China Aviation Oil Singapore - RHB Invest 2016-08-31: No Near Term Re-Rating Catalyst

China Aviation Oil Singapore - RHB Invest 2016-08-31: No Near Term Re-Rating Catalyst CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil Singapore - No Near Term Re-Rating Catalyst

  • CAO lacks near term re-rating catalyst, as we expect a likely acquisition of an aviation asset (using its USD210m of cash only) in early 2017. Organic growth for 2016-2017 also seems priced in at the current share price level.
  • We forecast a slower 10% profit growth in 2017 amidst expectations of slow growth in China’s jet fuel imports. 
  • Amidst jet fuel oversupply in the domestic market, import growth of its bonded jet fuel into China will be driven by the displacement of non-bonded jet fuel imports and growth in international air traffic. 
  • Maintain NEUTRAL and SGD1.56 TP (8% upside).

No inorganic expansion this year. 

  • As at end 2Q16, China Aviation Oil (CAO) had cash and net cash balance of SGD210m and SGD170m respectively.
  • Management plans to use the cash balance to acquire suitable aviation-related assets outside China. Given the strong earnings and cash flow contributions made by its associate – a refueller at Shanghai Pudong International Airport – we will not be surprised if CAO looks to acquire similar assets outside China.
  • However, we believe any such acquisition is likely to occur only in early 2017.

Slower growth in bonded jet fuel import volume into China. 

  • Amidst shortfalls in domestic jet fuel supply in the past, Chinese airlines were forced to use imported fuel, even for local operations. However, since 2013, China’s jet fuel market has been in an oversupply situation and the country has seen sharp rise in jet fuel exports and a gradual decline in import of non-bonded jet fuel. 
  • Although CAO’s tax-free and bonded jet fuel will displace demand for non-bonded fuel, with abundant availability of domestic jet fuel, we believe growth in imports of its fuel into China will now be purely driven by growth in international air traffic from China.

Refueller at Shanghai Pudong International Airport remains a prized asset. 

  • CAO’s 33%-owned Shanghai Pudong International Airport Aviation Fuel Supply Co (SPIA) accounts for 90% of its earnings from associates. 
  • SPIA also pays almost all of its earnings as dividends. 
  • The firm has witnessed strong growth in aircraft traffic over the past two years and we believe SPIA will continue to benefit from the rise of Shanghai as a financial centre and the opening of tourist attractions such as Disneyland. It accounted for almost 61% of the company’s profit in 2015 and 62% of its profit in 1H16.

Share price movement has been volatile, but trading close to fair value.

  • CAO’s share price dropped 14% to SGD1.35 on 23 Aug from a high of SGD1.57 on 8 Aug before moving back up sharply to SGD1.44 as at yesterday’s close. 
  • Despite the short-term volatility, we note that CAO’s share price has been trading around our SGD1.56 TP, which implies 1x 2017F PEG.

Maintain NEUTRAL. 

  • We will turn into buyers at a price range of SGD1.20-1.25, which will then offer 25-30% upside over a 12-month time period based on our TP. 
  • Key downside risks are the opening up of China’s aviation fuel supply market (which removes CAO’s current monopoly) and losses in the oil trading business from sudden oil price shocks. 
  • Key upside risks are stronger growth of bonded jet fuel imports into China and earnings accretive acquisition in 2016.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-31
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.560 Same 1.560