Earnings Call: H2 2019

Mar 11, 2020

Ladies and gentlemen, welcome to BOC Aviation 2019 full year results conference call. Mr. Timothy Ross, please begin. Thank you, operator, and welcome everyone to BOC Aviation's earnings call to discuss our final results for the year end of the 31st of December 2019. With me today are our Managing Director and Chief Executive Officer, Robert Martin, our Deputy Managing Director and Chief Financial Officer, Phang Thim Fatt, and our Chief Operating Officer, David Walton. Please note that some of the information you will hear during our discussion today may consist of forward-looking statements, which are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. You should not place undue reliance on any forward-looking statements, and you should review our results announcements for full details. Please also note that all currency references in today's call are in USD only. A copy of our earnings announcement is available both via the Hong Kong Stock Exchange and in the investors section of our website at www.bocaviation.com. A conference call presentation is also available in the investors section of our website. This call is being recorded and will be available for replay from our website within the next 24 hours, as are the transcripts of today's management presentation. I will now turn over the call to Robert Martin for his comments. Thanks, Tim, and good evening to everyone on the line. Thank you for joining us for our 2019 full year results earnings call. We are delighted with the results that we present to you today, which represent earnings growth of 105% and net tangible assets growth of 88% over the last four years since 2015, the year immediately prior to our IPO in June 2016. We are pleased to report a net profit after tax of $702 million for 2019, up 13% on last year. This is our 15th year of consecutive record earnings. We generated double-digit growth in all three of our major revenue activities, validating the portfolio approach we take to our business. This helped to drive a post-tax return on equity for 2019 of 16%, above the long-term average of 15%. 2019's ROE was one of our best years ever. Our total revenues and other income rose 15% compared to 2018, approaching $2 billion. We ended 2019 with total assets of $20 billion, which reflects our sustained efforts to grow our balance sheet through investment in aircraft. Net book value of our aircraft over the year grew by 12% to $16.8 billion, with a weighted average remaining lease term of 8.4 years, which provides a stable base for future revenue growth. Reflecting the strength of our financial performance in 2019, our board has recommended declaring a final dividend of $0.2153 per share, payable to shareholders of record on June 4. This final dividend brings the total dividend for 2019 to $0.3541 per share and represents a payout ratio for the full year of 35% of net profit after tax. This is in line with the board's policy of paying up to 35% of net profit after tax to shareholders in the form of dividends. The full-year dividend is equivalent to a dividend yield of 4.8%, based on our opening stock price at the beginning of 2019 versus 3.5% for the Hang Seng Index. During the year in review, both S&P Global Ratings and Fitch Ratings reaffirmed our industry-leading corporate credit ratings of A-minus. In terms of operating environment, the relatively benign market backdrop that prevailed for much of 2019 has changed so far in the first quarter of 2020. Airline passenger traffic as measured by IATA, the trade association for the world's airlines, rose 4.2% in 2019, below the long-term trend rate of 5% for the first time in seven years, as trade frictions and delays of aircraft deliveries impacted growth. The airline industry continued its recent run of profitability, and IATA expects it to have generated around $26 billion in profits for 2019. Travel demand in the airline sector has deteriorated since the start of the Lunar New Year travel period in January, as the impact of COVID-19 has made itself felt. While its effects were initially concentrated in Asia, it has recently become more global in its reach. As we enter this challenging period for our customers, we would like to remind you of our positioning and strategy in such periods. First, we're a senior creditor of airlines and do not take equity positions in airlines. Second, we have a globally diversified portfolio of airline credits. Third, we see times like this as opportunities to support our customers with well-secured liquidity in the form of purchase and lease-backs. Finally, we've already placed all of our new aircraft delivering this year, and we have no unplaced scheduled lease expiries. We've been through similar crises over the last 26 years, such as 9/11, SARS, and the global financial crisis, many of which have provided us with opportunities to deepen our customer relationships whilst providing good investment opportunities. Based on our experience, we expect to emerge even stronger from the current period of volatility. Manufacturer production issues dominated headlines in 2019, with the grounding of the Boeing MAX program affecting both airlines and lessors with MAX aircraft on order. We took delivery of only one of the 28 737 MAX aircraft scheduled for delivery to us in 2019. This was further exacerbated by Airbus A320neo family delays that result in the postponement of 5 of our A320neo aircraft from 2019 to 2020, and we expect continued new aircraft delivery delays through the current year. At present, we are only scheduled to take delivery of 4 Boeing MAX aircraft in the fourth quarter of 2020 and anticipate delays in the other MAX aircraft scheduled for delivery this year into 2021 and beyond. As part of the company's ESG enhancements, the board implemented a long-term incentive plan for management in 2017, where 50% of long-term performance bonuses are used to purchase BOC Aviation shares in the secondary market. A total of 2.4 million shares have been purchased by a trustee in March and April of both 2018 and 2019 after the announcement of our full-year results and will vest after the third year following their grant. A third tranche will be purchased along similar lines this year, further strengthening management's alignment with shareholders. At the beginning of January this year, we have welcomed Madam Zhang Xiaolu as our Vice Chairman and Deputy Managing Director following the retirement of Mr. Wang Jian. We have also welcomed Mr. Deng Lei as Chief Commercial Officer for Asia Pacific and the Middle East to the senior management team following the retirement of Mr. Gao Jinyue. We would like to thank both Mr. Wang and Mr. Gao for their contributions to the company. We also announced the forthcoming transition of our other Chief Commercial Officer, Mr. Steven Townend, into the Chief Financial Officer role from October 2020 to replace Thim Fatt, who will retire in the fourth quarter of this year. This is in line with our succession plan, and we are pleased to have such a diverse and global board and management team. I will now hand the call over to David to speak to our operations and business development, and then Thim Fatt will take over for a more detailed review of our P&L and balance sheet. Ted? Thank you, Robert. Let me add my thanks to all of you for joining us this evening. In 2019, we delivered 54 new aircraft to airline customers from our order book, including 12 where the customer exercised purchase options at delivery, giving us 42 new aircraft added to our owned portfolio. Our total fleet stood at 523 aircraft at the end of 2019, comprising 317 owned and 40 managed aircraft and an order book of 166 aircraft. Our owned aircraft portfolio remains one of the youngest in the industry at 3 years. Some of the highlights of 2019 included signing a commitment to lease 10 Airbus A320neo aircraft to our existing customer, Air China. Closing a purchase and lease transaction with our largest customer, Qatar Airways, for 3 Airbus A350-900s. Signing a financing arrangement with our existing customer, Azul Brazilian Airlines, for 18 A320neo family aircraft scheduled for delivery in 2021 through 2023. The portfolio sale of 17 aircraft to the Silver 2019 ABS platform contributed to our bottom line in the second half of 2019. We continue to actively invest in the latest generation aircraft. As of 11th March, our order book of 205 aircraft is 100% latest technology, including 787, A330neo, 737 MAX, and A320neo families of aircraft. Our long-term lease contracts, which have a weighted average remaining lease term of 8.4 years, provide us with significant revenue visibility. As of today, our committed future rentals under these contracts total more than $18 billion. Due to our active liability management and hedging policy, our net lease yield, which captures both the effects of interest rate fluctuations and the competitive lease rental environment, remained stable at 8.4% in 2019. We had another year with robust portfolio utilization of 99.6% and a collection rate of more than 96%. Over the past 12 years, we have averaged utilization of 99.8% and collections of 99.5%, near perfect on both measures across industry cycles. To achieve this, we focus on good customer selection, and we monitor our customers carefully with a focus, in particular, on their cash flow. In 2020, we are receiving requests from some of our customers for assistance as passenger demand, and therefore airline revenue, is affected by COVID-19. We are a long-term partner to our airline customers, and we will evaluate any such requests carefully in light of their cash flow forecasts and in light of the support provided by other stakeholders. We will work with affected customers to find solutions, which we believe will likely involve partial deferrals of rent for three months or less, with interest payable on overdue amounts, or will involve more purchase and leaseback transactions with those customers. In this context, I would like to remind everyone that we are the owner of our aircraft, we are a senior creditor of our airline customers, and our operating lease contracts are well-structured. We are paid rent monthly or quarterly in advance. We collect security deposits, and for many of our customers, we collect security to provide protection against future major maintenance events. At the same time, we are looking for opportunities to provide liquidity for our customers and to put good new business on our balance sheet. Since the beginning of 2020, we have added another 42 aircraft to our order book, comprising 20 A320neo delivery positions, 10 of which we have already placed with an airline customer. We have also executed our largest ever purchase and lease transaction for 22 Boeing 787s, which are scheduled for delivery to American Airlines in 2020 and 2021. These transactions illustrate the strength of our global customer reach. It also highlights the way our team contributes to build good long-term business on the strength of our capital structure and our available liquidity. Having over $5 billion in available liquidity as at today's date, and A-minus credit ratings, positions us well to work with our global customer base and execute new investment opportunities. With that, I will hand it over to Tim Fatt. Thank you, David. Our post-tax earnings per share was $1.01 per share, up 13% over 2018 earnings per share. Net assets per share, meanwhile, rose 9% to $6.60 in 2019. Net profit before tax also rose by 13% to $775 million, driving a pre-tax ROE of 17.7%. The principal driver of the growth in earnings was a 15% increase in total revenues and other income. Our core lease rental contribution was $695 million, which net of operating costs, represented 72% of net profit before tax. Our lease rental income rose 11% compared to 2018, as we increased the size of our fleet while retaining a stable lease rate factor. At the same time, depreciation increased 12% compared to 2018, rising at the same pace as investment in our fleet. We sold 28 aircraft from the owned fleet during 2019 compared to 34 aircraft sold in 2018. As we capitalize on robust investor demand for aircraft with leases attached. Gains on aircraft sales were $134 million and accounted for 17% of pre-tax earnings. Interest, fee related, and other income amounted to $137 million, almost 50% more than 2018 levels as we generated more fee income from pre-delivery payment financing. These activities comprise 11% of our net profit before tax, after deduction of associated interest expense. Finance charges increased by $75 million, driven primarily by an increase in our borrowings as we invested in more aircraft. Our average cost of funds rose to 3.6% in 2019 from 3.3% in 2018. Staff costs declined $12 million and represented approximately 4% of our total revenue and other income in 2019, below 2018, when staff costs represented 5.3% of our total revenue and other income. During 2019, we recognized impairment costs related to financial assets of $25 million as compared with no charge the previous year. This is related to trade receivables that were past due and in excess of security deposits held under leases to which the payment's related. Of the $43 million total receivable, an amount of $33 million has since been collected or secured by additional collateral. Other operating costs in 2019 were $59 million, 11% higher than 2018, but lower than the growth in our revenues. Our average tax rate was stable at 9.4%. At the end of the year, our total assets had increased 8%, or around $2 billion to $20 billion from the end of 2018. We had capital expenditure of $3.2 billion in 2019, primarily related to our aircraft deliveries and pre-delivery payments. We now expect total CapEx of $11 billion between 2020 and 2024, of which $5 billion is expected in 2020. Our indebtedness increased, rising 8% to $13.5 billion at the end of 2019, with our gross debt to equity ending the year at 2.9 is to 1. Capitalizing on our own industry-leading ratings, we identified investor demand to raise $3.9 billion in total debt during 2019. This borrowing activity included our successful bond offering that raised $2.1 billion under our GMTN program, with the balance raised from our banking group of over 70 banks. Now back to Robert for his final comments. Thanks, Tim Fatt. 2020 marks the start of our 27th year as a company, and I would like to thank all of our team for achieving a 15th year of consecutive record profits. As a management team, we focus on the long term, with an emphasis on long-term sustainable earnings. We've continuously proved ourselves in the face of adversity during this period, producing profits in every year since our inception. While there are headwinds presented by COVID-19, we expect to capitalize on the superior structure of our balance sheet with low debt to equity, strong investment-grade credit ratings, and our access to liquidity, with over $5 billion of cash and undrawn backstop credit lines at today's date. Our business plan remains growth-focused. Our sights are set higher than in 2019, and we've started in a manner that is consistent with our targets, adding a further $2 billion in contracted future revenues so far in 2020. This concludes our review of the industry, our company's financials, and our outlook. I'll pass the call back to Tim. Thanks, Robert. This wraps up management's formal commentary. We now have time for Q&A, and request that each participant restrict themselves to one question and one follow-up, unless time permits for additional queries. I'll hand the call now back to the operator for the Q&A session. Thank you. We now come to the Q&A segment. For callers, if you have any questions for our speakers today, you may press 01 on your telephone keypad now. Once again, that will be 0 followed by 1 on your telephone keypad. Our first question, we have Ivan from BOCI. Over to you. Okay. Thank you. Congratulations on the very strong start last year. My first question is about, as Robert mentioned, you have placed all the aircraft for this year. Is there any chance that our airline customers will defer some of the deliveries? Also, if not considering the 737 MAX, what is our guidance for the aircraft delivery for 2020? Thank you. Okay. Thanks, Ivan. It's Robert. Okay, so the first thing is we've received no request for deferrals of deliveries at this point. However, I want to be transparent with everyone. There will be some short-term delays, probably in March and in the early part of the second quarter, due to practical issues of people being allowed to physically go and receive deliveries. In our case, that's principally related to Airbus, with Toulouse and Hamburg deliveries. I think we have four deliveries, if I remember correctly, of 320 family in the next four months. We're just watching those very carefully because a number of those are the end of the Air China order, and also we have one other plane that was due to go to China. So you may see some short-term delays there. Now, in terms of guidance for 2020, I think Tim Fatt gave you that. We're expecting CapEx of $5 billion. Okay. And full back delivery. Okay, thanks. Okay. Can I ask a follow-up question? For the leaseback deals, I understand it is a very competitive market. This year, do we see more chances because everyone is in trouble? According to your experience, what can we do for this year, 2020? Thank you. Okay. If you look back in history, Ivan, what has happened is when we have periods of industry turbulence, we tend to relatively do better because we carry a lot of liquidity, and we are able to move quickly, which is exactly what we have been doing over the last six weeks since the start of Lunar New Year. Supporting customers, either that potentially have deliveries coming, which was the case with American Airlines, or customers who may want to add to their liquidity by doing sale leasebacks on unencumbered aircraft. Okay. Thank you. Thank you. Our next question, we have Ben from Goldman Sachs. Please go ahead. Hi. Good evening. Thanks for doing the call tonight. Can I just ask a little bit more about the impact of COVID-19, potentially this first half in particular, and particularly around the risk of either having credit costs or even asset impairments coming through and how you look at that and how we should think about it, both in the first half and in second half, if COVID-19 does continue for longer. Thanks. Okay. Thanks, Ben. First of all, the thing to remember is all of our aircraft are on long-term leases, even those planes that are due to deliver to us during this next four months to the middle of the year. We're not concerned in any way about impairment. In terms of where we're working with customers, as David mentioned during his presentation, our general approach is if they really need some help, we're working with them on partial deferrals over a three-month period. Our cashflow was very good during January and February. Realistically, that's going to be over the next three months. Then it will be repaid over the summer period. It will just be a short-term cashflow issue. As we mentioned at the start of the call, we've got $5 billion of liquidity. Okay. Are you seeing distress in any of your customers, and is there a risk of any planes that you might have to take back and re-lease? If that would happen, how is the market at the moment? What would be the potential impact on earnings in that case? Okay. At the moment, we're obviously watching all of our customers very carefully, because when COVID has hit, it hit pretty quickly. It's quite interesting. What we've seen is, around the world, and I've spent a lot of time visiting CEOs over the last six weeks, is basically those airlines that have been through downturns before are pretty well prepared in terms of they know what to do in terms of raising additional liquidity. Where they've got unencumbered assets that they can convert into cash, which we're happy to help them do, and where they are already taking some cost-cutting measures. Where that becomes more challenging is whether you've either got smaller carriers or carriers who may have their fleet 100% on operating lease, where they don't have unencumbered assets to basically use. Our Head of Risk Management, David Farrell, is watching that very carefully. We have less than a handful of customers we have on that list at the moment, and we've identified potential homes in case we need to move those aircraft. They're single-aisle aircraft, so they easily move. There's still pockets of demand around the world. Okay, great. Thank you. Thank you. Next, we have Calvin from Daiwa. Over to you. Thanks very much for the time for the presentation. Just two questions. One is I saw your collection rate is actually further declined to 96.9% from 97% in the interim results. What management expect for this? Because I assume that this doesn't reflect any impact from the COVID-19. Would management expect a further little bit decline more, or do you think it will be more stable? This is my first question. Okay. Thanks, Calvin. If you look back to last year, you're correct. COVID didn't affect last year at all. Last year's impact on collections was twofold. One was, of course, some of those MAX lessees. Bear in mind, we had six MAX aircraft that were delivered, and are sitting parked with our airline customers. To be frank with you, there was some slowness of payments there. The second thing is a large North Asian airline group who got slow on payments last year. In both cases, as mentioned during the presentation, we made recoveries during the first quarter. Okay. Now, if you're looking forward, yes, as I mentioned in response, I think, to Ivan's question, we will see some short-term impact from deferrals during basically the first half of this year. But those will be recovered over the summer period, and then they'll be back to normal by fourth quarter. Okay. My second question is also about COVID-19. I just want to clarify that for the deferrals, it's only a cashflow issue, but you will still book the receivables, and you do expect the receivables to be collected back within the year. So should not be like a P&L impact, right? Correct. If you remember, we have a pretty stringent provisioning policy here, which we enforced at the end of last year. If we have amounts owing that are above our security deposits, then we will immediately provision for it in our P&L. There will be no change to our policy in that, so investors will be able to see exactly how we are tracking when we come to our half-year results. Okay. Thank you. Thank you. Our next question, we have Paul from DBS. Over to you. Congratulations on a good set of results, and congratulations on the deal with American Airlines. With the kind of liquidity that we have, over $5 billion, in terms of potentially looking for deals, are we sort of targeting certain geographies? Obviously, I think America got boosted with the deal with American Airlines. Are we looking at certain geographies? Or what sort of deals are we looking for? Are we looking for new customers or to increase transactions with existing ones? That is my first question. Okay, thanks, Paul. As with previous situations like this, we tend to use a period like this to upgrade the average credit quality in the portfolio. We're primarily focused, first of all, on those stronger carriers in the market where we can do volume deals. Obviously, American Airlines is a good example of that, and I think you'll see us doing more of that as this quarter proceeds. Thanks. The $5 billion CapEx guidance provided by Tim Fatt earlier on, that excludes any sort of new deals or pop-ups that we could potentially be doing in the next couple of months, right? Yeah, absolutely. That is purely what we have announced to date. The last deal we announced was American Airlines, and if my memory's correct, 12 of those deliver this year and 10 deliver next year. My final question is really with regards to COVID-19 again. What kind of duration, or in terms of how long it would last, do you think it would take for us to see airlines getting really stressed? I think the assumption is that it'll be over by summer, but if it stretches, say beyond an X number of months, how long do you think it would take before things start really stressful? Well, let me turn it around the other way. How do we approach this? Because I really can't comment on what airline managements are doing, because that is their business. What I can tell you is what we are thinking. Our base case is that starting from March, we're allowing for a three-month period, so this will then go through March, April, May. Then our base case is recovery as we go into the summer season. Now, bear in mind, here in Asia in particular, that May traditionally is a low month for the airline industry. May and November are the two low months. We wouldn't expect to see significant pickup in May anyway. We think that will happen in June. But we also believe that as people come out of this situation, and we're already seeing good signs in certain provinces in China, where already there's a number of provinces where there have been no new cases for over 10 days now. We're beginning to see a little bit of light at the end of the tunnel. The same with Macau. That's our base case. But we obviously, as good management, have a contingency plan for what happens if this goes on longer. If it were to extend through for another three months after that. Okay. Thanks, Robert. Okay. Thank you. Next, we have Sabrina from JT Capital. Over to you. Hi. Thanks for the chance. I am Arvind here. My question is similar to what has been already asked, but I would still again ask for a bit more clarity. I am quite concerned about the 20% of the fleet, which you are exposed to, for those airliners who have a relatively smaller fleet, like below 20 airlines. If they decide to give you back a plane and you need to repossess, what would happen to your aircraft utilization rate and, in terms of earnings? Is there any risk on that regard? Okay. Probably the best way to address this, last year, we moved a number of aircraft around that we had to repossess from Jet Airways, from Avianca Brazil, from Germania. Maybe if David just talks through our experience, I think that is probably the best way to handle this. David? Sure. As Robert said, we had to deal with some customer difficulties last year. The first one was Avianca Brazil. Actually, we repossessed those aircraft at the end of the prior year, and we had those exported from Brazil, and then back out on lease, having been repainted and fixed up a bit. They were back on lease again in under 45 days, those two aircraft. We had another customer go bankrupt. We had one owned aircraft there and one managed. That was Germania in Europe. Actually, we had zero downtime for those aircraft. Yeah. The final example, I think along with many others in the industry, we had aircraft on lease to Jet Airways in India. We had five owned aircraft and two managed aircraft. We had those aircraft back out on lease, on average, across the seven aircraft, in 21 days. We were able to very quickly get those aircraft redeployed. The reason for that, one of the main reasons is, we have a very experienced team from our technical and legal side, and importantly, we have a global marketing team. I recognize that in this situation, as Robert said, there are areas of the world that have different stress at the time being. But if you have a global team, you are able to find those pockets where there is still demand for aircraft. That is what we have got the team working on now as contingency plans. As Robert said, we had a good experience last year. I gave you some data on that, and we are preparing in case we need to redeploy aircraft for this year. Okay. I mean, your ability to deploy when business is as usual is well known. It is just that in COVID-19, with probably demand faltering and the IATA estimates the global airline traffic growth is going to be the lowest ever in a decade or so, I am just worried about whether it is that easy a task. I mean, I do not know. Also, just wanted to know the contingency plan you had in mind, if you could brief a little bit more on that, or is it kept under wraps? Sorry, you are talking about contingency planning in which particular scenario? No, the 3 months, if the COVID-19 lasts longer, you are prepared for a better contingency plan. Yeah. So if you could brief on that a little bit. Yes, by all means. So, what we will do in the next three months, we will continue to raise capital from the debt capital markets, and also we have a banking group of 70 banks. So basically, our view is we will not run down our liquidity. We will keep a high level of liquidity during this period. Bear in mind as well, we have a low debt to equity, so we can also, basically lever up slightly if we need to. And finally, bear in mind my comments that we are heavily focused on adding new transactions from stronger credit airlines, which will also put the company in better shape as we move into the second half of the year. Okay. Thank you. Yep. Thank you. Next in queue, we have Shashank from Liontrust. Please go ahead. Hi. Thanks for the call. My question is on the CapEx, which you mentioned at $5 billion. With the delays in the MAX and some neo-deliveries as well, is that a stronger element of purchase and leaseback deals in that? Also on the MAX, we've recently got news about wiring issues, which has delayed the aircraft even further. Can you give a sense of where you think MAX is, and when is it likely that it will actually come back in the sky? Shashank, thanks for the questions. Let me deal with the second one first. Based on MAX, I was in the U.S. last week meeting with some of our major customers, like Southwest, American, to get their views on when they think MAX comes back. Because I think this is very important that they're going to be the first operators who will fly this. The feeling I came away with is this is really a third quarter issue this year. Now, bear in mind, the crucial party in all of this is the regulator, the FAA. The FAA will be the determinant of when these aircraft are able to both deliver and fly again. Just going back to your first question then in terms of CapEx. We've got a reasonable number of Airbus aircraft delivering this year, and those are coming straight off the production line under our own order book. We had five, remember, delayed from last year that are included within that. In addition to that, then, we've obviously now began to layer on top of it some purchase and leasebacks, starting with the American 787 transaction, and there will be more. This won't be the last ones we do. Right. Just on the aircraft, if worst case scenario, some airlines go bankrupt, and you have to recover some of the aircraft. In terms of the sale transactions which are happening right now, is there any reduction in the price of the aircraft which you are seeing in the market right now? Okay. We've got a number of sales in the pipeline of selling aircraft with lease attached at the moment. None of the lessees attached to that, I think, are at risk of bankruptcy. I am reasonably confident those will get done first half. I think realistically, though, you can expect that our sales for this year are likely to be back-ended probably more in the second half than the first half, just because obviously, there is more uncertainty in the first half. Right. Thank you. Okay. Thank you. Next in queue, we have Ajith from UOB Kay Hian. Please go ahead. Hi, Robert. Congratulations on a good set of results. I might have missed the part on the portion of the MAX deliveries for 2020. Can you provide the number again? Yeah, no problem. Four MAX deliveries in fourth quarter. As for sale and leaseback, would you be looking at, again, narrow-bodied aircraft or wide-bodied aircraft into 2020? As far as- The answer is both. Both. Basically, as you know, our portfolio, we tend to have a mix of roughly, by balance sheet, 60% single aisle, 40% wide body. We will be looking at both. Okay. In terms of what the request from customers in looking for PLBs and so forth, where do you see the demand in terms of, is it more on narrow-bodied aircraft? No, it's both, frankly. I think our approach to this is to talk to carriers and find out what they have unencumbered at the moment. As you know, our strong preference is to write long-term leases where we can. Generally, we're looking for aircraft that are less than five years old, because as you know, we've got a very average young age of our fleet, and we want to maintain that to the extent possible. Okay, clear. Thank you. Yep. Thanks. Thank you. Our next question, we have Gloria from Neuberger. Please go ahead. Hello. Thank you very much for the presentation. In terms of the security deposit that the team just mentioned at the beginning, how many months of security deposit does BOC Aviation collect? The answer is it depends upon the airline credit. We have collected anywhere from one month up to a high of 14 months. What happens is when our risk team does the evaluation, this is one of the key factors they take into account. So it depends on the airline credit rating is the answer. In addition, for weaker airlines, we also collect what are called cash maintenance reserves. Those cash maintenance reserves will build up over the period from the delivery of the aircraft to the big, heavy maintenance visit so that we have cash collateral for the heavy maintenance events. Now, sometimes instead of taking cash, we will take an investment-grade, rated letter of credit instead to make sure we are secure for those same engine and airframe shop visits. Understood. Just now the team also mentioned that the company is looking to maybe have a more relaxed collection term over the next three months to help the airline industry, in case of the COVID-19 situation prolongs. So, at that point of time, I guess after three months, the company may need to consider provisioning. Can we talk more about the provisioning policy, as in, will we provision the part that is not covered by the existing security deposit, or it is just a whole loan that the company will take a percentage of the remaining lease balance to provision? No. As an operating lessor, our policy is very, very clear. It is anything that is owed to us above and beyond the security deposit that we hold. Okay? That is how we have always done our provisioning, right the way back to when we set up the company. Mm. If let's say the airline customer become quite stressed after three months, the base case is that there is high likelihood BOC Aviation will take back the aircraft. Is that the right way to interpret it? No, it depends on how much security we are holding. If we are holding six months of security, then we are well secured. That is why I said the risk team looks at this on a case-by-case basis, depending on each individual credit. Obviously the weaker the credit, the more security we generally take. Understood. That is very clear. Thank you. Okay. Thank you. Next in queue, we have Robert from Huabao Fund. Please go ahead. Thank you for the opportunity. I want to ask, the current fleet had a premium of $1.3 billion over its book value, represent an 8% premium. Why there is 8% premium over the book value? What are the key underlying assumptions and the key factors? Also, if the 2020 financial market turbulence continued and the economic situation deteriorated further, will that possibly trigger the write-down or the decreased value of the appraised value of fleet? If that happened, what is the impact on the future P&L? Thank you. Okay. Thanks, Robert. The first thing is, the $1.3 billion comes from the difference between the average of five appraisers' values, which we will get every six months. These are the numbers as of the end of December last year, versus our net book value. Unlike other industries, in our industry, we take the original historic cost of the aircraft, and we depreciate 3.4% per annum from that original historical cost. We never write aircraft upwards. As time goes on, obviously, your net book value will come downwards. When we do our impairment test, which drives any impairment, that is driven by two things. First of all, we do the naked value of the aircraft versus the appraised values. Secondly, we look at the value in use, which is the NPV of the cash flows, which are under the lease through to the lease expiry. Every 6 months we test this. You look at impairment on an individual aircraft basis, not on a fleet basis. Occasionally from time to time, we will have one or two aircraft that we will impair. We haven't had that at the end of last year. All of the appraised values are above our net book value, and so we're in good shape. If there's a market dip, occasionally we may get impairment, and we just take that straight through the P&L if that were to happen. Thank you. This industry will be sometime during the extreme time, like 2009 or 2001, the valuer will give an independent evaluation which has had a discount of NBV rather than a premium? Yes. On individual aircraft, we may see that from time to time. Bear in mind, we have latest generation aircraft in our fleet, which are the most fuel efficient in the market. Our average fleet age is 3 years old. You tend to see aircraft values becoming more volatile as the aircraft get older. The other thing to remember is we do have an average lease term remaining of 8.4 years on all of our leases, and so we have solid cash flow attached to our aircraft that are in the fleet today and those that are due to deliver. Thank you. Okay. Thank you. Our next question, we have Calvin from Daiwa. Over to you. Thanks for taking my question again. Just one follow-up, is that the interest cost, what you expect? Because I saw the interest cost further shoot up to 3.6% on the cost of debt. You mentioned mainly is due to the more fixed rate. Now your fixed rate already increased to probably close to 80%. Should we assume it should be stable at this level, or do you see further increase? Maybe I will get Mr. Pang. This is his area of expertise. Take this one. Pang. If you look at the current market for interest rate, interest rate has dropped off tremendously. As we enter into new financing, those new financing for our $5 billion of CapEx will be at this lower rates. We would also have refinancing of $1.2 billion this year, which will be done at the lower rate. We would expect if current interest rate hold at this level, to have a lower average cost of fund this year. Okay. But I assume most of them already fixed, I assume. The new contract impact would not be very significant. But at least not increasing. It should be on the declining trend. Am I correct? Yes. The way to think of it is, think of our portfolio on 31st December 2019. There we have a series of transactions which are mainly fixed rate leases on the lease side and most of the debt is hedged. Really where the difference is going to come in is as we finance that additional $5 billion of CapEx this year, and as Tim Fatt and the treasury team refinance the $1.2 billion of debt that's falling due during this year. Okay. My second question will be the net lease yield. Do you expect to be actually decline a little bit this year. So what do management expect for this year? It depends on the ratio of new purchase and leaseback business to placement business. Because we have a choice whether we do purchase and leasebacks, we tend to get better returns in a market like this on purchase and leasebacks versus regular placements. So we've had a good start to the year on that side. We will do more during this year. I think it's probably best we give you guidance on that at the half year, depending on how much additional CapEx that we achieve in the first half. Okay. Thank you. You are welcome. Thank you. Our last question, we have Ben from Goldman Sachs. Please go ahead. Hi. Thanks again for taking the questions. Actually, my question is quite similar to Calvin's on net lease yield. I think you have probably answered most of it. One of the questions to follow that up is, how will a number of things impact the net lease yield? One being, the MAX returns. I guess this year, we have relatively few of those in Q4. Maybe thinking about next year as well. The MAX coming back, does that put downward pressure on net lease yields? Secondly, given the market situation and the stresses and uncertainty, are you finding that funding costs may be higher relative to what they were a few months back? How will that also affect the net lease yield this year or next year? Thank you. Okay. Thanks, Ben. First of all, MAX, I am afraid to say this year, totally insignificant. Because even if we get deliveries, they will only be in fourth quarter, so at best, we will have a couple of months on the books. MAXes won't affect our net lease yield this year. In terms then of funding cost, I was actually sitting with our treasurer this afternoon challenging him exactly on this issue, because I also wanted to know. The base rates have come down significantly, as you have seen. If you look at five-year Treasuries and 10-year Treasuries, which are the most common types of capital markets funding that we issue, the base rates have come down significantly, and we don't think the margins have significantly widened out for an investment-grade credit like ours. Net-net, it will be at lower levels than we have seen previously, which is good for the net lease yield. Okay, great. Then, it's a big CapEx this year with the $5 billion. Are you still finding markets open and funding available? Yes, definitely. We have got 70 banks in our banking group. Our top 10 banks have been with us for 25 years. Because we have done quite a lot of stuff in the capital markets over the last five years, a lot of our banks are under-lent to us and so would like to see opportunities to increase that. In addition, we still think there is depth in the capital markets to support more issues this year. Okay, great. Thank you. Bear in mind, we're A-minus rated, so that obviously helps us in a situation like this. Okay, great. Thank you. Just one last question, if I may, just on funding markets as well. How is the ABS market? I know you mentioned that in terms of sales, there's more uncertainty that may go into the second half. Is that also something that is affecting ABS market and your ability to sell into that? Yeah. If you split it into two parts, I think you can get As and Bs away. It's just a matter of price. Is there a bit of widening of price compared to last year? But remember, again, base rates have come down. Treasuries have come down since last year. I think the challenge at the moment in the ABS market is really the E-notes. We're not interested in ABS as a source of funding. We can fund ourselves much cheaper using corporate debt in either the capital markets or the bank markets. Where we use ABS is as an exit strategy for portfolios of aircraft. I think realistically, we're probably talking about third quarter before that market becomes open again. Okay, great. Thank you very much. That is very helpful. Okay. I should just say to everyone on the call, thank you. We had a record attendance today. We appreciate all of your time. We know you are all busy. With that, I will hand back to Tim. Yeah. Thank you everyone for joining today. Thank you for your time and focus. We will look forward to speaking with you all again in about five months' time, if not before. Thank you, operator. Good night. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.