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BOC Aviation shares gain in trading debut after US$1.1b IPO

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BOC Aviation Ltd, the aircraft leasing unit of Bank of China that raised US$1.1 billion from a share sale last month, rose as much as 2.6 per cent in its trading debut in Hong Kong on Wednesday.

[SINGAPORE] BOC Aviation Ltd, the aircraft leasing unit of Bank of China that raised US$1.1 billion from a share sale last month, rose as much as 2.6 per cent in its trading debut in Hong Kong on Wednesday.

Shares of the company climbed as high as HK$43.10, versus the offer price of HK$42, according to data compiled by Bloomberg. The company sold new and existing shares in Asia's second-biggest IPO this year, and it plans to use the proceeds to help pay for new planes.

The initial public offering attracted 11 cornerstone investors including Boeing Co, sovereign wealth fund China Investment Corp and Temasek Holdings's Fullerton Fund Management Co, the lessor said on Tuesday.

"You have growth and high visibility of earnings and higher returns," said Mohshin Aziz, an analyst at Malayan Banking Bhd in Kuala Lumpur. "People want lower risk returns. The story that Asia is strongest region for aviation growth for the next 20 years seems to gel well."

Asian leasing companies are boosting fleets as the region is set to overtake the US as the world's largest market for aircraft in two decades. Economic growth in China, India and South-east Asia is spurring air travel and encouraging more companies such as billionaire Li Ka-shing's CK Hutchison Holdings Ltd to enter the plane-leasing market, whose returns can exceed those of airlines and are usually locked in through multiyear contracts.

China Aircraft Leasing Group Holdings Ltd, which raised HK$728.9 million (S$129.2 million) from an IPO in July 2014, fell on the first day of its trading. The shares of the company are now 44 per cent higher than the offer price and trade at 9.48 times their estimated 2016 earnings. The price to earnings ratio for Air Lease Corp is 8.85 and 11.31 for Air Castle Ltd.

In the past 30 years, the number of aircraft owned by operating lessors jumped 11 per cent annually, according to Singapore-based Phillip Capital. That's double the pace of growth in the commercial fleet, where 40 per cent of jets are leased.

The leasing business had been dominated by companies such as General Electric Co-backed GECAS and ILFC. A new breed of Asian companies have emerged to challenge them. Among them are BOC Aviation and Sumitomo Corp-backed RBS Aviation.

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, owns and manages 270 planes, underscoring the growth prospects in what is set to be the world's largest aviation market.

At the end of last year, the Singapore-based company had 241 planes on order.

BOC Aviation's customers include IAG SA's Vueling Airlines SA, Southwest Airlines Co, Aeroflot PJSC, EVA Airways Corp, Cathay Pacific Airways Ltd, Singapore Airlines Ltd's India affiliate Vistara and WestJet Airlines Ltd, according to the lessor's website.

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 is typically leased to another carrier.

Leasing a plane can be more lucrative than flying one. Operating margins at AerCap Holdings NV, the biggest listed lessor, averaged 34 per cent the past three years, according to data compiled by Bloomberg. That compares with 7.8 per cent for the Bloomberg World Airlines Index.

BOC Aviation posted a record net income of US$343 million in 2015, 11 per cent more than a year earlier. Revenue rose 10 per cent to US$1.09 billion.