China Aviation – chart looks bullish amid analyst buy calls; below average valuations, supported with 3.6% dividend yield (3 Jan 2020)

Dear readers,

Happy New Year! Hope your new year has been great. Market has been extremely interesting for the past couple of months. Recently, China Aviation (“CAO”) caught my attention with its bullish chart and looks interesting on a risk to reward aspect. CAO closed at $1.30 last Fri. Day range was $1.29-1.32.

Read on for more.


Why did CAO catch my attention?

a) Average analyst target price $1.70

With reference to Figure 1 below, average analyst target is around $1.70. Together with an estimated dividend yield of around 3.6%, CAO offers a total potential return of around 34%.

Figure 1: CAO total potential return 34%!

Analyst target 3 Jan 20

Source: Bloomberg 3 Jan 2020

b) Below average valuations

CAO trades at 1.0x P/BV and 8.4x PE. This is lower than its average 2Y, 5Y and 10Y valuations. For example, 2Y P/BV and PE are at 1.2x and 9.6x respectively. 5Y P/BV and PE are at 1.1x and 9.9x respectively. To some extent, these below average valuations offer a certain degree of margin of safety.

c) Chart seems bullish

With reference to Chart 1 below, CAO is on an uptrend since late Aug 2019 evidenced by all the rising exponential moving averages (“EMA”) and the uptrend line. It is encouraging to see that buying is accompanied with above average volume. ADX is also starting to rise and closed at 30.6, amid positively placed DIs. RSI closed at 61.1 which is not overbought. Indicators are strengthening. For example, OBV is at a seven-month high and MACD has done a bullish centerline crossover. However, the doji formed on last Fri may indicate some selling pressure. On balance, CAO’s chart is positive and may trend higher over time. A sustained break below $1.23 with volume expansion negates the bullish chart outlook.

Near term supports: $1.28 / 1.26 / 1.24

Near term resistances: $1.30 / 1.32 – 1.33 / 1.35 – 1.36

Chart 1: CAO – uptrend since Aug; buying accompanied with volume

CAO chart as of 3 Jan 2020

Source: InvestingNote 3 Jan 2020

d) Earnings accretive acquisition may spark a re-rating

Based on its 3QFY19 financial results, CAO has around US$195m net cash with zero loans. Thus, it has sufficient war chest to make earnings accretive acquisitions. It is common knowledge that CAO has been on the lookout for M&A target as it has frequently mentioned it in their quarterly reports under Section 10. However, except for some small acquisitions, it has not made any significant acquisitions. The most recent acquisition was a US$8m acquisition in Navires Aviation Limited in 2018. According to a DBS Research report dated 8 Aug 2019, DBS postulates that CAO may increase its M&A efforts with a new management team seconded from parent China National Aviation Fuel Group Limited (“CNAF”). A significant earnings accretive acquisition is likely to lead to re-rating in its share price.

e) Impressive board of directors

CAO has an impressive board of directors. For example, Mr Teo Ser Luck is the Chairman of CAO’s audit committee. CAO also has BP personnel in their board of directors. For example, Mr Eugene Leong, chief operating officer at BP Singapore Pte Limited is a non-executive, non-independent director of CAO.

f) 24% of the market cap backed by net cash

CAO’s market capitalisation is around SGD1.12b. With a net cash of US$195m, approximately 24% of its market capitalisation is backed by net cash. In other words, CAO’s ex cash PE is even lower than Bloomberg’s reported current PE of 8.4x.

g) 4QFY19 results should meet most analysts’ estimates

Based on my back of the envelope calculations, RHB and CIMB estimate CAO’s 4QFY19 net profit to be around US$15.4m and US$16.5m respectively. DBS Research dated 8 Aug 2019 is less updated (as I didn’t see their report post CAO’s 3QFY19 results) and they estimate that CAO’s 4Q to be around US$19.6m. Based on Table 1 below, although 4Q seems to be CAO’s weakest quarter based on historical trend, the lowest quarterly net profit for the past three years was US$15.1m and for the most recent three quarters, CAO has posted quarterly net profit in excess of US$23.9m. Thus, based purely on observation and gut feel, I think CAO should be able to meet RHB and CIMB’s estimates.

Table 1: CAO’s quarterly results since 1QFY17

Table 1_CAO's quarterly results past 12 quarters

Source: Ernest’s compilations; company

h) Strong shareholders hold 71.5% of CAO

Based on CAO’s annual report 2018, CNAF and BP investments Asia Limited, a subsidiary of oil major, BP hold 51.3% and 20.2% of CAO respectively. Based on CAO’s website, CNAF is a large State-owned enterprise in China. It is the largest aviation transportation logistics service provider in China. CNAF has businesses ranging from aviation fuel distribution, storage and refuelling services at over 210 airports in China. Together with BP (which does not need any introduction), such strong reputable shareholders are reassuring (at least to me).



a) Business risks such as lower volumes, lower margins, FX etc.

Based on RHB report dated 4 Nov 2019, CAO’s near term results may be affected by lower margins due to China’s decision to lower wholesale aviation fuel prices and rates charged by CNAF to the airlines. Furthermore, the Chinese Yuan has weakened against the USD for the better part of 2019 which has resulted in foreign exchange losses.

b) Chart reading is subjective

As you are aware, chart reading is subjective. There is no rule that even with rising EMAs and trendline, coupled with above average volume on days where share price rises, that the stock will definitely rise in the next few months. Share price movement depends on a multitude of factors such as external market factors and overall market sentiment etc.

c) Illiquid – Average 30D volume is around 422K shares

CAO is not a liquid stock. Top 20 shareholders collectively hold 82.6% of CAO. This may be one of the reasons why CAO’s shares are not actively traded. Average 30D volume is around 422K shares. Thus, it may be subject to large price movements should there be sudden buying or selling interest.

d) Not familiar with the company

This is my first time looking at CAO. Suffice to say that I am not extremely familiar in the company’s fundamentals. It takes time to know a company in detail. Without access to management (see point below), it is not easy to be familiar with the company. Readers should refer to CAO’s company website HERE and the analyst reports HERE for more information on CAO.

e) No access to either its investor relation or management

I have no access to either its investor relation or management. My positive view is based purely on analyst reports, its bullish chart and my view that SG market is likely to be positive in the next 1-3 months (Read HERE for my market outlook in 1Q2020).


CAO catches my attention due to its positive analyst reports, bullish chart and my overall positive outlook in our Singapore market in 1Q2020. I’m vested with a trading basis. It is noteworthy that I am not familiar with CAO’s specific company fundamentals and chart reading is subjective. In addition, its illiquidity is something readers have to be aware of. Readers, as usual, please do your own due diligence and exercise your independent judgement.


P.S: I have already notified my clients to take note of CAO last week where it was trading around $1.28-1.29.


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