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

Analyst Shekar Jasiwal said 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 in 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 that are either unwilling or unable to travel internationally at the current time, are using the opportunity to travel within the country, sparking a “sharp m-o-m revival” since the low of February 2020. 

He pointed out China’s monthly aviation traffic has improved to 46.1 million in August from a low of 8.3 million passengers in Feb 2020. He also expects the volume of domestic flights in China during this year’s annual Golden Week holiday between 1 October and 8 October, 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 2H20,” Jasiwal said.

He elaborated that SPA has also seen a material improvement in flight traffic and as such, SPIA, the exclusive aircraft refuelling service provider at SPA, should see a rebound in its profit contribution to CAO in 2H20 and a gradual recovery in international traffic will support profit growth in 2021.

SPIA is China Aviation Oil’s 33%-owned associate and accounts for 65% of CAO’s (profit before tax) PBT. 

As for domestic passenger volume at SPA, Jasiwal said these have reached pre-pandemic levels, and domestic aircraft movement is now higher than levels recorded prior to COVID-19. 

Total aircraft movements at SPA have now reached 72% of 2019 levels, although international flights have yet to recover. 

Furthermore, a news report suggests that this year, the most popular Golden Week destination for domestic air travellers in Shanghai. 

As at 1.41pm, shares of CAO are trading at 91 cents, with a FY20 price-to-book ratio of 0.6 and dividend yield of 5.3%.