Broker's take: RHB upgrades China Aviation Oil to 'buy' as air traffic improves

CONTINUING improvement in China's aviation traffic and a likely year-on-year (y-o-y) growth in domestic passenger volume and aircraft movements in the upcoming Golden Week holidays are set to give a boost to China Aviation Oil (CAO).

That's according to RHB, which upgraded Asia's largest jet fuel trader and supplier on Wednesday to "buy" from "neutral".

Analyst Shekhar Jaiswal also upped the target price to S$1.05 from S$0.95. The stock rose S$0.01 or 1.1 per cent to trade at S$0.905 as at 2.48pm on Wednesday.

Although international air traffic has yet to pick up, the y-o-y higher domestic aircraft movement at Shanghai Pudong International Airport should support CAO's earnings recovery in H2 2020, Mr Jaiswal wrote in an update on Wednesday.

"Strong control on 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," he added.

Individuals who are unwilling or unable to travel internationally at the moment are also using the opportunity to travel within the country, according to RHB.

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China's passenger aviation traffic has seen a sharp month-on-month revival from the low in February this year. The number of passengers in that month sank 85 per cent on the year to just 8.3 million passengers.

The country's monthly aviation traffic has since improved to 46.1 million passengers in August, although this is still down 25 per cent y-o-y.

During this year's annual Golden Week holiday from Oct 1 to 8, the volume of domestic flights in China is expected to "push well past" last year's record, the analyst said.

CAO's valuations also remain "compelling" when compared with its peers, and given expectations of profit growth of about 30 per cent in 2021, he added.

The company's net cash position stands at about US$406.7 million, equivalent to some 72 per cent of its market cap.

Another key driver is the growth in earnings from its associates, especially CAO's 33 per cent-owned Shanghai Pudong International Airport Aviation Fuel Supply (SPIA), which has seen a material improvement in flight traffic, RHB noted.

SPIA is the exclusive aircraft refuelling service provider at Shanghai Pudong International Airport.

Separately, CAO was recently sued by Banque de Commerce et de Placements over an alleged fraudulent deal as the Swiss bank sought to reclaim the US$19 million it paid to the Singapore-listed firm for a cargo, a court document showed.