• Maintain BUY and SGD1.60 Target Price, 13% upside with 3% yield.
• CHINA AVIATION OIL(S) CORP LTD (SGX:G92) reported 1Q19 recurring PATMI of USD26.3m (down 2% y-o-y), in line with our and consensus estimates. We expect China Aviation Oil to benefit from signs of recovery in international passenger traffic growth in China. This, in addition to increase in passenger capacity at Shanghai Pudong International Airport (SPA) by late 2019, should provide scope for upside surprise to our profit estimates.
• We believe its ex-cash 5.4x 2019F P/E remains compelling.

China Aviation Oil's 1Q19 Results Announced on 25 Apr Were in Line

• China Aviation Oil’s 1Q19 PATMI of USD26.3m is comparable with our estimate of USD26.2m.
• Operating profit of USD6.3m was below our USD7m estimate amidst higher depreciation cost, which was related to the adoption of Singapore Financial Reporting Standards (International) 16. The weak operating profit was partially offset by lower tax expenses reported during the quarter.
• Tax expenses fell 28% y-o-y, amidst decrease in recognition of deferred tax liabilities on China Aviation Oil’s share of undistributed retained earnings from associates and lower provision of income tax expense by a subsidiary during 1Q19.

Jet Fuel Volume Continues to Grow

• During 1Q19, supply and trading of middle distillate volume increased 9% y-o-y to 4.64m tonnes. This increase was supported by 6% y-o-y increase in supply and trading of jet fuel volumes to 3.54m tonnes and 18% y-o-y increase in supply and trading of gasoil volumes to 1.10m tonnes.
• Trading of other oil products registered the third consecutive quarterly decline, with volume falling 11% y-o-y to 2.14m tonnes.

Associate Earnings Remain Weak

• Profit from associates declined 9% y-o-y to USD19.1m. Contribution from Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), a 33%-owned associate that accounts for > 60% of China Aviation Oil’s PBT, registered contribution of USD17.2m (down 8.9% y-o-y). This was 2.4% below our estimate.
• In CNY terms, SPIA’s profit contribution was only 3.3% lower as the CNY has weakened 6.1% y-o-y against the USD. China Aviation Oil highlighted that decline in profit for SPIA was largely due to y-o-y decline in revenue caused by lower average oil price.

Maintain BUY; Placing Our Estimate and TP Under Review

• We remain bullish on China Aviation Oil’s share price outlook, as it should see benefits from recovery in China’s international aviation traffic.
• While we maintain our BUY rating on the stock, we have placed our earnings estimate and Target Price under review as we await response to some queries that we have posed to China Aviation Oil’s management.

Source: RHB Invest Research - 26 Apr 2019