INDUSTRY OVERVIEW. The global economy and China s economy are expected to continue to grow steadily during the forecast period from 2015 to 2020;

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1 The information and statistics set forth in this section and elsewhere in this document have been derived from an industry report commissioned by us and independently prepared by Frost & Sullivan, in connection with the Global Offering. In addition, certain information is based on, or derived or extracted from, among other sources, publications of government authorities and internal organizations, market statistics providers, communications with various PRC Government agencies or other Independent Third Party sources unless otherwise indicated. We believe that the sources of such information and statistics are appropriate and have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information and statistics are false or misleading in any material respect or that any fact has been omitted that would render such information and statistics false or misleading. Our Directors confirm that, after taking reasonable care, they are not aware of any adverse change in market information since the date of the Frost & Sullivan Report which may qualify, contradict or adversely impact the quality of the information in this section. None of our Company, the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners, the Underwriters or any other party involved in the Global Offering or their respective directors, advisors and affiliates have independently verified such information and statistics and no representation has been given as to their accuracy. Accordingly, such information should not be unduly relied upon. SOURCE OF INFORMATION We have commissioned Frost & Sullivan, an independent market researcher and consultant, to conduct analysis and prepare a report (the Frost & Sullivan Report ) on the leasing industry and markets in China and worldwide. Founded in 1961, Frost & Sullivan conducts industry research and corporate training in various industries, including the financial and leasing industries. We agreed to pay Frost & Sullivan a fee of RMB560,000 for the preparation and use of the Frost & Sullivan Report. Unless otherwise indicated, market estimates or forecasts in this section represent Frost & Sullivan s view on the future development of the leasing industry in China and worldwide. In preparing the report, Frost & Sullivan has relied on statistics and information obtained through both primary and secondary research. Primary research includes interviewing industry insiders and recognized third-party industry associations, while secondary research includes reviewing corporate annual reports, databases of relevant official authorities and professional agencies, independent reports and publications, as well as the proprietary database established by Frost & Sullivan during the past decades. Frost & Sullivan also cross-checked the information obtained from different sources to ensure such information is in line with the practice of the industry. The forecasts were made by Frost & Sullivan on the basis of following assumptions: The social, economic and political conditions in China and elsewhere in the world are expected to remain stable during the forecast period from 2015 to 2020; The global economy and China s economy are expected to continue to grow steadily during the forecast period from 2015 to 2020; The key drivers of the global and China s leasing industry are expected to continue to drive the development of leasing market in the forecast period from 2015 to 2020; and 79

2 The leasing markets in China and elsewhere in the world are not expected to be materially and adversely affected by any extreme circumstances during the forecast period from 2015 to Our Directors confirm that, after reasonable and due inquiry, there has been no adverse change in the market information since obtaining the data from Frost & Sullivan which may limit, contradict or affect the information in this section. OVERVIEW OF THE PRC ECONOMY The PRC has sustained steady and rapid economic growth since According to Frost & Sullivan, the PRC s nominal GDP grew at a CAGR of 11.9%, from RMB34,562.9 billion in 2009 to RMB67,670.8 billion in The PRC s real GDP grew at a CAGR of 8.6% from RMB12,407.1 billion in 2009 to RMB18,706.9 billion in In terms of nominal GDP in 2014, the PRC is the second largest economy in the world. Despite the lower growth rate caused by the slowdown of global macroeconomic growth, the PRC s economic growth remained at a medium-to-high speed in recent years. According to Frost & Sullivan, the PRC s nominal GDP is expected to grow at a CAGR of 8.2% from 2015 to 2019, reaching RMB92,900.2 billion by 2019, and the PRC s real GDP is expected to grow at a CAGR of 6.3%, reaching RMB25,400.9 billion by According to Frost & Sullivan, in terms of total investment, the PRC s fixed asset investment grew from RMB22,459.9 billion in 2009 to RMB56,200.0 billion in 2015, representing a CAGR of 16.5%. Total fixed asset investment of the PRC ranked first in the world in Such rapid expansion of fixed asset investment has been largely driven by accelerated urbanization in the PRC. According to Frost & Sullivan, the PRC s urban fixed asset investment grew from RMB19,392.0 billion in 2009 to RMB50,126.5 billion in 2014, representing a CAGR of 20.9%. Meanwhile, despite a lower growth rate resulting from the slowdown of global economy, the PRC s fixed asset investment is expected to sustain its rapid growth at a double-digit growth rate from 2014 to The PRC s fixed asset investment is expected to grow at a CAGR of 11.4% from 2015 to 2019, reaching RMB86,652.4 billion by 2019; while the PRC s urban fixed asset investment is expected to grow at a CAGR of 11.4% during the same period, reaching RMB85,981.9 billion by Additionally, as the majority of their assets and liabilities of the finance lease business are denominated in Renminbi and also under finance leases with floating rate pricing, the business of most of the PRC s leasing companies is primarily affected by the fluctuations in Renminbi interest rate. For example, the PBOC reduced its benchmark rate five times in 2015, resulting in a decrease in the one-year benchmark lending rate from 5.60% on January 1, 2015 to 4.35% on December 31, In addition, the PBOC also reduced the deposit reserve ratio three times in 2015, resulting in ample liquidity in the market and a decrease in interbank borrowing costs. The significant decrease in benchmark rate led to decreases in the finance lease income and expenses of the leasing companies, and affected the net interest margin of their finance lease businesses. On the other hand, lower benchmark rate and deposit reserve ratio may also help to bring down the RMB funding cost for leasing companies. The table below sets forth the fluctuation of the PBOC benchmark leasing interest rates from February 21, 2002 to February 21, 2016: 80

3 Adjustment Date PBOC benchmark lending interest rates (%) Less than 6 months 6 to 12 months 1 to 3 years 3 to 5 years Over 5 years 2/21/ /29/ /28/ /19/ /18/ /19/ /21/ /22/ /15/ /21/ /16/ /9/ /30/ /27/ /23/ /20/ /26/ /9/ /6/ /7/ /8/ /6/ Adjustment Date (1) Less than 1 year 1 to 5 years Over 5 years 11/22/ /1/ /11/ /28/ /26/ /24/ Note: (1) Since November 22, 2014, the PBOC has been applying three benchmark interest rates rather than the previous five. OVERVIEW OF THE PRC LEASING INDUSTRY The PRC s leasing industry has grown rapidly since According to Frost & Sullivan, in terms of the balance of leased assets, the market for the PRC leasing industry grew from RMB664.7 billion in 2009 to RMB2,633.9 billion in 2014, representing a CAGR of 31.7%. As of December 31, 2014, in terms of the balance of leased assets, the PRC had become the largest leasing market in the world. The PRC leasing industry also demonstrates significant growth potential, and the main drivers include: The penetration rate of the PRC leasing industry remains relatively low. Despite rapid growth of the PRC financial leasing industry, there remains potential for its development as compared with the PRC banking industry. According to Frost & Sullivan, as of December 31, 2014, total loans in the PRC amounted to RMB81,677.0 billion, while the balance of leased assets of the PRC leasing industry was RMB2,633.9 billion. Meanwhile, as the PRC leasing 81

4 industry is still in the early stages of development, the penetration rate of the PRC leasing industry, which refers to the proportion of total leased assets in the total fixed asset investment, remains relatively low as compared with those of the developed countries. In 2014, among the top ten leasing markets in terms of total leased assets, the penetration rate of the PRC leasing industry was 5.14%, compared with 23.2% in the United States, 28.6% in the United Kingdom and 16.4% in Germany. In recent years, the rapid development of CBRC-regulated leasing companies, supported by the financial strength of their shareholders, increased customer awareness of leasing products, and a more developed regulatory environment, played important roles in helping increase the penetration rate of the PRC leasing industry. The aforementioned factors may continue to drive the increase of penetration rate of the PRC leasing industry going forward. The PRC government continues to facilitate the development of the PRC leasing industry. For example, the CBRC allowed commercial banks to conduct leasing services in 2007, providing them with significant development opportunities in the emerging leasing industry. In 2008, the PBOC, the CBRC, the CSRC and the CIRC announced the financial sector s opinions on supporting the development of the PRC s service sector. The opinions encouraged non-bank financial institutions, including financial leasing companies, to provide efficient financial leasing services to the PRC s service sector, which is expected to accelerate the development of the PRC leasing industry. In September 2015, the PRC State Council promulgated opinions to encourage financial leasing services to play a more important role in the development of real economy, industry upgrades and transformation, as well as industry capacity reallocation in the PRC. The PRC State Council also encouraged financial leasing companies to raise capital through various means, such as debt and equity financing, asset securitization and cross-border RMB financing, providing significant opportunities for the development of the PRC leasing industry. The restructuring of the PRC s economy is expected to stimulate the development of the PRC leasing industry. The main focus of the restructuring of the PRC s economy is to promote the optimization of economic structures, innovation-driven development and the effective allocation of economic resources. This encourages companies to invest more in equipment upgrading and replacement, and local governments to adopt flexible and commercial-oriented approaches to optimize their balance sheets and better manage their infrastructure asset portfolio. These reform efforts are expected to increase the demand of leasing services and further promote the future development of the PRC leasing industry. COMPETITIVE LANDSCAPE IN THE PRC LEASING INDUSTRY According to Frost & Sullivan, as of December 31, 2014, there were a total of 2,077 leasing companies in the PRC. These leasing companies can be generally classified into two categories based on their regulatory regime: CBRC-regulated leasing companies. The CBRC-regulated leasing companies are usually established by banks, non-bank financial institutions or local governments in the PRC. The CBRC-regulated leasing companies are the major players in the PRC leasing industry, and generally have stronger shareholder backgrounds, higher licensing requirements, better financial and liquidity performance, and greater flexibility in financing. As of December 31, 2014, there were 32 CBRC-regulated leasing companies in the PRC, with an aggregate asset balance of RMB1,278.7 billion. The key players in this category mainly include, among others, CDB Leasing, ICBC Financial Leasing Co., Ltd. and Minsheng Financial Leasing Co., Ltd. 82

5 MOFCOM-regulated leasing companies. MOFCOM-regulated leasing companies can be divided into Chinese-funded MOFCOM-regulated leasing companies, and foreign-funded MOFCOM-regulated leasing companies based on the differences in their shareholder structures. The Chinese-funded MOFCOM-regulated leasing companies are established by PRC equipment manufacturers or independent parties, whereas the foreign-funded MOFCOM-regulated leasing companies are generally established by foreign equipment manufacturers or independent parties. As of December 31, 2014, there were 152 Chinese-funded financial leasing companies and 1,893 foreign-funded financial leasing companies in the PRC, with an aggregate asset balance of approximately RMB1,101.0 billion. The key players in this category mainly include, among others, Far East Horizon Limited, Bohai Leasing Limited and Changjiang Leasing Limited. The regulatory requirements for the CBRC-regulated leasing companies and the MOFCOMregulated leasing companies are mainly different in terms of sources of funding and requirements in capital adequacy, leverage ratio and minimum registered capital. In particular, compared with MOFCOM-regulated leasing companies, CBRC-regulated leasing companies can finance their businesses in the interbank lending market at a lower financing cost and with diverse sources of funding, while MOFCOM-regulated leasing companies are not allowed to finance their businesses by deposits or interbank lending. Meanwhile, CBRC-regulated leasing companies are regulated under more stringent CBRC regulations, and generally have greater capacity in financing safety and operation stability. Currently, the PRC leasing industry is dominated by CBRC-regulated leasing companies in terms of market share, industry influence and business size. However, in recent years, CBRC-regulated leasing companies are facing intense competition with key MOFCOM-regulated leasing companies. The following table sets forth the five largest leasing companies in the PRC in terms of total revenue in 2014: The five largest leasing companies in the PRC in terms of total revenue in 2014 Rank Company Revenue (RMB in billions) Market Share 1 CDB Leasing % 2 ICBC Financial Leasing Co., Ltd % 3 Far East Horizon Limited % 4 Minsheng Financial Leasing Co., Ltd % 5 Bohai Leasing Limited % 83

6 CDB Leasing is a CBRC-regulated leasing company, and has the highest credit rating among all publicly listed leasing companies in the world. CDB Leasing also holds a leading position in terms of a variety of major financial indicators compared with its competitors. According to Frost & Sullivan, as of December 31, 2013, 2014 and 2015, in terms of the balance of operating lease assets, CDB Leasing was the largest CBRC-regulated leasing company in the PRC, and a number of its financial indicators, such as total assets, net assets and paid-in capital, also ranked highly in the PRC leasing industry. Meanwhile, as of December 31, 2013, 2014 and 2015, CDB Leasing ranked first among all leasing companies in the PRC in terms of total revenue. The following table sets forth the five largest CBRC-regulated leasing companies in the PRC in terms of total revenue and balance of operating lease assets as of December 31, 2014: The five largest CBRC-regulated leasing companies in the PRC in terms of total revenue as of December 31, 2014 The five largest CBRC-regulated leasing companies in the PRC in terms of the balance of operating lease assets as of December 31, 2014 Rank Company Revenue (RMB in billions) Rank Company Balance of operating lease assets (RMB in billions) 1 CDB Leasing CDB Leasing ICBC Financial Leasing Co., Ltd ICBC Financial Leasing Co., Ltd Minsheng Financial Leasing Co., Ltd Minsheng Financial Leasing Co., Ltd Bank of Communications Financial Bank of Communications Financial 11.9 Leasing Co., Ltd.... Leasing Co., Ltd CMB Financial Leasing Co., Ltd CCBFinancial Leasing Corporation AIRCRAFT LEASING The Global Airline Industry The development of the global aircraft leasing market is largely dependent on market demand for air transportation. According to Frost & Sullivan, global revenue passenger kilometers ( RPKs ) grew from 4,540.8 billion in 2009 to 6,144.5 billion in 2014, representing a CAGR of 6.2%. As a result, in terms of the number of aircraft, the size of the global commercial aircraft fleet grew from 23,264 in 2009 to 26,653 in Meanwhile, according to Frost & Sullivan, the global airline industry is expected to continue to grow rapidly from 2014 to 2019 and in the long term, primarily because: (i) global market demand for air transportation is expected to continue its rapid growth rate from 2014 to The global RPK is expected to grow at a CAGR of 5.1% from 2014 to 2019, reaching 7,887.0 billion by 2019, and the size of the global commercial aircraft fleet is expected to increase to 31,094 by 2019, respectively; and (ii) the global airline industry is expected to remain profitable primarily due to relatively low fuel prices. According to Frost & Sullivan, the fuel price is expected to remain at a low level, which is expected to help reduce the operating costs of airlines, increase consumer spending on air traffic brought about by lower air fares, and stimulate market demand for commercial aircraft. 84

7 The PRC Airline Industry Driven by rapid economic growth, the PRC airline industry grew rapidly from 2009 to According to Frost & Sullivan, the number of the PRC s air passengers grew from approximately million in 2009 to approximately million in 2014, representing a CAGR of 11.2%, and is expected to grow at a CAGR of 8.5% from 2014 to 2019, reaching approximately million by During the same period, the PRC s RPK grew from billion in 2009 to billion in 2014, representing a CAGR of 13.5%, and is expected to grow at a CAGR of 11.3% from 2014 to 2019, reaching 1,077.4 billion by The rapid growth of the PRC airline industry led to rapid growth in the number of commercial aircraft in service in the PRC. According to Frost & Sullivan, the number of commercial aircraft in service in the PRC grew from 1,417 in 2009 to 2,370 in 2014, representing a CAGR of 10.8%, and is expected to grow at a CAGR of 10.6% from 2014 to 2019, reaching 3,914 by Introduction of Aircraft Leasing Industry The Role of Aircraft Operating Lessor The risks and rewards of the aircraft ownership generally sit with the operating lessor while the risks and rewards of operating remain with the lessee or airline in an aircraft operating lease. The lessee or airline operator pays the operating lessor for the benefit of operating the aircraft over an agreed fixed term in return for rental payments paid monthly or quarterly in advance. During the lease, an aircraft owner has the right to sell the aircraft with the lease attached to another owner, while the lessee is responsible for maintaining the aircraft in accordance with the lease requirements, as well as local and internationally recognized aviation safety standards, such as the airworthiness requirements of the FAA, the EASA or other applicable aviation authorities. To mitigate the financial risks associated with aircraft operation and maintenance work, the operating lessor may also require the lessee to pay a security deposit in advance of delivery of the aircraft, and to collect maintenance reserves. In addition, an aircraft operating lessor will also actively manage their fleet with an in-house team of experts to undertake technical monitoring and remarketing of aircraft as the end of a lease approaches, or to manage any other issues. Reasons for Airlines taking Aircraft on Operating or Finance Lease Operating leases can satisfy the diversified needs of funding for airlines in different stages of history and development. For more mature airlines, or airlines with high credit quality, which generally seek financing flexibility for their aircraft fleet, their decisions to procure aircraft on operating leases is driven by their relative cost competitiveness, their ability to manage capacity development, and to mitigate residual value risks. Also, aircraft operating lessors may offer better availability options for the delivery of new aircraft. For start-up or low-cost airlines, which generally prefer to utilise their available resources to finance working capital, operating leases generally allow them to use operating cash flows to secure capacity and retain capital to invest elsewhere in their businesses. Furthermore, airline lessees can keep their operating leases off-balance sheet unlike finance leases. Lease payments under operating leases are recorded in the lease expenses. Therefore, leased assets and lease payments under operating leases will not change lessees reported assets and liabilities and hence the key financial metrics derived from them. However, this off-balance sheet treatment of operating leases may be affected by new accounting requirements effective in See Risk Factors Risks Relating to Our Business and Industry We face risks related to changes in accounting standards. 85

8 In contrast, airlines may prefer to take aircraft on finance leases if they have sufficient cash reverses, or where airlines expect strong recurring profits for which owned or depreciable assets provide tax shelter. Ultimately, the purchase decision will depend on a variety of factors such as the airline s cost of capital, balance sheet strength, credit standing, prevailing debt interest rates and spreads, as well as the cost, accounting and tax treatment of each asset finance option. Operating Metrics of Leasing Aircraft Lessors Generally, the main operating metrics used to benchmark aircraft operating lessors include: current fleet size, mix of the fleet by aircraft type, committed orders and total aircraft value. For more information on the current fleet size and total aircraft value, see Aircraft Leasing The Global and the PRC Aircraft Leasing Industry, and Aircraft Leasing Competitive Landscape of the Global and the PRC Aircraft Leasing Markets for details, respectively. Additionally, other important metrics also include the average fleet age and geographical distribution of the customers, as well as lease yield. Among these, the average fleet age is generally inversely related to the average remaining lease term. Core Aircraft Lease Markets According to Frost & Sullivan, as of December 31, 2015, the global aircraft operating lessor fleet and backlog is currently dominated by the Asia-Pacific region with 33.4% of market share, of which China alone has 13.2%. Europe followed with 25.1%, and then North America with 16.4%. The following pie chart illustrates the respective share in the aircraft operating lessor fleet and committed orders by lessee region in 2015: Middle East, 5.9% Africa, 2.4% Russia & CIS, 7.1% Europe, 25.1% Latin America, 9.7% China, 13.2% Asia-Pacific (excluding China), 20.2% North America, 16.4% 86

9 Cost of Financing for Aircraft Leasing Companies Generally, an aircraft leasing company with a higher credit rating is able to finance its business development at lower interest rates. Aircraft leasing companies with lower credit ratings, on the other hand, may incur larger risk premiums and overall financing if committing to higher yields to maturity. Therefore, a higher credit rating constitutes an important comparative advantage in the capital intensive aircraft leasing market. Meanwhile, a diversified funding source to match long-term assets is also a crucial factor in the cost of financing for aircraft leasing companies. Long-term debt generally provides an aircraft leasing company taking aircraft on operating leases with the flexibility to take advantage of the market cycle. This is especially the case in the current low interest rate environment, where debt maturities can match the lease terms. Outlook for the Aircraft Leasing Industry The growth of the global aircraft leasing industry largely depends on the development of the commercial aviation industry and the global economy, the growth of which further depends on various factors, including passenger demand, technological development, industry regulation, aircraft manufacturer supply and fuel costs. While these factors intertwine with each other, we face both the opportunities and challenges in the aircraft leasing industry. Looking ahead, the global market demand for air transportation is expected to continue its rapid growth rate. Moreover, the expected relatively lower fuel price could help reduce the operating costs of airlines, increase consumer spending on air travel brought about by lower air fares, and further stimulate global market demand for commercial aircraft. Meanwhile, new aircraft technologies can generate operational and cost efficiencies, which are passed to passengers, hence driving air travel growth. These favorable factors may generate great aircraft leasing opportunities for our business. Nevertheless, there are potential factors that may adversely affect the commercial aviation industry in the future. The surge or fluctuations of fuel prices may affect the profitability of airline customers and their decision to lease aircraft. Unfavorable global economic and market conditions as well as other factors beyond our control may discourage the use of air travel, such as the outbreak of epidemic diseases and severe weather conditions. See Risk Factors Risks Relating to Our Business and Industry We may be subject to risks related to epidemics, acts of terrorism, wars, or other natural or man-made calamities globally. In addition, we will also face challenges from heightened competition due to an increasing number of market participants. The Aircraft Leasing Industry The robust growth of the global and PRC airlines industry, along with the benefits brought by the accounting treatment of aircraft operating leases, has greatly promoted the development of the global and PRC aircraft leasing industry. For information on the benefits brought about by the accounting treatment of aircraft operating leases, see Aircraft Leasing Introduction of Aircraft Leasing Industry Reasons for Airlines Taking Aircraft on Operating or Finance Lease. Aircraft operating leases allow airlines to maintain the operation of aircraft while at the same time lowering their operating costs. They also enable airlines to arrange their fleet and manage their balance sheets with more flexibility and not assume the responsibilities of managing the residual value of the aircraft. According to Frost & Sullivan, the global aircraft leasing penetration rate, which refers to the proportion of the total number of commercial aircraft 87

10 under lease within the total number of commercial aircraft in service, grew rapidly from 0.5% in 1970 to 29.7% in 2014, and is expected to grow to 31.0% by According to Frost & Sullivan, in terms of total revenue of aircraft leasing business, the size of the global aircraft leasing market grew at a CAGR of 4.0% from 2009 to 2014, and is expected to grow at a CAGR of 4.6% from 2014 to 2019, reaching USD45.9 billion in The following table sets forth the historical and forecast size of the global aircraft leasing market from 2009 to 2019: Billion USD E 2016E 2017E 2018E 2019E The historical and forecast size of global aircraft leasing market from 2009 to 2019 Meanwhile, the size of the global aircraft leasing fleet grew at a CAGR of 3.1% from 2009 to 2014, and is expected to continue at that growth rate from 2014 to 2019, reaching 12,874 units in Within this, the number of global operating lease aircraft fleet grew at a CAGR of 3.4% from 2009 to 2014, and is expected to grow at a CAGR of 3.7% from 2014 to 2019, reaching 9,513 units in 2019; while the number of global financial lease aircraft fleet grew at a CAGR of 3.1% from 2009 to 2014, and is expected to grow to 3,361 units in The following table sets forth the historical and forecast numbers of the global aircraft leasing fleet from 2009 to 2019: Unit Operating Lease Financial Lease 14,000 12,000 10,000 8,000 9,482 2,671 9,871 10,213 10,467 10,707 2,781 2,910 3,025 3,094 11,071 11,439 3,154 3,213 11,793 3,262 12,139 12,509 3,344 3,344 12,874 3,361 6,000 4,000 6,811 7,090 7,303 7,442 7,613 7,917 8,226 8,531 8,838 9,165 9,513 2, E 2016E 2017E 2018E 2019E The historical and forecast number of global aircraft leasing fleet from 2009 to

11 In particular, the PRC aircraft leasing industry experienced significant growth from 2009 to According to Frost & Sullivan, in terms of total revenue derived from PRC airlines, the size of the PRC aircraft leasing market grew at a CAGR of 5.6% from 2009 to 2014, and is expected to grow at a CAGR of 10.6% from 2014 to 2019, reaching USD5.6 billion in The following table sets forth the historical and forecast size of the PRC aircraft leasing market from 2009 to 2019: Billion USD E 2016E 2017E 2018E 2019E The historical and forecast size of the PRC aircraft leasing market from 2009 to 2019 Meanwhile, according to Frost & Sullivan, the number of the PRC s aircraft leasing fleet grew at a CAGR of 4.7% from 2009 to 2014, and is expected to grow at a CAGR of 9.0% from 2014 to 2019, reaching 2,009 units in In particular, the number of the PRC s operating lease aircraft fleet grew at a CAGR of 9.3% from 2009 to 2014, and is expected to grow at a CAGR of 12.5% from 2014 to 2019, reaching 1,633 units in The following table sets forth the historical and forecast number of the PRC s aircraft leasing fleet from 2009 to 2019: Unit 2,500 Operating Lease Financial Lease 2,000 1,500 1, ,202 1,039 1,093 1,128 1, , , ,054 1, ,197 1,858 1, ,338 1,479 2, , E 2016E 2017E 2018E 2019E The historical and forecast number of the PRC s aircraft leasing fleet from 2009 to

12 Competitive Landscape of the Global and PRC Aircraft Leasing Markets Competition is intense in the global aircraft leasing market. According to Frost & Sullivan, as of December 31, 2014, there were over 160 aircraft leasing companies in the world. In terms of total book value of aircraft fleet, CDB Leasing ranked tenth among all aircraft leasing companies in the world. The following table sets forth the 20 largest aircraft leasing companies globally in terms of the total book value of the aircraft fleet as of December 31, Rank Company Total book value of both operating and finance lease aircraft fleet (USD in millions) Rank Company Total book value of both operating and finance lease aircraft fleet (USD in millions) 1 AerCap Holdings N.V , Aviation Capital Group Corp ,266 2 GE Capital Aviation 32, Avolon Holdings Limited... 6,069 Services, Inc BBAM Aircraft Leasing and 15, Doric GmbH... 4,383 Management LLC... 4 SMBC Aviation Capital... 12, Standard Chartered Aviation... 4,263 5 BOC Aviation Pte. Ltd.... 9, Aircastle Limited... 4,080 6 AWAS Aviation Capital Ltd.... 9, Macquarie Air France Ltd.... 3,840 7 Air Lease Corporation... 7, Jackson Square Aviation Ltd.... 3,671 8 CIT Aerospace, Inc , FLY Leasing Ltd.... 2,997 9 ICBC Financial Leasing Co., Ltd... 6,721 (1) 19 Nordic Aviation Capital A/S... 2, CDB Leasing... 6,299 (1) 20 MC Aviation Partners, Inc.... 2,842 (1) calculated on basis of the foreign exchange rate between US Dollar and Renminbi by PBOC (1 US Dollar = Renminbi) on December 31, 2014 There is also great competition in the PRC aircraft leasing market. Historically, the PRC aircraft leasing market was dominated by foreign aircraft leasing companies. In recent years, however, the market share of Chinese aircraft leasing companies has increased rapidly and is expected to remain at its rapid growth rate in the coming years. Meanwhile, Chinese airlines are exempt from paying withholding tax when leasing aircraft from Chinese aircraft leasing companies, which strengthens the competitiveness of the Chinese aircraft leasing companies in the PRC aircraft leasing market. According to Frost & Sullivan, as of December 31, 2014, there were over 50 Chinese and foreign aircraft leasing companies providing leasing services to Chinese airlines. The following table sets forth the five largest aircraft leasing companies operating in the PRC as of December 31, 2014 (in terms of number of aircraft leased to Chinese airlines). Company Market Share AerCap Holdings N.V % GE Capital Aviation Services, Inc % ICBC Financial Leasing Co., Ltd % CDB Leasing % Changjiang Leasing Co., Ltd % 90

13 Entry Barriers of the Aircraft Leasing Market The crucial factors for an aircraft leasing company to stay competitive in the market mainly include: a diversified aircraft portfolio that is in constant revenue service, a broad geographical spread of airline lessees in major traffic generating regions, a strong relationship with the financing community (allowing the aircraft leasing company access to adequate capital at low financing cost with diversified and effective means through the demand cycle), strong negotiation power against aircraft manufacturers, suppliers and airlines to secure favorable pricing or costs, and an extensive customer base to maximize trading opportunities and returns. In addition, a competitive aircraft leasing company should also adopt an active aircraft portfolio management strategy to maximize residual value and minimize the risks through the use of diversified mitigating measures, such as maintenance reserves, robust return conditions or security deposits. In order to secure lease contracts with airlines, an aircraft leasing company should also monitor aircraft orders and fleet expansion plans in the market, and have expertise in aircraft asset management and the aircraft marketing and remarketing. CDB Leasing s Competitive Advantages in the Global and PRC Aircraft Leasing Markets As of December 31, 2013, 2014 and 2015, CDB Leasing ranked first among all Chinese leasing companies in terms of aircraft operating lease assets. CDB Leasing has global aircraft leasing platforms in the PRC, the Cayman Islands and Ireland, and a global customer network. Meanwhile, CDB Leasing has the highest credit ratings among all publicly listed leasing companies in the world, which allows the Company to finance its aircraft leasing business at lower cost. As of December 31, 2015, CDB Leasing s customer base included 40 airlines, 12 of which were in the PRC and 28 overseas. INFRASTRUCTURE LEASING The PRC Infrastructure Leasing Industry Infrastructure investment is a major driver of the PRC s economic growth. In the past three decades, sustained and increasing spending on infrastructure construction by the PRC government has produced significant infrastructure assets. According to Frost & Sullivan, the aggregate five-year infrastructure investment in the PRC between 2011 and 2015 was RMB48,117.8 billion, the largest in the world, compared with an aggregate investment of RMB17,376.3 billion between 2005 and In addition, the PRC government continues to consider infrastructure construction as a top priority during China s 13th five-year plan ( ). According to Frost & Sullivan, the aggregate five-year infrastructure investment in the PRC between 2015 and 2019 is expected to reach RMB73,395.8 billion. Existing and increasing infrastructure assets have greatly promoted the development of the PRC infrastructure leasing industry. Currently, the PRC infrastructure leasing industry mainly focused on completed and revenue-generating infrastructure assets such as toll roads, urban rail transit systems, power equipment, and urban water supply systems. In recent years, infrastructure leasing increased rapidly among PRC local governments and state-owned infrastructure construction companies, primarily because infrastructure leasing was more flexible in lease terms, interest rates and the use of proceeds compared with other means of financing. Such comparative advantages have provided PRC local governments and infrastructure construction companies with more options to better manage their infrastructure asset portfolios. According to Frost & Sullivan, in terms of total assets held under finance leases, the PRC infrastructure leasing market grew at a CAGR of 14.7% from 2009 to 2014, and is expected to reach RMB824.0 billion by The following table sets forth the historical and forecast growth of the PRC infrastructure leasing industry from 2009 to 2019: 91

14 RMB in billions Transportation Urban Energy E 2016E 2017E 2018E 2019E The historical and forecast growth of the PRC infrastructure leasing industry from 2009 to 2019 Transportation Infrastructure Leasing Industry According to Frost & Sullivan, the total length of highways and railways in the PRC amounted to 4.5 million kilometers and thousand kilometers in 2015, respectively, and are expected to grow to 4.9 million kilometers and thousand kilometers by 2019, respectively. Benefiting from the significant volume of transportation infrastructure assets, the PRC transportation infrastructure leasing industry has grown rapidly in recent years. According to Frost & Sullivan, in terms of total assets held under finance leases, the PRC transportation infrastructure leasing market grew from RMB111.7 billion in 2009 to RMB228.6 billion in 2014, representing a CAGR of 15.4%, and is expected to grow at a CAGR of 12.2% from 2014 to 2019, reaching RMB406.9 billion by Urban Infrastructure Leasing Industry The PRC s rapid urbanization produced increasing demand for urban infrastructure investment during the past three decades. According to Frost & Sullivan, urban infrastructure fixed investment in the PRC grew from RMB19,392.0 billion in 2009 to RMB50,126.5 billion in 2014, representing a CAGR of 20.9%, and is expected to reach RMB85,981.9 billion by Benefiting from the rapid development of PRC urban infrastructure fixed investment, the urban infrastructure leasing industry in the PRC has grown rapidly in recent years. According to Frost & Sullivan, in terms of total assets held under finance leases, the PRC urban infrastructure leasing market grew from RMB68.9 billion in 2009 to RMB122.6 billion in 2014, representing a CAGR of 12.2%, and is expected to grow at a CAGR of 10.6% from 2014 to 2019, reaching RMB202.5 billion by Meanwhile, as of December 31, 2014, the PRC s urbanization rate (urbanization rate refers to the proportion of the total urban population within the total population) was 54.4%, compared with 82.3% in the United Kingdom, 81.4% in the United States and 75.1% in Germany. Therefore, it is believed that the PRC s urban infrastructure investment and urban infrastructure leasing industry have considerable growth potential in the future. Energy Infrastructure Leasing Industry The PRC government considers new energy as a main focus of development in the future, and has announced a series of policies to facilitate its development. As a result, a number of major Chinese power companies have increased their investments in the new energy areas. Compared with other sources of funding, finance leasing provides customized solutions for energy equipment manufacturers to expand their market shares, and generate stable, riskadjusted yields for various investors. According to Frost & Sullivan, the PRC s energy 92

15 infrastructure fixed investment grew from RMB1,000.3 billion in 2009 to RMB1,632.7 billion in 2014, representing a CAGR of 10.3%, and is expected to grow at a CAGR of 22.3% from 2014 to 2019, reaching RMB4,472.5 billion by Meanwhile, in terms of total assets under finance lease, the PRC energy infrastructure leasing market grew from RMB46.5 billion in 2009 to RMB99.4 billion in 2014, representing a CAGR of 16.4%, and is expected to grow at a CAGR of 16.6% from 2014 to 2019, reaching RMB214.6 billion by Competitive Landscape of PRC Infrastructure Leasing Market According to Frost & Sullivan, as of December 31, 2014, there were over 20 leasing companies providing infrastructure leasing services in the PRC. In terms of leased assets, CDB Leasing ranked first among all such leasing companies. Meanwhile, in terms of leased assets, among the leasing companies providing transportation infrastructure and urban infrastructure leasing services in China, CDB Leasing ranked first and third, respectively. The following table sets forth the five largest leasing companies providing infrastructure leasing services in the PRC, in terms of leased assets and their market shares, as of December 31, 2014: Company Market Share CDB Leasing % Bank of Communications Financial Leasing Co., Ltd % ICBC Financial Leasing Co., Ltd % Minsheng Financial Leasing Co., Ltd % CMB Financial Leasing Co., Ltd % The following table sets forth the five largest leasing companies providing transportation infrastructure and urban infrastructure leasing services, respectively, in the PRC in terms of leased assets and their market shares as of December 31, The five largest leasing companies providing transportation infrastructure leasing services in the PRC as of December 31, 2014 The five largest leasing companies providing urban infrastructure leasing services in the PRC as of December 31, 2014 Rank Company Market Share Rank Company Market Share 1 CDB Leasing % 1 Bank of Communications 10.0% Financial Leasing Co., Ltd Bank of Communications 13.2% 2 ICBC Financial Leasing 8.0% Financial Leasing Co., Ltd.... Co., Ltd ICBC Financial Leasing 9.7% 3 CDB Leasing % Co., Ltd Minsheng Financial Leasing 9.1% 4 Minsheng Financial Leasing 7.6% Co., Ltd..... Co., Ltd CMB Financial Leasing Co., Ltd % 5 CMB Financial Leasing Co., Ltd % Entry Barriers of the Infrastructure Leasing Market Infrastructure construction generally requires large-scale investment and a long construction period, and investors are mostly large state-owned enterprises or other companies affiliated with local governments. As a result, the entry threshold for the infrastructure leasing business is generally higher than that of other leasing businesses. Crucial factors for a leasing company to stay competitive and increase its market share mainly include, among others, adequate capital, low financing cost and stable sources of financing. Well-managed relationships with the PRC local governments and large state-owned enterprises are also essential to leasing companies to secure their leasing contracts. Meanwhile, infrastructure leasing companies also need expertise in infrastructure asset management in order to diversify their revenue sources. 93

16 Competitive Advantages of CDB Leasing in the PRC s Infrastructure Leasing Market As the sole leasing business platform of the CDB, CDB Leasing has benefited from CDB s high-quality industrial resources. CDB Leasing s industry focus is synergistic with that of CDB and, similar to CDB, CDB Leasing serves infrastructure sectors that are of national strategic significance. CDB Leasing has extensive experience in providing leasing services involving a wide range of infrastructure assets in both direct finance leasing and sale-and-leaseback transactions. It has cultivated a broad customer base across infrastructure industry sectors, established a well-recognized brand name in the market, and maintained good, cooperative relationships with government authorities at various levels. SHIP, COMMERCIAL VEHICLE AND CONSTRUCTION MACHINERY LEASING Ship Leasing Industry Most of the vessels in the PRC are purchased by shipping companies through loans, project financing or other financing methods. Historically, the international ship financing market was dominated by traditional ship financing banks in the United States and Europe. In recent years, however, such banks have scaled back their ship financing businesses due primarily to financial difficulties and changes of business strategy. In fact, according to Frost & Sullivan, in terms of ship prices and freight rates, the shipping industry is currently at a historical low point. The table below sets forth the Baltic Dry Index from 2012 to 2015, showing the currently challenging market environment in the global shipping industry: 2,500 2,000 1,500 1, Baltic Dry Index from 2012 to 2015 Under such circumstances, ship leasing has become the preferred choice for shipping companies. However, despite rapid development in recent years, the penetration rate of the global ship leasing industry (which refers to the proportion of the total number of vessels under leases in the total number of vessels in service), was still less than 30% as of December 31, Therefore, the global ship leasing industry still has considerable growth potential. CDB Leasing conducts its ship leasing business in both the PRC and overseas markets. As of December 31, 2015, CDB Leasing had a portfolio of 45 owned or leased vessels, with the average age of the CDB s owned vessels at 6.6 years. 94

17 Commercial Vehicle Leasing Industry Benefiting from factors such as improvements in infrastructure, development of free trade zones and the extension of transportation networks in the PRC, the PRC automobile industry, especially the commercial vehicle segment, has grown rapidly in recent years. Meanwhile, urban infrastructure construction, real estate development, and the growth of the rail transportation network, have also provided significant development opportunities for various commercial vehicle leasing businesses. According to Frost & Sullivan, the number of vehicles in use in the PRC commercial vehicle leasing industry grew from approximately 1.6 million in 2009 to approximately 3.2 million in 2014, representing a CAGR of 14.8%, and is expected to grow at a CAGR of 7.4% from 2014 to 2019, reaching approximately 4.5 million by As of December 31, 2014, in terms of the number of leased commercial vehicles, CDB Leasing ranked second among all leasing companies providing commercial vehicle leasing services in the PRC. Construction Machinery Leasing Industry Benefiting from rapid urbanization in the PRC and increases in fixed asset investment, the demand for construction machinery has grown rapidly in recent years. Meanwhile, the PRC government has announced a series of incentive policies to encourage the development of high-end construction machinery equipment industries, providing great opportunities for the development of the PRC construction machinery leasing industry. According to Frost & Sullivan, the number of construction machinery equipment units in the PRC construction machinery leasing industry grew from approximately 1.4 million in 2009 to approximately 3.3 million in 2014, representing a CAGR of 19.2%, and is expected to grow at a CAGR of 7.4% from 2014 to 2019, reaching approximately 4.4 million by As of December 31, 2014, CDB Leasing ranked fifth among all leasing companies providing construction machinery leasing services in the PRC. Entry Barriers of the Ship, Commercial Vehicle and Construction Machinery Leasing Markets In the ship leasing market, a leasing company needs adequate capital to finance its businesses. Meanwhile, a leasing company should also establish stable, high-quality overseas client bases and service networks to support its international development. Furthermore, a leasing company needs expertise in macroeconomics, international finance, international law and shipping asset management to keep its competitiveness in the international market. In the commercial vehicle leasing market, unless a leasing company has adequate capital and low financing costs to support its business, it is difficult for the leasing company to develop economies of scale and succeed in this highly competitive market. In the construction machinery leasing market, a leasing company not only needs strong financing capacity, low financing costs and risk control capabilities, but also needs to provide flexible and stable leasing solutions that meet its customers needs. 95