SINGAPORE (June 28): RHB is maintaining its “buy” call on China Aviation Oil (CAO) with a target price of $1.90, given China’s rapidly-growing aviation market and the group’s increased business diversification.
The largest jet fuel trader with a monopoly on imported jet fuel supply to China’s aviation industry, CAO serves as a direct proxy to the rapidly-growing outbound aviation traffic from China to the rest of the world.
International passenger traffic -- inbound and outbound -- has significantly grown in the past two years and as more Chinese travel overseas, similar growth can be expected over the next few years.
In a Wednesday report, analyst Shekhar Jaiswal said, “We expect jet fuel supply volumes to grow at 8-15% over 2017-2019.”
CAO has also shown strong growth in other oil products business, comprising trading revenue from gas oil, fuel oil, aviation gas and crude oil.
Although earnings from this industry tend to be more risky, with the group spotting losses in the segment in 2014-2015, it has shown to be profitable for five quarters in a row since 1Q16.
“We expect this segment to report strong growth in 2017-2018, aided by double-digit volume growth and gradual expansion in margins,” says Jaiswal.
Shanghai Pudong International Airport Aviation Fuel Supply (SPIA) accounts for 90% of CAO’s associate earnings and pays about 90% of its earnings as dividends.
Since SPIA is planning a 33% increase in its passenger handling capacity by 2019, CAO is expected to see a 15-19% growth in 2017-2019.
As part of the group’s internationalisation strategy, it has aggressively diversified its revenue base.
Although China’s contribution to its revenue declined by 51% in 2016, as compared to 80% in 2010, total revenue doubled to US$11.7 billion ($16.2 billion).
This was attributed to the strong growth in China’s aviation market, which profited CAO too despite a weak oil price environment.
“We remain bullish on CAO’s share price outlook as it remains on track to deliver steady earnings growth and higher dividend yields,” comments Jaiswal.
Upside risks to the call include acquisition of an earnings business in 2017, while downside risks include the opening up of China’s aviation fuel market.
At 1.11pm, shares in CAO are trading flat at $1.67.
