• Maintain BUY with new SGD1.55 Target Price from SGD1.50, 26% upside plus 4% yield.
• China Aviation Oil's Better-than-expected 3Q19 earnings were driven by an increase in volume and profitability for the supply of jet fuel in regions outside China. This more than offset weakness in earnings contribution from associates.
• While weakness in associate earnings may persist in the near term, we remain confident of China Aviation Oil’s long-term growth – to be driven by growth in Chinese aviation traffic.
• Ex-cash 6x 2020F P/E and below 1x P/BV remains compelling.

3Q19 Results Beat Expectations

• Amidst 19% growth in middle distillate volumes and increase in profitability for supply of jet fuel to regions outside China, CHINA AVIATION OIL (SGX:G92) reported gross profit of USD16.3m, which was almost double of our gross profit estimate of USD8.6m. See China Aviation Oil Announcements.
• However, weak contribution from associates, which was due to a decline in earnings for Shanghai Pudong International Airport Aviation Fuel Supply Corp Ltd (SPIA, 33%-owned by China Aviation Oil), implied that reported PATMI of USD23.9m was only 19% higher than our estimated PATMI of USD20.1m.

China Aviation Oil Continues to Grow Jet Fuel Volume and Profits

• We estimate that China Aviation Oil reported growth in jet fuel supply volume to regions outside China for a third consecutive quarter. This is in line with China Aviation Oil’s efforts to diversify from its reliance on the Chinese aviation market. We also estimate that volume for supply of jet fuel in China declined for the first time since 3Q17.
• Nevertheless, jet fuel supply and trading business remain highly profitable as we estimate that gross profit generated from the supply of jet fuel to regions outside China almost tripled from the same quarter last year.

Lower Margins to Offset Near Term Volume Growth for SPIA

• Although SPIA reported 5% increase in volume, profit fell 30% due to the weakening of the CNY against the USD, and due to pressure on margins driven by the Government’s decision to lower wholesale aviation fuel prices and rates charged by China National Aviation Fuel Group (China Aviation Oil’s parent) to the airlines (see news article). The decision was taken to boost aviation traffic in China.
• While the recent increase in Shanghai Pudong Airport’s passenger capacity should drive strong growth in jet fuel refuelling volume, near term earnings growth may be hampered by lower margins.

Reiterate BUY

• We reduce China Aviation Oil’s 2020F-2021F by 3% to account for lower crude oil price forecasts and lower contribution from SPIA. China Aviation Oil’s valuation remains cheap vs regional and global peers.
• Given its zero debt balance sheet and significant net cash position (c.25% of its market cap) it is expected to undertake a sizable earnings-accretive acquisition.

Source: RHB Invest Research - 4 Nov 2019