• Stay BUY with SGD1.60 Target Price, 30% upside, 3.6% yield.
• We believe the decline in China Aviation Oil’s share price during the last one month seems unwarranted. Market seems overly concerned about a slowdown in China’s aviation traffic, despite passenger traffic growing by 3.9% y-o-y in April.
• We remain positive on China Aviation Oil (SGX:G92)’s long-term earnings growth prospects, aided by growth in China’s international passenger traffic as well as capacity expansion at Shanghai Pudong International Airport (SPA).
• In addition, China Aviation Oil's ex-cash 3.9x 2020F P/E remains compelling.

China’s Aviation Traffic Continues to Grow

• We are not overly concerned with China’s aviation passenger traffic declining 1.9% m-o-m in April 2019. This is mainly because the monthly traffic was still 3.9% higher y-o-y. While there are concerns about some negative impact from escalation of the US-China trade war, we remain confident of China Aviation Oil’s ability to deliver mid-single digit jet fuel supply volume growth in 2019.

Capacity Expansion at SPIA to be Completed by September

• News report suggests that SPA’s satellite terminals will begin operations in September. This will increase the airport’s annual capacity to 80m passengers. See news report.
• With its fifth runway already operational since late-2018, we believe, the current capacity expansion will enable Shanghai Pudong International Airport Aviation Fuel Supply (SPIA) to report a strong jet fuel volume growth during 2020-2021. SPIA accounts for three quarters of China Aviation Oil’s profit before tax.

Continues to Seek M&A Opportunities

• The acquisition of Navires Aviation (NAL) in 2018 enabled China Aviation Oil to establish a presence at four European airports, namely Schiphol, Brussels, Frankfurt, and Stuttgart.
• As at end-2018, China Aviation Oil supplied jet fuel to 51 airports outside mainland China in over 20 countries. China Aviation Oil plans to keep expanding its customer base globally and extending its reach into key aviation markets worldwide.
• With a strong Chinese state-owned enterprise parentage, China Aviation Oil could also gain from growth opportunities offered by China’s ‘One Belt, One Road’ strategy, in our view.

Reiterate BUY

• Despite recent weakness in China Aviation Oil’s share price, we estimate China Aviation Oil could report a revival in earnings growth towards the end-2019. With a zero debt balance sheet and a large net cash position (c.49% of its market cap), China Aviation Oil could also undertake an earnings-accretive acquisition.
• In our view, China Aviation Oil could even consider paying higher dividends, subject to management and board approvals, in case it is unable to grow inorganically.
• Key downside risks are losses being reported at its oil trading business, despite all the risk control measures, lower-than-estimated jet fuel volume growth and opening up of the Chinese aviation fuel supply market, which would remove China Aviation Oil’s current monopoly.
• China Aviation Oil is also one of the RHB's Top Singapore Small Cap Companies - 20 Jewels 2019 Edition.

Source: RHB Invest Research - 28 May 2019