June 11, 2019

Our revision of crude oil price forecasts has resulted in a c.2% adjustment in FY19-20F earnings. We remain upbeat on the long-term growth of China’s aviation passenger traffic, in line with its rising per capita income and expanding aviation infrastructure. We conservatively expect CAO’s near-term earnings to be driven by increasing jet fuel supply to China and more jet fuel being pumped by SPIA, which accounts for 65% of pre-tax profit.

In our recently-published regional oil & gas report titled REG Oil & Gas: Tensions Escalate, we trimmed 2019-2020 Brent crude oil price forecasts by c.3%. This downgrade was in line with our expectation of a prolonged US-China trade war, leading to possibly lowerthan-expected global economic growth. We believe this will likely dampen global oil demand more than International Energy Agency’s (IEA) current estimate of 1.3mbpd additional demand for 2019.

We remain confident of growth in China’s aviation passenger traffic over 2019-2021. To account for concerns relating to negative impact from the escalation of the US-China trade war, we are forecasting only mid-single digit jet fuel supply volume growth for China Aviation Oil (CAO) in 2019. This compares with an average jet fuel supply volume growth of c.11% during last 10 years. The completion of capacity expansion at Shanghai Pudong International Airport (SPA) by end-2019 should also enable Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA, which is 33%-owned by CAO) to see higher-thanestimated jet fuel volume growth in 2020-2021.

With a zero debt balance sheet and large net cash position (c.46% of its market cap), CAO could undertake an earningsaccretive acquisition, in our view. The group may even consider paying higher dividends, subject to management and board approvals, in case it is unable to grow inorganically.

Despite outperforming the STI by about 20% YTD, CAO’s stock continues to trade at a compelling ex-cash FY20 P/E of 4.3x. This compares with an estimated FY20 earnings growth of 7.6%. Reiterate BUY, SGD1.60 TP offers 22% upside, 3% yield.  – RHB

China Aviation Oil closed at: S$1.32