China Aviation Oil Singapore - RHB Invest 2016-01-14: Proxy To China’s Aviation Traffic Boom

China Aviation Oil Singapore - RHB Invest 2016-01-14: Proxy To China’s Aviation Traffic Boom CHINA AVIATION OIL SINGAPORE G92.SI 

China Aviation Oil Singapore (CAO SP) - Proxy To China’s Aviation Traffic Boom 

  • We initiate coverage on China Aviation Oil with a BUY and DCF-based SGD1.24 TP (82% upside), implying 12.4x FY16F P/E. 
  • Despite often being perceived as a risky Chinese jet fuel trading house, it has managed to deliver low-risk resilient profits on a rare jet fuel import monopoly and lucrative stake in China’s largest airport refueller. It aims to double profits by 2020 through M&As. 
  • A dual listing has not been ruled out, given its undeserved valuations in the SG market. 

 Rare monopoly makes it a proxy to China’s global aviation boom. 

  • Thanks to its state-owned parent, China Aviation Oil Singapore Corp (China Aviation Oil) is Asia-Pacific’s largest physical jet fuel trader and the sole supplier of imported jet fuel for China’s civil aviation industry. This means it effectively has a monopoly on supplying jet fuel for all outbound international flights in China, making it an excellent proxy to the country’s global aviation traffic boom. 

 Size brings with it bargaining power and resilient low-risk profits. 

  • This sizable volume gives China Aviation Oil considerable bargaining power when dealing with suppliers. 
  • With its lucrative and low-risk businesses, ie jet fuel supply (with a fixed cost plus model) and investments in associates like Shanghai’s airport refueller, as well as a robust risk control framework, the company’s profits have remained resilient despite the 2014 oil shock. 

 Aiming for USD120m profit in five years with net cash funding M&As. 

  • Management intends to deploy its war chest of USD111m or SGD146m in net cash (around 25% of its market cap) for synergistic M&As. 
  • It has shared its 2020 target of doubling profits to USD120m through both organic (targeting the overseas market) and inorganic growth (through synergistic downstream M&As). 

 Weak share price due to market misperception. 

  • We believe that the market currently has a misperception of the company, believing it to be a high-risk Chinese oil trading house (due to its history). However, China Aviation Oil operates a low-risk cost-plus jet fuel supply business in China and has strong parents such as the Chinese Government and global oil major player BP. This misperception has led to a weak share price and undeserved valuations. 
  • We note that management does not rule out the possibility of a dual listing.

Edison Chen RHB Invest | http://www.rhbinvest.com.sg/ 2016-01-14
RHB Invest SGX Stock Analyst Report BUY Initiate BUY 1.24 Same 1.24