding perspective. BOCOM Financial Leasing and CCB Financial Leasing have already received capital injections from their parent banks, and CMB Financial Leasing has issued capital securities in the onshore market. 

In this report, we initiate coverage of BOCOM Financial Leasing (BOCOMFL), CCB Financial Leasing (CCBFL), CDB Financial Leasing (CDBFL), and CMB Financial Leasing (CMBFL) with Neutral fundamental recommendations. Given the underperformance of leasing bonds this year, we believe bond valuations are attractive in general. We open buy trading calls on BOCOMFL’s BCLMHK’24.