SINGAPORE (March 24): CIMB likes China Aviation Oil for its foothold in two of the world’s largest aviation markets, increasing contributions from associates and potential for M&As.
In a Thursday note, lead analyst Cezzane See says CAO’s position as sole imported jet fuel supplier in China makes it a proxy for the state’s growing outbound travel segment.
Under China’s 13th Five Year Plan, the government plans to have 260 airports by 2020, with key aviation hubs to serve over 90% of the population who live within a radius of 100km of each airport.
In 2014, CAO also became a member of the LAXFUEL consortium -- the largest jet fuel consortium in the US. This provided it with a toehold in one of the world’s largest aviation markets and in one of the world’s busiest airports, Los Angeles International Airport.
Currently, CAO supplies jet fuel to 43 international airports in 17 countries. Aviation marketing volumes have grown to 2.3 million tonnes from 1.8 million in 2015 and 0.2 million in 2011.
Meanwhile, future contributions from associates -- which amounted to US$66 million ($92.5 million) in FY16 -- look promising, especially from major contributor Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA) which is is the exclusive refueller for Shanghai Pudong airport.
One of the busiest airports in China, the airport is undergoing capacity enhancements which includes a fifth runway and a new satellite terminal.
SPIA’s associate contribution rose by 56% to US$60.6 million vs US$38.9 million in FY15 on the back of a 7.9% rise in volume growth and inventory gains from the oil price rebound in FY16.
Finally, CIMB believes CAO’s cash pile is earmarked for potential M&As for strategic assets that will give it access to more aviation hubs.
Shares of China Aviation are trading 1 cent higher at $1.48.