• Revenue met 95.9% of our full year expectation of US$8,792mn
• Share of profit from associates and JVs met 90% of our full year expectations of US$58.6mn
• Net profit met 81.8% of our full year expectations of US$86.8mn
• We revise up our FY16 forecast, with a higher FY16e EPS of US 10.4 cents from US 10.1 cents. We maintain our “Buy” rating with an unchanged TP of S$1.92 based on updated average forward PER of 13.9x, implying a 40% return from the last close price of S$1.4.

Results at a glance

Trading volume maintained at a remarkable growth, offsetting the low oil price impact.

In retrospect, China Aviation Oil (CAO)’s 9M revenue grew by 20.3% y-o-y to US$8.4bn. Though oil price bottomed out early this year, it failed to stabilise above US$50/bbl but hovered between US$40/bbl and US$50/bbl. The average oil price (Brent and WTI blended) during 9M16 was US$43/bbl, 20% lower than the average of US$54/bbl in 9M15.

However, CAO managed to boost the topline, demonstrating its immunity to the low oil price. This improvement was due to the substantial growth in trading volume of both jet fuel and other oil products. The trading volume of middle distillates segment (jet fuel) increased by 19.4% y-o-y to 10.88mn tonnes, and that of other oil products segment (mainly fuel oil and gas oil) increased by 128% y-o-y to 12.36mn. Accordingly, the revenue from middle distillates and other oil products was US$5.5bn (slightly down 1.8% y-o-y) and US$2.9bn (hugely up 110.2% y-o-y) respectively. Through this performance, we see that CAO is achieving the goal to become an integrated fuels provider, since the other oil products businesses were not dwarfed by the jet fuel trading business.

Investment in oil-related assets propelled the bottom line, underpinning the diversification strategy.

With a 42.4% y-o-y growth, YTD 9M16 net profit was reported at US$71mn, which was even higher than FY15’s full year net profit of US$61.3mn. The strong growth in net profit was buoyed by a US$47mn (up 52.6% y-o-y) share of profits from Pudong. Higher refueling volume, as well as higher margins resulting from 3Q’s oil price rebound helped. Besides, OKYC also contributed a gain of US$3.9mn YTD, recovering from losses during the same period in FY15, along with increasing demand for tank storage. Profits from TSN- PEKCL increased by 30.9% y-o-y to US$2.5mn, while Xinyuan’s profit dropped by 45.2% to US$0.26mn. Loss from CNF HKR was US$0.68mn, but it is expected to return to profits in 3 years. Returns from these assets as a whole was lucrative, and we expect the profit contribution to sustain in the long term as we expect China’s civil aviation market to continue to see high growth in the foreseeable future.

Valuation

We revise up our three years ahead forecast, with respective EPS of US 10.4 cents, US 13.7 cents, and US 17.9 cents in FY16e, FY17e, and FY18e.

Based on our FY16e EPS of US 10.4 cents (SG 13.8 cents) and the updated average forward PER of 13.9x, we maintain our “Buy” call with an unchanged target price of SG$1.92.