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Added – China Aviation Oil (Singapore) Corp Ltd

As
part of a routine, every Sunday I will read “The Edge” magazine. Last weekend
was no exception. Front page this week reads “China Aviation Oil’s Big Year
Ahead!” Being bullish about China long term future, the article aroused my
interest. I began researching about the company. Below is a review of my
research.
Company Brief
China Aviation Oil (Singapore) Corporation Ltd
(SGX:G92.SI) “CAO” is the largest physical jet fuel trader in the
Asia Pacific region and the sole supplier of imported jet fuel to China’s civil
aviation industry. Listed on SGX mainboard in 2001, CAO is backed by China
large state-owned enterprise China National Aviation Fuel Group Corporation
(“CNAF”). CNAF holds 51% stake in CAO, while BP investments Asia Ltd,
a subsidiary of oil major BP, holds 20% stake. CAO’s key businesses include 1)
Jet fuel supply and trading – core; 2) Trading of other oil products; 3)
Investments in oil-related assets. For more of CAO businesses,
please
refer here
Fundamentals
Price
S$0.705 ; Mkt Cap S$609.7 mil 
Ex.Rate 1USD to 1.34SGD
PE
7.6
 (based on annualized YTD3Q EPS of US5.20c)
PB
0.82
  (base on 3Q14 NAV of US64.21c) 
Dividend 2c
in 2013, i.e. 2.84% yield at
current price of 0.705. 
Healthy net cash of US$55.8mil as of End 3Q14. 
ROE
14.3%; ROA 4.5% in 2013
Note: Expect 4Q14 results could be weak like 3Q14.
Expected PE can be around 9 in 2014.
PROS
Award for Corporate Governance
& Transparency
CAO
was awarded
1)    “Singapore
Corporate Governance Award” (Mid Cap Category) at SIAS Investors Choice Awards
2013
2)    “Most
Transparent Company” (Runner-up in Oil & Gas Category) at SIAS Investors
Choice Awards 2013
CAO
was ranked 36th out of 664 companies listed on SGX, putting CAO in the top 6%
of Singapore-listed companies in terms of corporate governance and
transparency.
Note: Always be skeptical about awards! Nevertheless
the above awards probably show CAO is a probably one of the better S-chips?
Greater Demand of Air Travel in
China
China
jet fuel consumption grew >10% last year and expected to maintain growth
rate this year. By 2020, jet fuel consumption is forecast to hit 39mil tonnes. We
know that China has been building high-speed railways. To some, air travel
demand will be stifled. On the other hand, it will make it more convenient to
reach major international airports.
According
to Airbus forecast, China will need 5,363 new passenger aircraft and freighters
from 2014 to 2033, accounting for 17% of global demand. The country will also
have more domestic air traffic than any other country within 10 years. And,
passenger number are expected to grow by 7.1% annually over the next 20 years.
Oil Price Slump, Good for
Distribution Side of Oil Companies
Due
to the oil price slump, CAO share price also dropped more than 20% in the past
year. However unlike upstream oil producers who could face reduced
profitability, CAO is likely to see earnings recovery this year, according to
CAO CEO.
More
than a month ago, I blogged about Mark Mobius view on Oil stocks. Refer
here
. Mark Mobius cited that lower oil is bad for the exploration side, but
for the distribution side of oil companies its good.
Price Attractive Compare to
Competition
CAO
PB is at 0.82x respectively. Competitor Brightoil Petroleum base in HK which
operates oil fields and supplies bunker to ships, is trading at PB 2.09x. New
York listed World Fuel Services, the global leader in fuel logistics, is
trading at PB 1.88x.
CAO Diversifying Business Internationally
Today
China accounts for only 51% of the company’s revenue, down from 88% in 2011.
In
2012, CAO acquired Hong Kong and North American Fuel Corp (NAFCO) from its
parent. Today, NAFCO has jet fuel contracts supplying to major Chinese airlines
at US, London, Paris, Madrid, Amsterdam, Frankfurt and Geneva airports. NAFCO
also has contracts with Emirates and Taiwan China Airlines and EVA Air. In
2013, it won Hong Kong airport third aircraft refueling license in joint
venture with three partners. Its overseas jet fuel is projected to grow at a
rate of 20% annually. With Singapore Terminal 4 upcoming, CAO also see
Singapore as a potential new market.
Oil Storage Problems in Korea OKYC is
a Blessing
CAO
owned 26% stake in Oilhub Korea Yeosu (OKYC) which owns and oil storage
terminal in Korea. The launch of the operation was delayed due to problems in the
last two years. Now with oil price depressed, demand for storage of oil is so
high. By end of Nov, 81% of OKYC’s capacity was rented out.
New Markets
In
its pipeline plans, CAO wanted to expand its operations into supply of fuel oil
to ships in Singapore and China. Currently, CAO is renting fuel oil storage
facilities in Singapore, but has plans to acquire or build its own facilities
in future. CAO is also constantly exploring new products such as aviation
biofuels and LNG. Last year it become the sole importer of Avgas, or aviation
gas, into China. This is potentially big market because business jets which
consumes aviation gas are going to be more prevalent in China.
CONS
Decline in Earnings
YTD
3Q14, Revenue rise 13.5% yoy to US$12.7b, BUT Earnings decline >21%
yoy to US$44.7mil. Much of the weakness come from 3Q14 with >66.5% decline
in earnings yoy to US$7.3mil. On Jan 8, CAO warned that 4Q14 performance will
be similarly affected.
Volatile Oil Price Environment
The
decline in earnings in 2014 is due to the volatility and difficulty in trading
environment. Amid the challenging operating environment, many players reduced
their trading activities or stayed on the sidelines resulting in poor liquidity
in the fuel oil market. However CAO think that weaker players were already
pushed to the wall and squeeze out, and this year will spell earnings recovery
for CAO.
Global Uncertainty
The global
economic recovery remains uncertain. Exacerbated by speculative activities, oil
prices are expected to remain volatile and this may pose greater challenges to
the Group in terms of trading risk exposures.
China Slowdown
The
slowdown of China’s economic growth is inevitable and with the increase of
China’s domestic refining capacity, a corresponding slowing down of demand for
jet fuel import is to be expected. This would invariably pose challenges to our
core jet fuel business.
Over-supply from Domestic Oil Refiners
Domestic
oil refiners in China produce more jet fuels than the country consume. Due to
this jet fuel sale in domestic Chinese market may be affected. However for
international flights, only bonded fuel can be use. There can be a risk that
this ruling may change weighing down CAO share price. This is also one reason
why CAO is diversifying its business overseas.
Rolf’s Summary
As a
frequent traveler within China, one thing I hate most is taking internal
flights. Planes are practically always at full capacity, so are runways or air
traffic, resulting in frequent flight delays. I been to China’s three largest
international airport – Bejing Capital, Shanghai Pudong and Guangzhou Baiyun.
It’s always “People Mountain People Sea” meaning so many people).
During
Chinese New Year peak period from 4 Feb to 15 Mar, Chinese passengers are
expected to make 2.8 billion trips on China’s public transport network – 100
million more than last year. Among the forecasted 2.8 billion trips, 2.42
billion would be by public road transport, making up the bulk of the trips.
Only about 47.5 million trip will be by air, indicating the potential of growth
in this sector.
After
evaluating all the pros and cons, and taking into consideration my bull’s view
on China, proposition for myself…. Long CAO! I bought 10 lots for now at 0.71.
Hold
Hold Hold…..Please DYODD (Do Your Own Due Diligence) and read disclaimer in
this blog. LOL
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3 thoughts on “Added – China Aviation Oil (Singapore) Corp Ltd

  1. i traded this share long tme ago( not sure 2 or 3 years ago) . i bought at 1.01 sold around 1.1

    now then realise it become so cheap now.

    1. Hi Yeh,

      A decent 10% not too bad! They r not cheap, they are under-value! Haha.. Just kidding…

      Over long term, I still like to think of oil as a scarce commodity n China as the country of the future. Just personnel views!

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