China Aviation Oil - CIMB Securities 2017-01-16: Charting new heights

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CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil - Charting new heights

• China Aviation Oil (CAO) is a well-backed, integrated supplier and trader of jet and other fuels, with strong baseline net profit driven by China’s burgeoning international aviation market.
• Further capacity enhancement in Shanghai Pudong airport and expansion in global markets, especially the US, could propel earnings further.
• We initiate with Add and target price of S$2.00, based on 13x CY18F P/E (c.20% discount to peer average CY18F PER of 16.6x).
• Stock offers net cash/share of 23.4 UScts and CY17F yield of 2.7%, on a balance sheet that has negligible debt, giving it freedom to capitalise on M&A opportunities.

Key link to China’s expansionary international aviation market 

• China Aviation Oil (CAO) is the sole jet fuel importer to China, supplying 30-40% of China’s overall jet fuel supply. Imported (or bonded) jet fuel can only be utilised by outbound flights from China. 
• In our view, CAO is a proxy for China’s burgeoning international aviation, which is set to grow with the country’s increased urbanisation and ‘outward-looking’ investment policies.

Benefiting from Shanghai Pudong airport’s capacity expansion 

• CAO has a 33% stake in the exclusive refueller for Shanghai Pudong International Airport. This associate has been a major contributor to CAO’s historical PBT (64% of 9MCY16 PBT). 
• We believe the completion of the fifth runway in end-2017/2018 and the satellite terminal in 2019 would cause this associate’s contribution to lift off. According to industry sources, once completed in 2019, the airport will be among the world’s top three and able to handle 80m passengers in 2025 (+c.30% from c.60m it currently handles).

More diversified globally to reach new heights 

• In 1HCY16, CAO’s international revenue accounted for 51.0% of total revenue (vs. 20% in CY10). It has also expanded its trading network to 42 airports outside mainland China.
• We believe the company’s vision to trade globally would propel earnings growth. Its existing links to two of the world’s busiest airports (Los Angeles and Hong Kong international airports) and strong support structure (via strategic assets) provide the foundations for this global expansion, in our view.

Healthy balance sheet to back up opportunistic growth 

• CAO currently boasts a net cash position of c.US$202.8m, which we believe gives it the freedom to capitalise on any M&A opportunities that may emerge. 
• CAO has an ambitious net profit target of c.US$110m by 2020F (double 2010 net profit of US$54.7m) and we believe it would not rule out M&A to reach its goal.

Initiate with Add and target price of S$2.00 

• The stock currently trades at CY18F P/E of 9.9x, above the historical 8-year forward P/E average of 8.8x. In our view, CAO should trade at a narrower discount to its peers which currently trade at 16.6x CY18F P/E), given its higher returns and the likely structural rerating post-stellar net profit showing in 9MCY16 (+c.40% yoy). 
• Stripping out CAO’s net cash per share of 23.4 UScts, the implied CY17F P/E is just c.8.3x. We have ascribed a target CY18F P/E of 13x (c.20% discount to peer average ).

Key risks 

• Downside risks include: 
  1. weaker-than-expected Chinese international travel, 
  2. variability in gross margins from opportunistic trading activities, 
  3. lower-than-expected contributions from associates, and 
  4. slower-than-expected penetration of international markets.

Cezzane SEE CIMB Securities | LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2017-01-16

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