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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 13 Jun 2019, 11:39 PM

 

China Aviation Oil - Updating Our Oil Price Assumptions; BUY

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  • BUY, SGD1.60 Target Price offers 22% upside, 3% yield.
  • Our revision of crude oil price forecasts has resulted in a 2% adjustment in FY19-20F earnings. We remain upbeat on the long-term growth of China’s aviation passenger traffic, in line with its rising per capita income and expanding aviation infrastructure.
  • We conservatively expect CHINA AVIATION OIL (SGX:G92)’s near-term earnings to be driven by increasing jet fuel supply to China and more jet fuel being pumped by SPIA, which accounts for 65% of pre-tax profit.

Revision to Oil Price Outlook

  • In our recently-published regional oil & gas report titled REG Oil & Gas: Tensions Escalate, we trimmed 2019-2020 Brent crude oil price forecasts by 3%. This downgrade was in line with our expectation of a prolonged US-China trade war, leading to possibly lower-than-expected global economic growth. We believe this will likely dampen global oil demand more than International Energy Agency’s (IEA) current estimate of 1.3mbpd additional demand for 2019.

Still Confident of Earnings Growth Drivers

  • We remain confident of growth in China’s aviation passenger traffic over 2019-2021. To account for concerns relating to negative impact from the escalation of the US-China trade war, we are forecasting only mid-single digit jet fuel supply volume growth for China Aviation Oil in 2019. This compares with an average jet fuel supply volume growth of 11% during last 10 years.
  • The completion of capacity expansion at Shanghai Pudong International Airport (SPA) by end-2019 should also enable Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA, which is 33%-owned by China Aviation Oil) to see higher-than-estimated jet fuel volume growth in 2020-2021.

Large Net Cash Balance Sheet

  • With a zero debt balance sheet and large net cash position (c.46% of its market cap), China Aviation Oil could undertake an earnings-accretive acquisition, in our view. The group may even consider paying higher dividends, subject to management and board approvals, in case it is unable to grow inorganically. See China Aviation Oil's dividend history.

Reiterate BUY

  • Despite outperforming stock remains cheap vs regional and global peers (see Figure1 in attached PDF report).
  • Key downside risks are lower-than-estimated jet fuel volume growth and opening up of the Chinese aviation fuel supply market, which would put an end to China Aviation Oil’s current monopoly.

Source: RHB Invest Research - 11 Jun 2019

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