SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Asia’s leading multi-asset exchange

Singapore Exchange Ltd (SGX)

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Equity Bottom-Up

China Aviation Oil (Singapore) / Equity Bottom-Up

China Aviation Oil (Singapore) Corporation (CAO) has made good progress in the first half of the year, benefiting from favourable volume growth offset to a degree by FX and the non-recurrence of positive stock valuation. Trading conditions look more challenging in the second half with the jet fuel market having moved into backwardation since early July. We are thus taking a much more cautious view on the second half and have reduced our forecasts accordingly. It is important to recognise that cash generation has been far stronger than expected and should remain favourable in H2 as inventory is released and the main associate dividend is received. Thus, our fair value actually increases to US$1.55 (S$2.11) per share from US$1.45 (S$2.04) as a result.

China Aviation Oil (Singapore) Corporation (CAO) has made good progress in the first half of the year, benefiting from favourable volume growth offset to a degree by FX and the non-recurrence of positive stock valuation. Trading conditions look more challenging in the second half with the jet fuel market having moved into backwardation since early July. We are thus taking a much more cautious view on the second half and have reduced our forecasts accordingly. It is important to recognise that cash generation has been far stronger than expected and should remain favourable in H2 as inventory is released and the main associate dividend is received. Thus, our fair value actually increases to US$1.55 (S$2.11) per share from US$1.45 (S$2.04) as a result.

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<ul><li>Low price volatility versus the Singaporean market, low debt levels, and good price momentum relative to its sector </li><li>As sole import license holder, CAO supplies 30-40% of China’s jet fuel. As imported jet fuel is only allowed for outbound flights, CAO can be viewed as a proxy for China’s international air travel; up by 32% in 2016 </li><li>CAO is currently invested in five entities, including storage, pipelines and refueling facilities. With net cash of US$226m, it is well positioned to create further value through investments </li><li>Attractive at 17CE* 9.6% ROE/PB versus Asian Energy at 8.2% </li><li>Risks: Increase in oil prices, geopolitical uncertainties that could have an impact on global air traffic</li></ul>* Consensus Estimates

Low price volatility versus the Singaporean market, low debt levels, and good price momentum relative to its sector As sole import license holder, CAO supplies 30-40% of China’s jet fuel. As imported jet fuel is only allowed for outbound flights, CAO can be viewed as a proxy for China’s international air travel; up by 32% in 2016 CAO is currently invested in five entities, including storage, pipelines and refueling facilities. With net cash of US$226m, it is well positioned to create further value through investments Attractive at 17CE* 9.6% ROE/PB versus Asian Energy at 8.2% Risks: Increase in oil prices, geopolitical uncertainties that could have an impact on global air traffic* Consensus Estimates

CAO: Climbing China Air Travel Fuels Profitability

As the sole licensed importer and supplier of jet fuel to China&rsquo;s civil aviation industry, China Aviation Oil (Singapore) Corporation (CAO) is a direct play on the rapidly rising demand for air travel in China, augmented by both international and product expansion. While a healthy dividend income from a joint venture at Shanghai&rsquo;s rapidly expanding Pudong Airport provides the bulk of earnings, the growing trading and supply of oil is supportive of our 14% EPS CAGR over the next two years. Our cash and peer-based fair value of US$1.45 (S$2.04) suggests potential for investors.

As the sole licensed importer and supplier of jet fuel to China&rsquo;s civil aviation industry, China Aviation Oil (Singapore) Corporation (CAO) is a direct play on the rapidly rising demand for air travel in China, augmented by both international and product expansion. While a healthy dividend income from a joint venture at Shanghai&rsquo;s rapidly expanding Pudong Airport provides the bulk of earnings, the growing trading and supply of oil is supportive of our 14% EPS CAGR over the next two years. Our cash and peer-based fair value of US$1.45 (S$2.04) suggests potential for investors.

The Chief Operating Officer of Mainboard-listed China Aviation Oil adheres to a strict code of ethics, and can be a contrarian of sorts.
A seasoned trader, Jean Teo is known to be a straight shooter.
"As senior management, there's a need to stand firm and say 'No', even to the boss - I know this is uncommon in a Chinese-run firm, but it's important to do what is right," Teo said with a smile.

The Chief Operating Officer of Mainboard-listed China Aviation Oil adheres to a strict code of ethics, and can be a contrarian of sorts.
A seasoned trader, Jean Teo is known to be a straight shooter.
"As senior management, there's a need to stand firm and say 'No', even to the boss - I know this is uncommon in a Chinese-run firm, but it's important to do what is right," Teo said with a smile.

Singapore

China Aviation Oil (Singapore) Corporation Ltd is the largest physical jet fuel trader in the Asia Pacific region and a key supplier of imported jet fuel to China's civil aviation industry. The company also engages in the trading of other oil products and investments in oil-related assets. It was incorporated in Singapore on May 26, 1993.

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China Aviation Oil (Singapore) (CAO SP)

FTSE ST China Index up 18% in 2017 YTD

Singapore Exchange Ltd (SGX)

Progress in a backward market

China Aviation Oil (Singapore) Corporation (CAO) has made good progress in the first half of the year, benefiting from favourable volume growth...

Edison Investment Research

CAO: Climbing China Air Travel Fuels Profitability

Low price volatility versus the Singaporean market, low debt levels, andgood price momentum relative to its sector As sole import license holder,...

A. Stotz Investment Research

Fuelling growing aviation demand

As the sole licensed importer and supplier of jet fuel to China’s civil aviation industry, China Aviation Oil (Singapore) Corporation (CAO) is a...

Edison Investment Research

CAO Hits Energy, Aviation Sweet Spots

The Chief Operating Officer of Mainboard-listed China Aviation Oil adheres to a strict code of ethics, and can be a contrarian of sorts. A seasoned...

Singapore Exchange Ltd (SGX)

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