China Aviation Oil - CIMB Research 2017-06-08: Hitching A Ride On China’s Outbound Journey

CHINA AVIATION OIL(S) CORP LTD G92.SI

China Aviation Oil - Hitching A Ride On China’s Outbound Journey

A global forum held in May reaffirms China’s ‘One Belt, One Road’ initiative. “Internationalisation” and aviation infrastructure improvement remain priorities.
China Aviation Oil (CAO) is a prime beneficiary given strong parentage - China National Aviation Fuel Grp (CNAF) - and business model that is firmly intertwined with China’s aviation industry.

CAO’s core jet fuel supply division benefits from growth of Chinese carriers’ long-haul routes. Existing strategic alliances will further facilitate geographic expansion goals.
Capacity enhancements in FY17-19F are key future growth drivers for SPIA. Moderate yet steady growth expected for SPIA in the meantime (FY17-18F).
Maintain Add with a marginally lower target price, based on FY18F P/E of 13x (19.5% discount to peer average).

The ‘Belt and Road’ Forum for International Cooperation (BFR) held on 14-15 May reaffirmed China’s “internationalisation” goals and provides a further boost to the ongoing developments in Chinese international air routes and transport, in our view.
CAO benefits as its key earnings drivers –
1. imported jet fuel supply to China, and
2. associate contributions from Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA)
– are firmly intertwined with China’s aviation industry.

YTD Apr 17, the aggregate long-haul available-seat-kilometres (ASKs) of the three largest Chinese airlines continue to grow. In our view, this is a boon for CAO as its core jet fuel supply business is driven by outbound travel.
CAO’s strong alliance with Chinese carriers could also make it one of the preferred jet fuel suppliers for these carriers outside China, in our view, facilitating its international expansion goals and the volume growth of its aviation marketing division which reached 2.3m tonnes in FY16 (FY11: 0.2m tonnes).

The Shanghai Pudong Airport was one of the first few international airports to see enhancements in China’s bid to improve aviation infrastructure. Aircraft movement has been on a steady uptrend in the past 5 years, with 4MFY17 registering yoy growth of 3.7%.
For SPIA, we forecast FY17-18F refuelling volume growth of 6% p.a. and 15% for FY19 as new airport capacity enhancements are completed in end-17/early-18 and 2019.
We expect SPIA associate contributions to account for c.60% of CAO’s FY17-19F PBT.

As at 1Q17, CAO had a net cash position of 26.1 UScts/share, which accords it the financial flexibility to consider M&A opportunities.
CAO is also committed to a 30% dividend payout policy, which implies a yield of 2.7-3.28% for FY17-19F.

We continue to favour CAO for its prime position in key global aviation markets (US and China) and its healthy balance sheet.
We maintain our Add rating but lower our target price from S$2.28 to S$2.20, based on 19.5% discount to the peer average P/E, due to adjustments on our US$/S$ assumptions to US$1.40 (from US$1.45).
Key downside risks include:
1. weaker-than-expected jet fuel supply volume growth;
2. lower contributions from SPIA and other strategic stakes.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-06-08

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.20 Down 2.280