• US$11.70bn revenue exceeded our expectation of US$11.00bn by 6.3%
• US$66.4mn share of profit from associates and JVs in line with our expectation of US$66.0mn
• US$88.9mn net profit in line with our full year expectation of US$89.6mn
• 5 SG cents dividend proposed for FY16 (FY15: 3.0 SG cents).
• We revise our FY17e/FY18e EPS forecasts to 12.7/15.9 US cents. (Previous: 13.7/17.9 US cents). We maintain our “Buy” rating with an upgraded TP of S$2.00 based on updated blended average forward PER of 7x, implying a 31.1% return from the last close price of S$1.525.

Trading volume boosted phenomenal growth amid adversity of low oil price

In FY16, CAO’s total trading volume soared to 32.6mn tonnes with 61.5% Y-o-Y growth. Respectively, volume from middle distillates, mainly jet fuel, represented 41.8% growth to 18.6mn tonnes, and that from other oil products, mainly including fuel oil, gas oil, and crude oil, achieved 98.2% Y-o-Y growth to 14mn tonnes. However, the average oil price (Brent) suffered from 8.6% Y-o-Y drop. Apparently, high double-digit increase in supply and trading volume dwarfed the oil price decline.

For the perspective of FY17, the management guided that CAO might not duplicate the explosive growth similar to FY16, but the Group still have a promising future in terms of long-lasting increment of air traffic, especially in China domestic market, as well as ongoing International market expansion. In terms of jet fuel supply and trading, we believe CAO will continue riding on the tailwind in FY17 onwards. See Figure 1, according to China Aviation Administration of China, the revenue passenger kilometer (RPK) that measures the volume of passenger traffic has 13% compounded average growth rate (CAGR) over the past five years. Comparatively, CAO’s jet fuel trading volume CAGR aligns with it during the same period. Therefore, we believe revenue from this segment will have more than 10% growth in FY17.

For other oil products segment, we think it still has upward momentum in FY17. In retrospect over past 5 years, the revenue drawdown in FY15 was mainly due to backwardation in oil market, which suspended the trading activities for a moment. Since early 2016, market shifted into contango and lasted till now. As long as the market remain status quo, we believe this year’s performance could be better off.

Strong contribution from SPIA to drive bottom line growth

Associates contributed 72% of PBT, of which >90% is attributable to Pudong. Pudong associate’s FY16 contribution of US$60.6mn with 60% Y-o-Y growth was boosted by the RMB300mn (US$43.6mn) revaluation gain to its inventory. The underlying factor for our positive outlook for SPIA is that there still is land around it for further expansion. A fifth runway will be added by 2020, and a new terminal will be added in 2018, doubling the flight handling capacity of SPIA. More traffic flows is expected to translate into larger profit contribution thereafter.

Long-term goal remains unchanged but expect some improvements

Aiming to become a top-tier global transportation fuels provider, CAO will continue to contribute efforts on geographic expansion and fuel types’ diversification. To embody, it will vertically integrate the value chain from procurement, transportation, storage, marketing and refuelling. In FY17, management will try to improve gross profit margin, and the foundation of crude oil and fuel oil trading is not solid.

Valuation

We revise our FY17e/FY18e EPS forecasts to 12.7/15.9 US cents. (Previous: 13.7/17.9 US cents.)

Based on our FY17e EPS of 12.7 US cents (17.1 SG cents) and the blended average forward PER of 11.7x, we maintain our “Buy” call with an upgraded target price of SG$2.00.