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ERROR: type should be string, got "https://www.barrons.com/articles/a-calculated-bet-on-chinas-air-travel-boom-1434441557\nBarron's Take\nA CALCulated Bet on China’s Air Travel Boom\nIsabella Zhong\nJune 16, 2015 3:59 am ET\nChina’s budget airlines offer a no-frills business model. Too bad their stock valuations aren’t the same.\nLook no further than the shares of Juneyao Airlines (603885.CN) and Spring Airlines (601021.CN), which have soared as investors have piled into the budget airlines as a play on the anticipated the boom in Chinese tourism that Mckinsey & Co have forecast will see a three-fold increase in the number of people who can afford to fly by 2024. While the airlines offer a low cost business model and higher profitability than full service carriers, their shares don’t come cheap. Juneyao, which has by climbed the maximum 10% daily limit allowed in Shanghai every day since listing three weeks ago, trades at 38 times projected earnings, while Spring Airlines – whose shares up are four-fold since listing in January – fetches 36 times.\nBefore being scared off by the sticker shock of playing the growth in China’s budget airlines, investors should take a look at a much cheaper way to profit from the theme. China Aircraft Leasing Group ( 1848.HK ) trades at a mere 12 times projected earnings and allows investors to ride the potential growth of budget carriers in China – and without having to be exposed to the all too familiar operating risks that come with airline stocks.\nChina Aircraft Leasing Group ( 1848.HK ) is China’s largest independent and only-listed aircraft lessor. In other words, the company is in the business of buying airplanes from manufacturers like Airbus (AIR.FR) and then leasing the planes to airlines, typically for a 12-year period. CALC operates as a standalone company like Netherlands-based AerCap Holdings (AER), while many of its Chinese rivals such as ICBC Leasing and Changjiang Leasing Company are subsidiaries of banks or financial services companies. The Hong Kong-based company, however, is backed by Chinese state-owned conglomerate China Everbright ( 165.HK ), which has a 36% stake.\nBarron’s Asia coverage of Asia’s airline-related stocks\nAirAsia Under Pressure As Accounting Questioned – Jun.16, 2015\nCathay Pacific Receives Free Upgrade from Daiwa – Jun.15, 2015\nIHI: Japanese Aircraft Engine Maker Can Soar – Jun.3, 2015\nChina’s Airlines Gain Altitude – Jan 15, 2015\nSingapore Airlines Buffeted By Headwinds – Nov.7, 2014\nCALC currently has a fleet of 44 planes, mainly made up of single aisle Airbus planes. The company is growing rapidly and expects to have 100 planes on its books by 2016. CALC recently expanded its clientele to 11 airlines with the inking of a 12-year deal for four A320s with Air Macau at the beginning of the month. The number of potential customers is also likely to get bigger. Beijing last year lifted a six year ban on the creation of new airlines and has stressed the need for more low cost carriers in China. While additional budget carriers would escalate competition for incumbents like Juneyao and Spring Airlines, it spells good news for aircraft lessors like CALC as the tighter budgets of low-cost airlines makes them more likely to lease aircraft rather than make the substantial up-front investment needed to buy aircraft.\nAnalysts clearly like what they see in CALC given the rosy forecasts for earnings growth. Analysts surveyed by FactSet expect CALC to generate 31% annual earnings growth over the next three to five years on a current return on equity of 22.4%. But the speedy growth and strong profitability come at just 12 times projected earnings. Currently trading at around HKD11.50 a share, CALC shares have corrected 22.5% since reaching an all-time high at the end of May, taking their price earnings multiple below its five year average.\nThe aircraft lessor had delivered an impressive set of financial results for 2014. Net income increased 76% compared to the prior year on 67% growth in operating revenues. Based on CALC’s strong performance last year, CCB International analyst Lawrence Chen argues the company’s earnings may again surprise to the upside in 2015. Chen has a buy rating on CALC with a target price of HKD14.40, which implies 25% upside. The analyst points to the company’s aggressive building of its fleet, additional avenues for managing receivables and a new aircraft disassembly plant as drivers that could take CALC to the “next level.” CALC is planning to build a $2 billion aircraft disposal plant in Harbin that could dismantle around 50 planes a year and would be the first Chinese-operated facility of its kind in China.\nCALC, however, is more than just a play on China’s rising demand for air travel and consumption growth story. It is also a play on Beijing’s monetary easing and financial market reforms. CALC buys planes with borrowed money, which means interest expense accounts for two-thirds of the company’s costs. Given lease rates are likely to rise according to industry practice, as noted by Macquarie analyst Crystal Leung, lower borrowing costs would expand CALC’s net interest margin, which is currently 3.4%. Meanwhile, Beijing’s rekindling of China’s securitization market last year has given CALC options for better managing receivables. By packaging its streams of leasing income into asset backed bonds that are then sold to investors, CALC would not only reduce the amount of risk on its balance sheet but also raise money that could be used for growing its business. CCB International’s Chen expects CALC to make five securitizations in 2015 and six in 2016.\nHowever, like banks, the nature of CALC’s business means that it needs to regularly raise capital. In March, the company sold a HKD892 million convertible bond to main shareholder China Everbright and asset management companies Huarong and Great Wall. While the three-year notes, which have a conversion price of HKD11.28 and a size equal to around 12% of CALC’s outstanding shares, could weigh on the company’s share price if converted, the company’s rapid growth offers counteracting support.\nCALC offers a way to ride China’s rising demand for air travel without exposure to the all too familiar operating risks that come with airline stocks. The outbreak of MERS, or Middle Eastern Respiratory Syndrome, in South Korea has shaved off around 20% from the share price of Korean carrier Asiana Airlines (020560.KR), while airlines across Asia have been forced to cancel flights to the country. Then there’s the volatile jet fuel price. While China Southern Airlines ( 1055.HK )(600115.CN) and China Eastern Airlines ( 670.HK )(600115.CN), which do not hedge jet fuel costs, have benefitted from lower oil prices this year, higher oil prices would hurt their bottom lines. Meanwhile, aggressive fuel hedging has weighed on earnings for Hong Kong-based carrier Cathay Pacific Airways ( 293.HK ), which has been enjoying robust passenger growth this year.\nEmail: isabella.zhong@barrons.com\nComments? E-mail us at asia.editors@barrons.com"