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RHB downgrades China aviation oil with air traffic recovery delayed

Ng Qi Siang
Ng Qi Siang8/13/2020 09:45 PM GMT+08  • 3 min read
RHB downgrades China aviation oil with air traffic recovery delayed
Despite a strong balance sheet and attractive valuations, limited downsides means that investors should probably stay their hand.
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Following a resurgence in Covid-19 cases worldwide, air traffic recovery is likely to take longer than expected. Consequently, RHB analyst Shekar Jaiswal has downgraded China Aviation Oil from “buy” to “neutral” with long-run demand for aviation fuel likely to stay low. He has indicated a lower target price of $0.95 from $1.25 with a 2% upside.

“While China’s domestic aviation traffic continues to register MoM improvement, the resurgence of COVID-19 infections will push international traffic recovery to 2021. This would impact earnings for Shanghai Pudong International Airport Aviation Fuel Supply (SPIA), which accounted for 65% of China Aviation Oil’s 2019 PBT,” he remarks in a broker’s call today. SPIA is an associate of China Aviation Oil, which has a 33% stake in the organisation.

The stock’s main source of earnings for the aviation fuel provider is instead likely to be driven by domestic air travel. Passenger numbers have improved m-o-m despite a y-o-y decline almost certain to take place from February 2020, when aviation passenger numbers fell from 50.6 million to 8.3 million in the space of a single month. July saw 36.9 million passengers within China as the government began to lift lockdown measures, reviving domestic air travel.

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