• China Aviation Oil (CAO) announced the intention to dispose of its entire 39% equity interest in China Aviation Oil Xinyuan Petrochemicals Co Ltd (Xinyuan). 
• Xinyuan is a minor contributor to CAO’s share of associates profit; hence sale will have negligible impact on CAO’s profitability, in our view. 
• Maintain ADD and Target Price, based on 12.5x CY19F P/E (20% discount to peer average). 

Disposing of Xinyuan Interest Via Listing-for-sale

As China Aviation Oil (CAO) is a subsidiary of a China state-owned enterprise (SOE), the proposed disposal will be via a listing-for-sale through the Beijing Equity Exchange. No tentative completion deadline was disclosed.

Back in FY07, CAO disposed of a 41% stake (out of its total 80% stake then) in Xinyuan to Shenzhen Juzhengyuan Petrochemical Co Ltd (Juzhengyuan), then a 19%-stake owner in Xinyuan, for Rmb20.5m (~S$4.3m). The sale was on a “willing- buyer willing-seller” basis and at the original acquisition price CAO invested in Xinyuan in FY04, despite Xinyuan being a loss-making company.

Xinyuan is mainly engaged in the storage tank leasing and trade of oil products in Southern China. Its key asset is a storage tank farm located in the city of Maoming, Guangdong Province, China with a total storage capacity of 79,000m3. In FY17, it reported utilisation leasing rate of 99%.

Besides CAO, other current Xinyuan shareholders are Juzhengyuan with 60% stake, and China National Aviation Fuel Holding Company (CNAF) with a 1% stake.

Minor Impact on CAO’s Share of Associates Profit and Net Cash

In 1Q18, Xinyuan contributed US$0.2m, or a mere 0.9%, to CAO’s share of associates profit of US$21.0m. Over FY08-17, Xinyuan has on average accounted for 1.6% of CAO’s share of associates profit, with its highest contribution at US$1.6m in FY14, but only due to reversal of prior year impairment provisions made. Hence, its disposal will have a negligible impact on CAO’s future associate profits, in our view.

Assuming the sale is performed on a similar basis as in FY07, this could reap CAO Rmb19.3m (~US$3m), still a minor sum given that CAO had a net cash of US$171.5m (19.8UScts/share) as at end-1Q18.

We believe the proposed sale could be CAO’s way of streamlining its portfolio assets, especially since it has exited the petrochemical trading business.

Focus Will Still be on SPIA

Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA) continues to be CAO’s associate gem and accounted for 90.1% of its 1Q18 associate earnings.

The Shanghai Pudong airport started trial runs on its fifth runway at end-17; this could drive FY18F refuelling volumes for SPIA.

SPIA's 2019F volumes could grow further with the completion of the airport's satellite terminal to boost passenger capacity to 80m.

Poised for M&A Opportunities

CAO highlighted in end-17 that it is seeking synergistic M&A opportunities as it intends to expand its global jet supply and trading network. We are positive on CAO's expansion beyond being just a China-centric player.

Maintain ADD and Target Price of S$2.03

• We continue to favour CAO as a proxy for China’s growing outbound travel, as well as its expanding international footprint and healthy balance sheet.
• Our Target Price is still based on 12.5x CY19F P/BV, 20% discount to peer average of 15.8x to reflect its smaller market cap.
• Potential re-rating catalysts are higher product volumes and associate earnings, and possibility of M&As to fuel inorganic growth.
• Downside risks to our call include lower volumes, margins and associate earnings.

Source: CGS-CIMB Research - 19 Jun 2018