China Aviation Oil

Price target:

RHB Research “buy” $1.05 Upgrade as air traffic continues to improve

RHB Research has upgraded China Aviation Oil (CAO) to “buy” from “neutral” with a target price of $1.05, up from 95 cents previously.

Analyst Shekar Jasiwal says this is amidst continuing improvement in China’s aviation traffic as well as expectations of y-o-y growth in domestic passenger volume and aircraft movements at the upcoming Golden Week holidays.

Jasiwal said strong control on the Covid-19 cases in the country, rapid expansion of domestic capacity by Chinese airlines and aggressive price promotions have boosted demand for domestic aviation in China.

In addition, Chinese travellers either unwilling or unable to travel internationally at the current time are using this opportunity to travel domestically, sparking a “sharp m-o-m revival” since the low numbers seen in February this year.

He also says China’s monthly aviation traffic has improved to 46.1 million in August from a low of 8.3 million passengers in February this year. He also expects the volume of domestic flights in China during this year’s annual Golden Week holiday from Oct 1 and Oct 8 will likely push well past last year’s record.

“While international aviation traffic has yet to improve, higher domestic aircraft movement at Shanghai Pudong International Airport (SPA) should support earnings recovery for CAO in 2H2020,” Jasiwal notes.

He elaborated that SPA has also seen a material improvement in flight traffic. As such, the Shanghai Pudong International Airport Aviation Fuel Supply (SPIA), the exclusive aircraft refuelling service provider at SPA, should see a rebound in its profit contribution to CAO in 2H2020 and a gradual recovery in international traffic will support profit growth in 2021.

CAO owns 33% of SPIA. It also accounts for 65% of the latter’s profit before tax. — Lim Hui Jie