China Aviation Oil - DBS Research 2017-02-24: Soaring to new heights

China Aviation Oil - DBS Vickers 2017-02-24: Soaring to new heights CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil - Soaring to new heights

  • Net profit soared 45% to a record US$88.9m in FY16 on higher volumes and associate contributions.
  • Cash of US$287.3m on hand provides necessary ammunition to finance M&As.
  • DPS of 4.5 Scts proposed for FY16.
  • Maintain BUY with higher TP of S$1.85.

Maintain BUY with higher TP of S$1.85, as we roll forward our earnings base to FY18F (from FY17F). 

  • China Aviation Oil (CAO)’s profits soared 45.1% in FY16, as the group benefited from a surge in supply and trading volumes and higher associate contributions – particularly from Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), which contributed US$60.6m to group profit. 
  • We estimate that c.US$12m were due to one-off mark-to-market gains. Barring similar gains over our forecast period, we expect core earnings to taper slightly to US$86.7m in FY17F before growing 7% to US$92.8m in FY18F.
  • After modest increases of 2% p.a. to FY17F and FY18F earnings on slightly higher volumes and rolling forward our earnings base to FY18F, we arrive at a higher TP of S$1.85, based on 12x PE.

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 marketing and supply of jet fuel at 43 international airports outside China, and further growing its reach, volumes, and ultimately achieving greater economies of scale.

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

  • As the exclusive supplier of jet fuel to Pudong International Airport, SPIA has and should carry on to benefit from rising air traffic at the airport, which is driven by the continued development of Shanghai as China’s key financial centre. 
  • With US$287m cash on hand (or net cash of US$187m) at the end of 2016, 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.


  • Maintain BUY with higher TP of S$1.85, based on 12x FY18F PE. 
  • Given CAO’s robust growth prospects and scale, we think a PE valuation of 12x 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 via M&As.

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 on prospective M&A.

Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-02-24
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.85 Up 1.700