• BUY, SGD1.60 Target Price offers 23% upside, 3.5% yield.
• Although China Aviation Oil’s share price has moved lower in line with jet fuel prices, we highlight that profitability of its China jet fuel business is driven by volumes and not so much by the oil price outlook.
• 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 believe our earnings estimates remain conservative and ex-cash 4.3x 2020F P/E remains compelling.

China Is Witnessing Strong Growth in International Passenger Traffic

• This year, China’s aviation passenger traffic registered 8.6% y-o-y growth, while its international aviation passenger traffic has grown 16.6% y-o-y. All international flights flying out of China are required to use imported jet fuel, which is supplied only by China Aviation Oil (SGX:G92).
• Amidst expectation of some negative impact from the US-China trade war, we have conservatively forecasted mid single-digit jet fuel supply volume growth in 2019. This compares with an average volume growth of 11% in the last 10 years.

SPA Could See Strong Growth in Traffic

• Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA, which is 33%-owned by China Aviation Oil) is a jet fuel at Airport (SPA).
• SPA witnessed average passenger of 6% over the last eight. The of capacity by end-2019 could a high rate in at SPA and enable to register higher-than-estimated fuel in 2020-2021.

Oil Price Outlook Does Not Impact Profitability of Its China Jet Fuel Supply Business

• During last one, China Aviation Oil’s share price has moved jet fuel prices. While an of weaker jet fuel limit China Aviation Oil’s ability to grow its trading volumes, it does not impact the profitability of its China jet fuel supply business, which has registered steady volume growth and earns a fixed USD per ton margin.

Large Cash Balance Offers Scope for Inorganic Growth

• China Aviation Oil has been seeking opportunities to grow its jet fuel business outside China. A zero debt balance sheet and large net cash position (c.46% of its market cap), should enable China Aviation Oil to undertake an earnings-accretive acquisition.

Reiterate BUY

• Despite outperforming the STI by 14% YTD, China Aviation Oil’s stock continues to trade at an FY20F P/E of 7.9x (ex-cash FY20F P/E of 4.3x). This compares with a conservative estimated FY20F earnings growth of 7.6%. The stock also remains cheap vs regional and global peers.
• 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 - 10 Jul 2019