Cheung Kong

Cheung Kong in talks to buy aircraft from leasing firm

Given the industry oversupply, analysts wonder how much return the investment can generate

PUBLISHED : Monday, 04 August, 2014, 9:25am
UPDATED : Tuesday, 05 August, 2014, 3:03am

Li Ka-shing, the wealthiest man in Asia, is looking to venture into the capital-intensive business of aircraft leasing, but analysts wonder how much capital he will get back for his troubles.

Cheung Kong (Holdings) said in a notice posted yesterday to the Hong Kong stock exchange that it was in preliminary talks to acquire "certain planes" from Dublin-based Awas, an aircraft lessor focused on buying used jets mainly from other leasing companies.

It is the latest possible investment by Li outside Hong Kong. He had bought into the telecommunications sector in Ireland and an airport parking complex in Canada among others, stoking talk, which he has steadfastly denied, that he was gradually divesting out of the city.

The company gave no more details and a spokeswoman said she could not confirm media reports that Cheung Kong was looking to pay US$5 billion for about 100 newer aircraft among Awas' portfolio of more than 280.

"I don't quite understand why this would be an attractive business for Li," said Andrew Orchard, an analyst at CIMB Securities. "The industry is not doing that great. Maybe there is a little uptake in demand, but there is still quite a lot of capacity."

Awas' majority shareholder, British private equity firm Terra Firma, has been studying options to break up the company's US$11 billion worth of assets. Awas reported a profit margin of 6.7 per cent for the financial year to March, compared with 33.6 per cent reported by Netherlands-based AerCap, one of the largest lessors.

Another analyst said "US$5 billion for 100 aircraft sounds a bit high, which would average US$50 million per aircraft", adding the transaction price of a new A320, Airbus' best-selling narrow-body model, was only about US$30 million.

But he said aircraft leasing fit the investment criteria of Cheung Kong - whose portfolio spans property, ports, telecommunications, infrastructure and retail - as it also featured long-term investment with periodic return. The conglomerate's abundant cash flow would also be an edge, he said.

Eric Lin, an analyst at UBS, said the risk would depend on the aircraft's end customers and how high the return would be. "Leasing is a business with a stable return relative to being an operator," he said.

Analysts also warned of the risk of oversupply, given the cyclical nature of the airline industry.

The deal, if realised, would add to a list of multibillion-dollar deals in the aircraft leasing sector in the past two years, with the biggest being AerCap's US$7.6 billion purchase of International Lease Finance Corp from American International Group and Sumitomo Mitsui Financial Group's US$7.3 billion acquisition of Royal Bank of Scotland Group's aviation unit.