• Keep BUY and SGD1.25 Target Price, 10% upside and 3.4% 2021F yield.
• China Aviation Oil (SGX:G92) remains a good proxy to recovering Chinese aviation traffic. We foresee upside risks to 2H20 earnings, if current improvements in daily air passenger volume in China are sustained. Its monopolistic position in China and parent’s ambitions to grow business outside China should be positive for China Aviation Oil. Moreover, its cost-plus business model should ensure positive FCF generation.
• China Aviation Oil is trading below its NTA/share of USD0.95 (SGD1.30) and at ex-cash 2021F P/E of just 3.5x.

Recovering Domestic Aviation Traffic in China Is Positive for CAO

• On 6 Jun, the Civil Aviation Administration of China reported that daily air passengers exceeded 1m for the first time since 28 Jan, reaching 1.04m on 05 Jun and recovering to 62% of 2019 levels.
• The daily number of flights reached 11,333, marking a new daily record since Feb 2020. Daily air passengers averaged 458,300 in Mar 2020, 522,700 in Apr 2020 and 785,800 in May 2020. Daily air passengers and daily number of flights in the first five days of Jun 2020 reached 935,200 and 10,570 respectively, recovering to 57% and 66% of 2019 levels.
• If the current momentum of recovery in China’s aviation traffic is sustained, especially at Shanghai Pudong International Airport (SPA), China Aviation Oil could report better earnings in 2020. Shanghai Pudong International Airport Aviation Fuel Supply (SPIA), the exclusive aircraft refuelling services provider at SPA that is 33% owned by China Aviation Oil, accounts for 65% of its PBT.

Growth Opportunities as Parent Looks to Grow Business Beyond China

• Last week, China Aviation Oil’s parent, China National Aviation Fuel Group (CNAF), highlighted plans to expand its global presence over the next several years (see report). CNAF’s chairman noted that it plans to use the strategic platform provided by its Singapore operations – China Aviation Oil, the largest physical jet fuel trader in the Asia-Pacific region and the key supplier of imported jet fuel to China's civil aviation industry – to efficiently coordinate overseas resources to compete with other established foreign rivals.
• We view this positively as it will enable China Aviation Oil to expand its business beyond China.

Valuations Are Still Undemanding

• China Aviation Oil continues to trade below its net tangible asset value/share of USD0.95 (c.SGD1.30). Its 2021F P/E of 7.7x is below peers, which are trading between 11.0x and 12.0x 2FY P/E.
• China Aviation Oil is also highlighted as one of the RHB's Top Singapore Small Cap Companies - RHB Invest 2020-05-24: 20 Jewels 2020 Edition.
• Our SGD1.25 Target Price implies 0.9x P/NTA. In addition, a strong net cash position (c.54% of its market cap) should enable China Aviation Oil to undertake an earnings-accretive acquisition, thereby supporting its parent’s ambitions to grow business beyond China.

Source: RHB Invest Research - 12 Jun 2020