CHINA AVIATION OIL(S) CORP LTD (SGX:G92)
China Aviation Oil - A Delayed Beneficiary Of China’s Air Travel Resumption & Oil Prices
- China Aviation Oil (SGX:G92) has a monopolistic position supplying jet fuel to airlines at key airports in China. Predictably, its profitability has been hit by a COVID-19-related decline in air travel; however China Aviation Oil’s balance sheet remains strong with net cash of S$0.24 per share as at end-1H22. Nevertheless, it had material negative free cash flow of US$172m in 1H22 (1H21: +US$37m).
- China Aviation Oil’s valuations appear fair as it is trading at 2022 annualised ex-cash P/E of 10x.
China Aviation Oil is hit by lower business levels due to COVID-19.
- China Aviation Oil's recent 1H22 results were poor with supply and trading volume declining 36% y-o-y to 11.27m tonnes. While higher oil prices helped revenue grow 7% y-o-y, net profit fell 19% y-o-y to US$20m due to higher staff costs, provisions and lower associate contribution from Shanghai Pudong airport as China’s zero-COVID strategy throttled travel.
- Notably, receivables nearly doubled to US$1.3b, and China Aviation Oil's net cash fell 49% during the course of 1H22.
Reasonably healthy financial position.
- Despite its lower profitability in the past two years vs historical levels, China Aviation Oil’s balance sheet remains debt free with its net cash at US$205m as at end-1H22. This translates to a net cash per China Aviation Oil share of S$0.24, representing 28% of the current China Aviation Oil share price.
A mixed industry outlook at present, but should improve.
- While Chinese government actions have somewhat benefitted China Aviation Oil (e.g. increasing China Aviation Oil’s refined fuel export volume of 20,000 tonnes), the company’s outlook remains tied to the easing of China’s zero-COVID strategy – and thus travel restrictions – rather than other factors in the next 6-12 months.
- In addition, additional fuel charges for domestic flights, which in some instances represent about 80% of the ticket price, have currently dampened demand for short-haul domestic flights.
Volatile markets provide arbitrage opportunities for crude oil.
- China Aviation Oil has a diversified oil products portfolio (comprising of fuel oil, gasoil, gasoline and crude oil) as well as a trading network globally and thus is able to arbitrage pricing opportunities. We note that in 2021 its arbitrage trade volume was the highest in its corporate history.
- We also highlight that aside from jet fuel, China Aviation Oil has diversified away from its traditional aviation fuels and supplies other fuels to ship owners, power generators and end consumers.
Renewable energy a longer term threat – and possibly opportunity.
- Given the high oil prices and environmental regulation on carbon emissions, power generating firms have turned to other alternatives, thus threatening China Aviation Oil’s profitability in the long run. Cognisant of such risks, China Aviation Oil has stated that it will look to incorporate biofuels and carbon credits trading into its portfolio.
China Aviation Oil's 2020 and 2021 financial performance affected by COVID-19
- In 2020 and 2021, China Aviation Oil’s net profit fell 44% and 28% y-o-y respectively due to COVID-19-related decline in air traffic, thus negatively impacting China Aviation Oil’s business as lower volumes were seen in jet fuel supply as well as oil trading.
- For 2021 in particular, China Aviation Oil reported a net profit of US$40.4m, down 28.2% y-o-y from US$56.2m in 2020 due to the decrease in gross profit and other income partially offset by a decrease in expenses. Total revenue increased by 67.7% to US$17.6b in 2021 vs US$10.5b in 2020. As a result of the decline in profitability in 2021, China Aviation Oil paid out dividend of S$0.05 and S$0.03 in 2020 and 2021 respectively, although its payout ratio went up from 39.5% to 40.5% for 2021. See China Aviation Oil's dividend history.
China Aviation Oil - Valuations.
- Based on consensus, China Aviation Oil's Share Price trades at 2022 P/E and P/B of 10x and 0.6x respectively vs peers' average P/E and P/B of 8.9x and 0.8x. However on an ex-cash basis and annualising 1H22 EPS, the company currently trades in line with its peers.
- In 2021, China Aviation Oil generated an ROE of 4.5% vs regional peers' average of over 10%.
- See
Singapore Research Team
UOB Kay Hian Research
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https://research.uobkayhian.com/
2022-08-24
SGX Stock
Analyst Report
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