KGI Alert: Chailease Holding (5871.TW/5871 TT, OP): Earnings momentum picking up
KGI Greater China
25 Oct 2013
Available for Immediate Download
What’s new Unaudited September earnings were NT$494mn, up 15% MoM and 6.7% YoY, as business in China is gaining momentum. Excluding an income tax refund of NT$127mn in 2012, net profit in September grew 47% YoY. Management expects to receive an income tax refund of around NT$120mn in October. In 1Q-3Q13, earnings were NT$4.3bn, for EPS of NT$4.3, up 53% YoY and achieving 76% of our full-year forecast. Implications Impact from VAT implementation eased, as expected; capital leasing demand returns. Despite flat revenue MoM growth in September, the mix has turned favorable, leading to bottom line growth of 15% MoM. Capital leasing demand, which was delayed as a result of nationwide VAT implementation in China in August, has returned, while demand for low-margin trade finance has dwindled. Operations in China are gaining momentum entering 4Q13 on peak seasonality and new branches opening. VAT-related regulation change in China, likely late October, good for sales leaseback demand. On the policy front, China’s Ministry of Finance is likely to make amendments to VAT for sales leaseback business after consultation with leasing companies in China. The discussion of regulation change might be officially finalized by end-October. Although only about one-tenth of Chailease’s clients are affected by the introduction of VAT as they are not eligible to issue VAT invoices, the potential regulation amendment would encourage overall sales leaseback demand. Operations in Taiwan & Thailand still robust. Portfolio growth for operations in Taiwan and Thailand is trending up MoM, and is on track to meet our 2013 forecasts of 25% and 30% YoY growth, respectively. New aircraft leasing business from Bombardier started generating revenue in Taiwan in 2H13. The company expects to undertake two to three aircraft leasing contracts in 4Q13, which we think will contribute NT$40mn to revenue. Valuation & action Shares are trading at 12.6x 2013F EPS and 10.3x 2014F EPS, at the midrange of their historical range. Considering that operations in China are gaining momentum entering 4Q13 on peak seasonality, the delinquency ratio in China has stabilized and is expected to trend down to below 5%, and we forecast 2014 will grow robustly by 22% YoY, we maintain our positive view on the stock. Our 12-month target price is NT$85, based on average 2013-14 SOTP forecasts and target PE of 12.5x. (Chailease International’s target PE is 14x, and Chailease Finance’s target PE is 11x). We reiterate our Outperform rating on the counter. Risks Worse-than-expected asset quality in China.