China Aviation Oil

Price target:

RHB Group Research “buy” $1.15

Improvement in China’s domestic air traffic to drive growth

RHB Group Research’s Shekar Jasiwal has kept his “buy” call on China Aviation Oil (CAO) with a raised target price of $1.15 from $1.05, on expectations that China’s domestic air traffic will improve even after the Golden Week holidays peak travelling period. According to the Civil Aviation Administration of China, during the Golden Week holidays, China saw 13.3 million passenger trips, and the average daily passenger traffic and average daily flight volume reached 91% and 90% of the same period last year.

Jasiwal notes “a gradual but partial recovery” in international aviation traffic in China — especially at Shanghai Pudong

International Airport — should support CAO’s FY2021 earnings growth. While CAO’s share price has increased recently, valuations remain compelling amid expectations of about 30% profit growth in 2021.

Separately, he thinks China is well-positioned to extend its leadership in global aviation traffic recovery, as it manages to keep Covid-19 under control. Wu Guizhen, chief bio-safety expert at the Chinese Center For Disease Control and Prevention, was quoted in a report last month as saying that Covid-19 vaccine shots will be ready for public use as early as November or December in China. This is because final-stage clinical trials of several vaccine candidates have progressed very smoothly.

An effective vaccine development could significantly improve travel sentiment — not only in China, but also in the region, which will in turn benefit CAO.

Finally, he said despite the rise in the stock price, CAO’s 2021 price-to-earnings ratio (P/E) of 9.3 times is below the range of multiples of its global jet fuel-supplying peers, and implies only 0.3 times 2021 price/earnings to growth ratio (PEG).

The company has a zero debt balance sheet with a net cash position of US$406.7 million ($552.7 million), which is equivalent to about 64% of its market cap. On an ex-cash basis, the stock is trading at a compelling 3.3 times 2021 P/E. — Lim Hui Jie