China Aviation Oil - RHB Invest 2019-03-27: Signs Of Revival In Traffic; Upgrade To BUY


China Aviation Oil - Signs Of Revival In Traffic; Upgrade To BUY

  • Upgrade to BUY from Neutral, with new SGD1.60 Target Price from SGD1.50, 26% upside plus 3.6% yield.
  • CHINA AVIATION OIL(S) CORP LTD (SGX:G92) should benefit from signs of strong recovery in international passenger traffic growth in China. This, in addition to resolution of capacity constraints at Shanghai Pudong International Airport (SPA) once the new satellite terminal building is operational in 2H19, should provide scope for upside surprise to our jet fuel supply volume growth assumptions over 2019-2021.
  • We believe its ex-cash 4.6x 2019F P/E remains compelling.

Strong recovery in China’s international passenger traffic growth.

  • China registered 15% y-o-y growth in international passenger traffic in 2018, up from 7% y-o-y growth in 2017. This strong growth has sustained in 2019 as well, with the first two months registering 14-23% y-o-y growth. The revival in international passenger traffic growth is also supported by the rise in jet fuel imports into China, which grew 9% y-o-y in 2018 vs 6% y-o-y in 2017.
  • We expect jet fuel imports to continue growing in line with growth in international passenger traffic. China Aviation Oil will be a key beneficiary of this trend as it is the sole importer of jet fuel into China that is consumed by all of the country’s outbound international flights.

Capacity constraints at SPA to be resolved by early 2020.

  • Amidst capacity constraints, growth in profit contribution from Shanghai Pudong International Airport Aviation Fuel Supply Co (SPIA) – the sole supplier of jet fuel at SPA – has moderated over last few years. SPIA, a 33%-owned associate, accounts for 65% of China Aviation Oil’s profit before tax.
  • SPA commissioned its fifth runway in late 2018, and operations at its new satellite terminal building, which will be the world’s largest, are expected to commence in 2H19. With the resolution of capacity constraints, growth in SPIA’s profits could exceed our current conservative estimates.

Ex-cash valuations are compelling.

  • SPIA reduced its dividend payout to China Aviation Oil during 2016-2017 to fund its capacity expansion. With capacity expansion now in place, we expect the higher dividend payout, which we witnessed in 2018, to sustain over the forecast period.
  • We expect China Aviation Oil to receive 90% of its share of profits from SPIA as dividends. This should further add to China Aviation Oil’s net cash balance, which currently accounts for 45% of its market cap.
  • China Aviation Oil is trading at 4.6x 2019F P/E on an ex-cash basis, which we deem to be compelling.

Shekhar Jaiswal RHB Securities Research | 2019-03-27
SGX Stock Analyst Report BUY UPGRADE NEUTRAL 1.60 UP 1.500