Excerpts from analyst's report

RHB Research analyst: Edison Chen

cao planeCAO: The largest purchaser of jet fuel in the Asia Pacific region and the key supplier of imported jet fuel to the PRC’s civil aviation industry, and accounts for more than 90% of PRC's jet fuel imports. Photo: CAO (Singapore)
We initiate coverage on China Aviation Oil with a BUY and DCF-based SGD1.24 TP (82% upside), implying 12.4x FY16F P/E. Despite often being perceived as a risky Chinese jet fuel trading house, it has managed to deliver low-risk resilient profits on a rare jet fuel import monopoly and lucrative stake in China’s largest airport refueller. It aims to double profits by 2020 through M&As.

A dual listing has not been ruled out, given its undeserved valuations in the SG market. 

Rare monopoly makes it a proxy to China’s global aviation boom. Thanks to its state-owned parent, China Aviation Oil Singapore Corp (China Aviation Oil) is Asia-Pacific’s largest physical jet fuel trader and the sole supplier of imported jet fuel for China’s civil aviation industry. This means it effectively has a monopoly on supplying jet fuel for all outbound international flights in China, making it an excellent proxy to the country’s global aviation traffic boom.

Size brings with it bargaining power and resilient low-risk profits. This sizable volume gives China Aviation Oil considerable bargaining power when dealing with suppliers. With its lucrative and low-risk businesses, ie jet fuel supply (with a fixed cost plus model) and investments in associates like Shanghai’s airport refueller, as well as a robust risk control framework, the company’s profits have remained resilient despite the 2014 oil shock.

edisonchen1.16 Aiming for USD120m profit in five years with net cash funding M&As. Management intends to deploy its war chest of USD111m or SGD146m in net cash (around 25% of its market cap) for synergistic M&As.

"It has shared its 2020 target of doubling profits to USD120m through both organic (targeting the overseas market) and inorganic growth (through synergistic downstream M&As) -- Edison Chen (photo)

Weak share price due to market misperception. We believe that the market currently has a misperception of the company, believing it to be a high-risk Chinese oil trading house (due to its history).

However, China Aviation Oil operates a low-risk cost-plus jet fuel supply business in China and has strong parents such as the Chinese Government and global oil major player BP.

This misperception has led to a weak share price and undeserved valuations. We note that management does not rule out the possibility of a dual listing.

Full report here.

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