Thursday, April 12, 2018

China Aviation Oil: Flying with China Tourism Growth

Brief summary
China Aviation Oil is the largest physical jet fuel trader in Asia Pacific region and the key supplier of import jet fuel to Civil aviation industry of the People's Republic of China. Through their subsidiaries, they also supply jet fuel to airline companies outside of China.

There is 2 major shareholders.1
-China National Aviation Fuel Group Limited (Largest Aviation Transportation Logistics Service provide in China that provide aviation fuel procurement, storage, transportation and refuelling services across China airport
-BP investments Asia Limited (Strategic investor of CAO)

Business Model
Business Model1
Diversified Product Base1


Diversified Geographic Base1

 Using Swap analysis

Strength
-Strong support of Parent Company (China National Aviation Fuel Group Limited)
Being the largest aviation transportation logistics services provider in China which would give opportunity to China Aviation oil

-Good management
Investment and acquisitions in oil related assets that are complement to their core business.
Their current and quick ratio remain healthy above 1.1

-Diversify geographic base
Their business in 2017 are more diversified as compared to the 2010 where 80% of the group revenue is concentrated in China

-Diversified product
The revenue from other oil products are growing at a fast rate which can help to diversify their risk.

Weakness
-Tax
As they expand globally, the taxes they have to pay also increase which can be seen in the latest earning report.

-Slow down in global tourism
 If there is slow down in global tourism, it can hurt the earning.

-Change in local/foreign regulation
Any change in local/foreign regulation could affect the expansion plan of CAO.

-Forex exchange rate
Diversification of business also mean it will be subjected to exchange rate.

Opportunities 
 -Increase in domestic & international tourism
China is the most populous nation in the world and around 90% of Chinese citizens still have not applied for passports for outbound tours. More Chinese have indicated they are willing to travel which is opportunity. Worldwide, the tourism industry also has experience steady growth almost every year.3

-Global expansion of business
By expanding internationally, it can bring more revenue & diversified their risk.

-More airport infrastructure
Dong Zhiyi has said China has plans to build 66 new civil airports in the next 5 years in 2016.4
This also mean more growing demand for Jet fuel.


Threats
-Instability in South China Sea
There is uncertainty in South China Sea which can lead to instability.

-Trade War
Escalation of trade war between US and China could damage the ties between them and affect other countries. This could lead to decrease in the global tourism.

-Risking interest rate
FED is raising interest rate and any faster pace of raising interest rate.

Past 5 years performance







The estimated growth for past 5 years is around 8.1% using the normalized diluted EPS. The expected international tourism growth by UNWTO World Tourism Barometer is estimated to 4-5% for 2018.5 China domestic tourism trip growth rate is estimated around 10%.2 One year estimated share price is SGD1.75 based on the past 5 years growth if it continues at the same rate.

China Aviation Oil would continue to do well especially world tourism growth is expected to continue with due diligent management of the company. It is not a call to buy or sell, please do your own due diligent. If you have any idea to share, feel free to voice out.

Information is gather from the China Aviation report