China Aviation Oil - RHB Invest 2020-01-21: Remain Positive On Long-Term Growth; BUY


China Aviation Oil - Remain Positive On Long-Term Growth; BUY

  • Stay BUY, 21% upside plus c.4% yield. See China Aviation Oil Target Price.
  • We remain confident in CHINA AVIATION OIL (SGX:G92)’s long-term growth. This should be aided by the continuing rise in China’s aviation traffic and the group’s diversification into jet fuel supply to non-Chinese markets.
  • While weakness in associate earnings may persist in the near term, jet fuel refuelling volume growth at the Shanghai Pudong International Airport (SPA) could offer a positive surprise. Its ex-cash 6.4x 2020F P/E and below P/BV multiple remain compelling.

China is one of the key growth drivers; CAO is also diversifying away from its reliance on the East Asian state.

  • For the first 10 months of 2019, China’s international aviation passenger traffic registered 17% y-o-y growth. All international flights flying out of the East Asian country are required to use imported jet fuel, which is supplied only by China Aviation Oil.
  • We have conservatively forecasted mid-single-digit jet fuel supply volume growth during 2019-2021. This compares with an average volume growth of c.11% over the last 10 years.
  • Based on reported numbers, we estimate China Aviation Oil registering growth in jet fuel supply volumes to regions outside China for three consecutive quarters during 9M19. This is in line with its efforts to diversify from its reliance on the Chinese aviation market.

SPA’s new satellite terminal should support volume growth.

  • The recent addition of satellite terminals at SPA has increased the airport’s annual passenger handling capacity to 80m passengers (SPA handled 74m passengers in 2018).
  • Shanghai Pudong International Airport Aviation Fuel Supply (SPIA) – which is 33%-owned by China Aviation Oil and accounts for c.65% of the latter’s PBT – witnessed margins pressure in 2019 amidst weakening of the CNY against the USD. It was also due to the Government’s decision to lower wholesale aviation fuel prices and rates charged by China Aviation Oil’s China National Aviation Fuel Group parent to the airlines. However, as the airport’s sole refueller, we maintain that capacity addition at SPA could enable SPIA to register higher-than-estimated jet fuel volume growth in 2020-2021.

Reiterate BUY.

  • China Aviation Oil's share price outperformed the STI Index by 19% in 2019. Despite that, it continues to trade at a low 8.5x 2020F P/E (ex-cash FY20F P/E of 6.4x). The stock also remains cheap vs regional and global peers, which are trading at 12.1-22.6x P/E (market cap weighted average of 13.7x).
  • Given its zero debt balance sheet and significant net cash position (c.24% of its market cap), China Aviation Oil should be able to undertake a sizable earnings-accretive acquisition.
  • See China Aviation Oil Analyst Reports.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-01-21
SGX Stock Analyst Report BUY MAINTAIN BUY 1.550 SAME 1.550