As the sole licensed importer and supplier of jet fuel to China’s civil aviation industry, China Aviation Oil Singapore Corp Ltd (SI:CNAO) 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’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.
Chinese aviation growing rapidly
Chinese air travel grew at 15% in 2015, with international flights from People’s Republic of China (PRC) growing at 32%. China is expected to lead future global aviation traffic growth, with a committed airport build strategy and increasing business and leisure demand. As the sole supplier of imported jet fuel into PRC, CAO is exposed primarily to international traffic growth due to the restrictions on bonded fuel use. For CAO, stability is provided by the fixed price per barrel that it receives on this core supply. However, its associate Shanghai Pudong International Airport (SPIA) owns and operates the entire refuelling infrastructure at the airport. Despite only owning a 33% share, this is the largest contributor to CAO’s profitability and cash flow (through dividends), accounting for c 62% of operating profit in FY16 and most of cash flow. With the airport currently being expanded, the demand for jet fuel should continue to grow rapidly which, combined with the exclusive import licence to the PRC, provides a firm foundation for investors.
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