• Maintain BUY and SGD1.60 Target Price, 36% upside with 3.8% yield.
• CHINA AVIATION OIL(S) CORP LTD (SGX:G92) reported 2Q19 recurring PATMI of USD28.5m (down 3% y-o-y), in line with our estimate.
• We remain confident of China Aviation Oil’s long-term growth, which will be driven by continuing growth in China’s aviation traffic. This, in addition to an increase in passenger capacity at Shanghai Pudong International Airport (SPA), could provide scope for upside surprise to our profit estimates.
• We believe China Aviation Oil's ex-cash 5.6x 2019F P/E remains compelling.

2Q19 Results Announced on 7 Aug Were in Line

• CHINA AVIATION OIL(S) CORP LTD (SGX:G92)’s 2Q19 PATMI of USD28.5m is comparable with our estimate of USD27.7m. Operating profit of USD9.7m was below our USD10.6m estimate mainly on higher provision for expected credit loss.
• The weak operating profit was more than offset by higher-than-estimated contribution from associates and lower-than-estimated tax expenses reported during the quarter.

Jet Fuel Volume Continued to Grow

• During 2Q19, the supply and trading of middle distillate volumes increased 26% y-o-y to 5.72m tonnes. This increase was supported by a 19% y-o-y increase in supply and trading of jet fuel volumes to 4.06m tonnes, and a 44% y-o-y increase in supply and trading of gasoil volumes to 1.66m tonnes.
• Trading of other oil products registered a fourth consecutive quarterly decline, with volumes falling 9% y-o-y to 4.91m tonnes.

Profit Contribution From Associate Surprised on the Upside

• Profit from associates increased 3% y-o-y to USD19.2m. Contribution from Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), a 33%- owned associate that accounted for 56% of China Aviation Oil’s 2Q19 PBT, was at USD16.9m (up 8.3% y-o-y) – this was 13% above our estimate.
• In CNY terms, SPIA’s profit contribution grew 16% y-o-y as the CNY weakened 6.9% y-o-y against the USD.
• Profit contribution from other associates fell 25.6% y-o-y to USD2.2m, mainly attributable to lower contributions from Oilhub Korea Yeosu Co (OKYC), as its earnings were affected by foreign exchange losses.

Maintain BUY; Placing Our Forecasts and Target Price Under Review

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

Source: RHB Invest Research - 7 Aug 2019