China Aviation Oil - DBS Research 2016-08-02: Scaling new heights with SPIA

China Aviation Oil - DBS Research 2016-08-02: Scaling new heights with SPIA CHINA AVIATION OIL(S) CORP LTD G92.SI 

China Aviation Oil - Scaling new heights with SPIA

  • 2Q16 net profit grew 32% y-o-y to US$23.6m, mainly on higher volumes and share of profits from SPIA.
  • Ahead, supply business should still see good growth and likely to see more challenging trading environment in 2H16, but should be offset by SPIA’s firm growth.
  • Earnings forecasts raised by 6%/5% to US$75.4m/US$85.4m for FY16F/17F.
  • Maintain BUY with higher TP of S$1.70.

Maintain BUY with higher TP of S$1.70 as we lift earnings for FY16F/17F by 6%/5% on higher optimism over associate performance. 

  • 2Q16 net profit jumped 32% y-o-y to US$23.6m, bringing total profit for 1H16 up 48.6% to US$47.8m on 
    1. higher supply and trading volumes, 
    2. higher trading gains, and 
    3. c.50% increase in the share of profits from associated companies – primarily SPIA, which alone contributed > 60% of 1H16 net profit.
  • While the supply business should still see good growth ahead, we have lowered volume and GP/tonne estimates as we expect a more challenging trading environment in 2H16. However, we think that SPIA’S firm performance should more than offset trading challenges, if any.

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

  • With monopoly on the supply of bonded jet fuel to China’s civil aviation industry, 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 42 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. 

  • As the exclusive supplier of jet fuel to Pudong International Airport, Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA) has and should continue to benefit from rising air traffic at the airport, which is driven by the continued development of Shanghai as China’s key financial centre.

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

  • With net cash of c.US$169m at the end of 1H16, and strong support from its parent CNAF, we believe that CAO could be on the lookout for acquisitions to further grow the scale and reach of its business and profits.


  • Raise TP to S$1.70 based on 12x FY17F PE. 
  • We think that 12x earnings against the projected 18% 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/ 2016-08-02
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.70 Up 1.62