• CHINA AVIATION OIL(S) CORP LTD (SGX:G92)'s 2Q19 net profit of US$28.4m took 1H19 net profit to US$54.8m, largely in line (c.57.6%) with our/consensus FY19F (US$95.1m/95.05m).
• 2Q19 associate earnings grew 2.9% y-o-y, taking 1H19 associate earnings to US$38.3m.
• The stock is still net cash. Maintain ADD and Target Price of S$1.70, based on unchanged 11.0x FY20F P/E, 30% discount to peer average.

EBIT Down on Lower GP Margins and Higher Credit Provisions

• China Aviation Oil's 2Q19 revenue of US$5.9bn grew 2.9% y-o-y on significant growth in middle distillate volumes (+25.7% y-o-y).
• Despite this, 2Q19 EBIT was down 5.6% y-o-y only due to potential credit loss (“ECL”) of US$4.3m.
• 1H19 core EBIT (US$16.2m) was down 11.2% y-o-y (1H18: US$18.3m) but we had already factored that in as we foresaw weaker GP margins with the onset of global uncertainties since Apr 19.

…but Saved by Associates; Net Profit Slips Slightly

• 2Q19 associate earnings grew (+2.9% y-o-y) to US$19.2m on higher Shanghai Pudong International Airport Aviation Fuel Supply (SPIA) profits that grew to US$16.98m (+8.3% y-o-y/2Q18: US$15.7m) on higher refuelling volumes and lower operating expenses.
• 2Q19 share of profits from other associates was the main drag as it fell (-25.6%) due to lower OKYC contribution that was partly affected by foreign exchange losses.
• Overall, China Aviation Oil's 1H19 associate earnings were down 3.3% y-o-y but still within expectations.
• We had already expected China Aviation Oil to record lower net profit growth in FY19F (+1.4% y-o-y) vs. the 9% y-o-y net profit growth it recorded in FY18. Despite the fall in net profit (-2.5% y-o-y) in 1H19, it was still within our FY19F expectations.

Net Cash Position Is the Key Stabiliser; Maintain ADD

• China Aviation Oil was still in a net cash position at end-Jun 19 of 24UScts/share.
• We still see China Aviation Oil as a longer-term proxy for China’s growing outbound travel and like its healthy balance sheet.
• Maintain ADD and Target Price based on 11.0x FY20F P/E.
• Catalysts are higher product volumes and associate earnings.
• Downside risks include lower volumes, margins and associate earnings.

Source: CGS-CIMB Research - 7 Aug 2019