• Maintain BUY with unchanged SGD1.50 Target Price, 30% upside with 4.2% 2020F yield.
• We reduce CHINA AVIATION OIL (SGX:G92)’s forecasts by 1-2% to account for our revised CNY forecasts. Nevertheless, we remain confident in China Aviation Oil’s long-term growth, which should be driven by growth in China’s aviation traffic.
• In the near term, the increase in passenger capacity at Shanghai Pudong International Airport (SPA) provides scope for an upside surprise to jet fuel sales in China.
• Its ex-cash 5.1x 2020F P/E and below P/BV multiple remain compelling.

Shanghai Pudong International Airport’s Satellite Terminal Opens in September

• Shanghai Pudong International Airport’s satellite terminal opens in September as it completed final inspections by China's civil aviation regulator. The addition of satellite terminals will increase SPA’s annual capacity to 80m passengers which would ease congestion and provide room for growth (SPA handled 74m passengers in 2018).
• As the sole refueller at the airport, we maintain that the capacity addition at SPA could enable Shanghai Pudong International Airport Aviation Fuel Supply (SPIA, which is 33%-owned by China Aviation Oil), to register a higher-than-estimated jet fuel volume growth in 2020-2021. SPIA accounted for 65% of China Aviation Oil’s PBT in 2018.

Long Term Growth Drivers Remain Intact

• For the first six months of 2019, China’s aviation passenger traffic registered an 8.5% 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.
• Amidst expectations 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.

Small Updates to FX Forecast

• Amidst hiccups on the trade front, PBOC easing and further liquidity injection into its money market, our FX team has revised its forecasts for CNY. Although jet fuel is priced in USD, China Aviation Oil’s associates, especially SPIA, report earnings in CNY. This change in FX forecast reduces our 2019-2021F earnings by 1-2%. Every 5% weakening of the CNY vs the USD would lower China Aviation Oil’s 2020 earnings by 3%.

Reiterate BUY

• Despite outperforming the STI Index by 9% YTD, China Aviation Oil continues to trade at a low 2020F P/E of 7.2x (ex-cash FY20F P/E of 5.1x) with an estimated 2020 growth of 5.8%. The stock also remains cheap vs regional and global peers.
• Given its zero debt balance sheet and significant net cash position (c.29% of its market cap) China Aviation Oil is expected to undertake a sizeable earnings-accretive acquisition.

Source: RHB Invest Research - 2 Sep 2019