China Aviation Oil - UOB Kay Hian 2016-07-12: Closer Look At Its Lucrative SPIA Associate

China Aviation Oil - UOB Kay Hian 2016-07-12: Closer Look At Its Lucrative SPIA Associate CHINA AVIATION OIL(S) CORP LTD G92.SI 

China Aviation Oil Singapore Corp (CAO SP) - Closer Look At Its Lucrative SPIA Associate

  • With the opening of Shanghai Disneyland whereby it is expected to draw in 3m more air passengers annually, we take a closer look at CAO’s crown jewel - its stake in the exclusive refueller for Shanghai Pudong International Airport. We find it much superior to Thailand-listed Bangkok Aviation Fuel Service in terms of growth and profit. 
  • Maintain BUY and raise our target price to S$1.85, or 14.4x 2017F PE, based on a 20% discount to the peer average of 18x PE, implying 34.5% upside.


  • We released a corporate update on CAO yesterday.
  • SPIA to become one of world’s top three with Disney’s help. The primary airport for Shanghai, Shanghai Pudong International Airport (SPIA) is a fast growing hub for both passenger and cargo traffic. The opening of Shanghai Disneyland is estimated to bring in another 3m air passengers annually and more will come as Disneyland expands (expansion work has already begun). Combined with the increasing importance of Shanghai as a global business hub, this will attract more air travellers to Shanghai. To handle the increased traffic, SPIA is already building a new terminal that will push it to be one of the world’s top three busiest airports in 2019.


  • Recap: Crown jewel of CAO is its SPIA associate - an immensely profitable Shanghai asset. The crown jewel of China Aviation Oil Singapore Corp’s (CAO) investments is its 33% stake in the exclusive refueller for SPIA. The immensely profitable SPIA associate contributed US$38.9m, or 63% of CAO’s net profit in 2015, which was slightly below its cost of acquisition in 2002.
  • Positive on SPIA associate’s outlook as it looks to contribute more profits. Going forward, we expect this recurring income for CAO to grow at a CAGR of 10% from US$38.9m in 2015 to US$51.7m in 2018, accounting for more than 50% of group profit.
  • SPIA associate superior to BAFS. As a downstream airport jet refuelling company, we find the SPIA associate much superior to to its Thai peer, Bangkok Aviation Fuel Service (BAFS). The SPIA associate: 
    1. posts a higher historical volume growth, 
    2. enjoys a monopoly, and 
    3. delivers more than 4x net profit than BAFS’ despite similar volumes. 
  • If listed, we believe the SPIA associate should trade closer to BAFS’s 24x 2015 PE, given greater growth potential. As such, we add BAFS into the current peer list of CAO.


  • Maintain BUY and raise target price to S$1.85, or 14.4x 2017F PE, pegged at a 20% discount to peers’ average PE of 18x. 
  • Given the better outlook and that the market is beginning to recognise the value of CAO, we believe CAO should trade closer to peers’ average 2017F PE of 18x. As such, we use the relative valuation methodology and peg CAO to peers 2017F PE with a 20% discount and increase our target price to S$1.85.

Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-12
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.85 Up 1.56