China Aviation Oil - DBS Research 2021-01-25: Still Undervalued At < 3x Ex-Cash P/E


China Aviation Oil - Still Undervalued At < 3x Ex-Cash P/E

  • China Aviation Oil (SGX:G92)'s 2H20 earnings poised for a strong rebound, led by key associate SPIA as traffic at Shanghai Pudong International Airport has bounced on firm domestic air travel.
  • Expect steady improvement from FY21F onwards as international travel starts to recover in 2H21.
  • Net cash of ~US$400m for accretive acquisitions.

Domestic air travel recovery is well underway.

  • Domestic revenue-passenger-kilometers (RPK) in China had largely returned to pre-COVID-19 levels in Oct 2020, which is no surprise given that the country has managed to swiftly control the spread of the virus. China has also kickstarted an ambitious inoculation plan of vaccinating 50 million people by early Feb 2021, which is the peak travel season for the Lunar New Year, before rolling out a free national immunisation programme for the general public.
  • We believe that domestic travel will remain firm going forward as there will be increased confidence in travelling after mass vaccinations and pent-up demand will first drive domestic travel as international borders are likely to remain closed. Even after the opening of international borders, domestic flights should remain resilient as consumers largely perceive domestic markets to be safer, and also want to minimise time spent in an enclosed area.

Stronger earnings contribution from SPIA, as departing frequencies recover.

  • Weekly departing frequencies at Shanghai Pudong International Airport dipped to ~2,000 in Dec 2020 due to a resurgence of cases but it has since rebounded to ~3,500 in Jan 2021. Going forward, volumes should stay firm as long as the pandemic remains under control in China. Hence, China Aviation Oil’s earnings should improve materially from 2H20 as SPIA typically accounts for more than half its earnings.

International air travel recovery to lag domestic recovery.

  • With travel restrictions and border closures in place, international revenue-passenger-kilometers (RPK) remains in the negative y-o-y growth territory. The turnaround trajectory for international travel will likely be bumpy, with developed countries that have secured significant vaccine doses emerging out of the crisis first.
  • The turnaround in international travel activity in countries with a relatively lower vaccine coverage would likely trail other countries, as inbound travellers would opt to avoid these countries, while outbound travellers who have not been inoculated could be denied entry into other countries. However, we expect international air travel recovery to gain strong momentum from 2H21, as key aviation markets serviced by China Aviation Oil have fairly high vaccine coverage.
  • According to estimates by the Bloomberg COVID vaccine tracker, US, Australia, South Korea, Japan, Hong Kong, Macau, India and Indonesia have secured significant quantities of doses to inoculate most of their populations. We forecast international travel activity to reach 60% of 2019 levels by end-2021 (See our report in PDF: 2021 Regional Airlines Sector Outlook: The vaccines are here, but the skies are not clear yet).

China Aviation Oil’s supply volumes should start to pick up

  • China Aviation Oil’s supply volumes should start to pick up more meaningfully from 2H21, assuming the vaccinations being rolled out now in key aviation markets will allow international flights to resume in greater numbers.
  • Meanwhile, its trading business should continue to do well in a contango market for oil.

Recommend BUY with raised target price

Paul YONG CFA DBS Group Research | Jason SUM DBS Research | https://www.dbsvickers.com/ 2021-01-25
SGX Stock Analyst Report BUY MAINTAIN BUY 1.38 UP 1.200