Dear all

It has been an extremely busy period for me. Since August, I have stepped up my meetings with C suite management from the listed companies’ and their investor relations. Readers can click my LinkedIn (HERE) for some of the companies whom I met on a 1-1 basis.

Notwithstanding my busy schedule, I have constantly updated my clients with news flow and market observations.

In the interests of time, the below is a brief market observation on China Aviation Oil (CAO) and why it interests me.

 

Firstly, what does CAO do?

CAO is the largest physical jet fuel buyer in the Asia Pacific region and the key supplier of imported jet fuel to the civil aviation industry of the PRC. CAO and its wholly owned subsidiaries namely supply jet fuel to airports outside the PRC, including Asia Pacific, Europe, North America and the Middle East.

The CAO Group engages in international trading of jet fuel and other oil products and owns investments in various strategic oil-related businesses, which include Shanghai Pudong International Airport Aviation Fuel Supply Company Ltd, China National Aviation Fuel TSN-PEK Pipeline Transportation Corporation Ltd, Oilhub Korea Yeosu Co., Ltd, Shenzhen Zhenghe Petrochemicals Co., Ltd (formerly known as “Xinyuan Petrochemicals Co., Ltd”), CNAF Hong Kong Refuelling Limited (CAO holds 68% equity stake through its wholly owned subsidiary, CAOHK), and Aircraft Fuel Supply B.V..

 

What’s interesting about CAO?

a) Analysts are positive with a total potential return of around 28.6%

Notwithstanding the limited coverage in CAO, Philip Securities and CGS-CIMB have ascribed a target price of $1.01 and $1.14 respectively. OCBC also covers CAO with a target price $1.10 but it is not captured in Bloomberg. Hence, average target price on CAO is $1.08. Consensus estimates CAO’s FY24F dividend yield to be around 3.7%. All in, total potential return is around 28.6%, should the consensus be right. Readers can refer to CAO’s analyst reports HERE for more information.

Figure 1: Average analyst target $1.08; potential capital upside 24.9%!

Source: Bloomberg 19 Jan 24

b) CAO trades in a tight range $0.840 – 0.885 for almost two months, before staging an upside breakout

Based on Chart 1 below, CAO has been trading in a tight range $0.840 – 0.885 since 16 Nov 2023 through 10 Jan 2024. It is encouraging to see that after testing its 50-day simple moving average support line at around $0.850 on 9 Jan, CAO closed on a strong note at $0.865. Total volume transacted on 9 Jan was approximately 634K shares, the highest volume since 15 Nov 2023. It subsequently staged a strong break out on 11 Jan (likely due to a CGS-CIMB research report) and touched an intraday high $0.910 on 12 Jan, before profit taking set in. CAO closed at $0.865 on 19 Jan.

Although CAO has seen profit taking after touching $0.910 on 12 Jan, there are several positive points based on its chart.

• Since the close on 12 Jan, CAO has fallen approximately 3.9%. It is noteworthy that Hang Seng Index and FTSE ST Small Cap Index have dropped 5.8% and 3.1% respectively. Taken in this context, CAO has not fallen much especially if we take into CAO’s 4.7% rise from 10 Jan to 12 Jan.

• Eight out of the past nine sessions are accompanied with above average volume. In addition, OBV indicator has broken a key resistance set in 2023 and is now trading above it.

• Indicators such as RSI and MFI are near good support levels which may indicate that a potential upturn may be more likely than a breakdown.

• CAO at $0.865, is near a confluence of supports around $0.860 (50D SMA) – 0.870 (Fibonacci).

Chart 1: Volume has picked up 8 out of the past 9 sessions

Source: InvestingNote 19 Jan 24

c) 30% increase in weekly international passenger flights in 2024 may bode well for CAO

Based on an article on Bloomberg dated 4 Jan, the Civil Aviation Administration of China projects international passenger flights may rise to 6,000 per week, up from the current 4,600. At the start of 2023, there are less than 500 flights per week. This approximate 30% jump in weekly international passenger flights should bode well for CAO to some extent.

d) Strength in other travel related Chinese stocks

One interesting company Trip.com (9961.HK), China-based company mainly engaged in the operation of one-stop travel platform has formed a bullish double formation and breached its neckline of around HKD281 on 4 Jan. An eventual technical measured target is around HKD310. Amid the weakness in the Hong Kong market, Trip.com has seen some profit taking and is now testing its support around 273.60 – 273.80. Although it has fallen below its neckline, this stock seems to have buying interest. Trip.com closed at HKD 278.80. Hope that this buying interest will gradually filter down to other stocks which benefit from increase in outbound travelling from China.

e) Backed by net cash of around S$0.820 / share, 94.8% of its market cap

CAO sits on a large pile of cash and cash equivalents amounting to around US$534.35m and zero net interest-bearing debt. Using an exchange rate of USDSGD 1.32 (spot as of 19 Jan 24 – 1.3291), this translates to SGD705.34m. Given that it has outstanding shares amounting to 860.184m, this translates to SGD0.820 / share or 94.8% of its market capitalisation. I.e. As of now, if CAO doesn’t do any acquisitions, 94.8% of its valuation is backed by net cash, leaving 5.2% for its existing business. Based on analyst reports as of Aug 2023, CAO is on the lookout for acquisitions but talks are still at the preliminary stages.

 

Risks

a) Usual business risks

Slower than expected recovery in China’s international flight volumes, reduction in global travel (can be due to recession, another pandemic etc) may have an adverse impact on CAO.

b) Net cash per share may change depending on business requirements

As of 1HFY23, CAO has net cash US$534.35m. However, this amount may vary as sometimes, they may require funds for their trading activities or other business activities.

c) Difficulty in predicting profitability for its trading business

Based on Figure 2 below, it is noteworthy that CAO has a small gross profit margin (GPM) in its trading of jet fuel. A small change in GPM can have a material impact on CAO’s trading profits. [Based on CGS-CIMB report, they cited that CAO typically enjoys better margins when oil markets are in contango (forward price is higher than the spot price)]. This segment is difficult to successfully predict on a consistent basis.

d) Illiquidity

Although liquidity has improved in the past two weeks, average 30-day volume is only 351K shares traded per day. This is still not a liquid stock where we can get in or out easily.

 

Conclusion

Given that China international air travel is likely to pick up in 2024; cheap valuations in CAO where its net cash per share amounts to around S$0.820 and its supportive chart, it seems likely that CAO may trend higher as we head closer to its results likely in Feb.

Nevertheless, readers have to take note of the above risk factors, such as unpredictability in its trading GPM; illiquidity; and its exposure to China’s outbound travel.

P.S: I have informed my clients on CAO approximately two weeks ago when it was trading around $0.855 but I have no time to post until now.

 

Disclaimer

Please refer to the disclaimer HERE