China Aviation Oil - DBS Research 2016-07-07: Propelling towards full potential

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CHINA AVIATION OIL(S) CORP LTD G92.SI 

China Aviation Oil - Propelling towards full potential

• Initiate with BUY and TP of S$1.62, based on 12x FY17F PE; we like CAO as its two main sources of profit are derived from 
  1. a monopoly to supply imported jet fuel to the burgeoning Chinese civil aviation market, and 
  2. a 33% stake in the sole supplier of jet fuel at China’s second largest airport – Shanghai Pudong International Airport, both of which are fairly low risk and have firm long-term growth prospects. 
• Following our Equity Explorer in April, we initiate coverage on the stock.

Sole supplier of imported jet fuel in China with growing international presence. 

• With a monopoly on the supply of bonded jet fuel to the civil aviation industry in China, CAO should benefit from the long-term growth of China’s international air travel market. 
• Furthermore, with the backing of SOE parent China National Aviation Fuel Group (CNAF), CAO has expanded its business to the marketing and supply of jet fuel at 41 international airports outside China, and further growing its reach, volumes, and ultimately greater economies of scale.

Firm outlook for prized asset 33%-owned associate, SPIA.

• Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA) has and should continue to benefit from rising air traffic at Pudong International Airport, which is driven by the continued development of Shanghai as China’s key financial centre. Contribution from SPIA amounted to 64%, 85% and 63% of CAO’s total profit in FY13, FY14 and FY15, respectively.

Net cash and strong balance sheet could fund acquisition- driven growth. 

• With net cash of c.US$230m at the end of 1Q16, and strong support from its parent CNAF, we are of the belief that CAO could be on the lookout for acquisitions to further grow the scale and reach of its business and profits.

Valuation:

• Our 12-month TP of S$1.62 is based on 12x FY17F PE. 
• We think that 12x earnings against the projected 15% EPS CAGR over FY15- FY17F is reasonable, and believe that the group is poised to see a structural re-rating of its valuation multiple on sustained earnings growth, especially if CAO can utilise its strong cash balance to further accelerate growth through M&A.

Key Risks to Our View:

• Weaker demand for air travel and execution risk. A sustained slowdown in demand for air travel could impact jet fuel demand and volumes. 
• Further, the group could also face execution risk in its trading business and prospective M&A activities.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-07-07

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