company note alpha series singapore china … & gas - retail singapore china aviation oil...

Oil & Gas - Retail│Singapore│January 16, 2017

Company Note │ Alpha series

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.

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China Aviation Oil Charting new heights ■ CAO is a well-backed, integrated supplier and trader of jet and other fuels, with

strong baseline net profit driven by China’s burgeoning international aviation market. ■ Further capacity enhancement in Shanghai Pudong airport and expansion in global

markets, especially the US, could propel earnings further. ■ We initiate with Add and target price of S$2.00, based on 13x CY18F P/E (c.20%

discount to peer average CY18F PER of 16.6x). ■ Stock offers net cash/share of 23.4 UScts and CY17F yield of 2.7%, on a balance

sheet that has negligible debt, giving it freedom to capitalise on M&A opportunities.

Key link to China’s expansionary international aviation market China Aviation Oil (CAO) is the sole jet fuel importer to China, supplying 30-40% of China’s overall jet fuel supply. Imported (or bonded) jet fuel can only be utilised by outbound flights from China. In our view, CAO is a proxy for China’s burgeoning international aviation, which is set to grow with the country’s increased urbanisation and ‘outward-looking’ investment policies.

Benefiting from Shanghai Pudong airport’s capacity expansion CAO has a 33% stake in the exclusive refueller for Shanghai Pudong International Airport. This associate has been a major contributor to CAO’s historical PBT (64% of 9MCY16 PBT). We believe the completion of the fifth runway in end-2017/2018 and the satellite terminal in 2019 would cause this associate’s contribution to lift off. According to industry sources, once completed in 2019, the airport will be among the world’s top three and able to handle 80m passengers in 2025 (+c.30% from c.60m it currently handles).

More diversified globally to reach new heights In 1HCY16, CAO’s international revenue accounted for 51.0% of total revenue (vs. 20% in CY10). It has also expanded its trading network to 42 airports outside mainland China. We believe the company’s vision to trade globally would propel earnings growth. Its existing links to two of the world’s busiest airports (Los Angeles and Hong Kong international airports) and strong support structure (via strategic assets) provide the foundations for this global expansion, in our view.

Healthy balance sheet to back up opportunistic growth CAO currently boasts a net cash position of c.US$202.8m, which we believe gives it the freedom to capitalise on any M&A opportunities that may emerge. CAO has an ambitious net profit target of c.US$110m by 2020F (double 2010 net profit of US$54.7m) and we believe it would not rule out M&A to reach its goal.

Initiate with Add and target price of S$2.00 The stock currently trades at CY18F P/E of 9.9x, above the historical 8-year forward P/E average of 8.8x. In our view, CAO should trade at a narrower discount to its peers which currently trade at 16.6x CY18F P/E), given its higher returns and the likely structural re-rating post-stellar net profit showing in 9MCY16 (+c.40% yoy). Stripping out CAO’s net cash per share of 23.4 UScts, the implied CY17F P/E is just c.8.3x. We have ascribed a target CY18F P/E of 13x (c.20% discount to peer average ).

Key risks Downside risks include: i) weaker-than-expected Chinese international travel, ii) variability in gross margins from opportunistic trading activities, iii) lower-than-expected contributions from associates, and iv) slower-than-expected penetration of international markets.

▎Singapore

ADD Consensus ratings*: Buy 4 Hold 0 Sell 0

Current price: S$1.51 Target price: S$2.00 Previous target: S$ Up/downside: 32.9% CIMB / Consensus: 10.5%

Reuters: CNAO.SI Bloomberg: CAO SP Market cap: US$912.6m S$1,302m Average daily turnover: US$1.49m S$2.10m Current shares o/s: 866.2m Free float: 28.9% *Source: Bloomberg Key changes in this note

N/A

Source: Bloomberg Price performance 1M 3M 12M Absolute (%) 5.6 11.1 137 Relative (%) 2.6 3.6 122 Major shareholders % held China National Aviation Fuel Grp 51.0 BP PLC 20.1

Analyst(s)

Cezzane SEE T (65) 6210 8699 E [email protected] LIM Siew Khee T (65) 6210 8664 E [email protected]

SOURCE: COMPANY DATA, CIMB FORECASTS

Financial Summary Dec-14A Dec-15A Dec-16F Dec-17F Dec-18FRevenue (US$m) 17,061 8,988 9,977 13,391 16,887Operating EBITDA (US$m) 12.41 23.90 28.59 30.32 32.78Net Profit (US$m) 53.25 61.28 80.74 83.53 92.27Normalised EPS (US$) 0.06 0.07 0.09 0.10 0.11Normalised EPS Growth (35.3%) 15.6% 31.8% 3.1% 10.1%FD Normalised P/E (x) 15.63 14.81 11.24 10.90 9.91DPS (US$) 0.015 0.021 0.028 0.029 0.032Dividend Yield 1.43% 2.01% 2.67% 2.74% 3.03%EV/EBITDA (x) 44.08 19.73 14.25 11.07 9.33P/FCFE (x) 14.89 9.91 10.90 9.64 16.57Net Gearing (17.0%) (28.8%) (34.8%) (41.3%) (40.8%)P/BV (x) 1.64 1.53 1.40 1.29 1.18ROE 9.9% 10.7% 13.0% 12.3% 12.5%% Change In Normalised EPS Estimates Normalised EPS/consensus EPS (x) 0.98 0.88 0.85

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Oil & Gas - Retail│Singapore│China Aviation Oil│January 16, 2017

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Charting new heights In a nutshell China Aviation Oil (CAO) is a well-backed, integrated supplier and trader of jet and other fuels. It is 51%-owned by China National Aviation Fuel Group Corporation (CNAF), which is the largest aviation transportation logistics service provider in China. It has three key net earnings drivers that are captured on the “Gross-Profit” and “Share of JV and associate” lines:

A) Gross profit is spurred mainly by i) imported (or bonded) jet fuel supply to China at a fixed cost-plus/mt supplied (estimated at US$3/mt or 0.4% GP margin), ii) jet fuel supply to international airports, and iii) trading of jet fuel and other fuel products.

B) Contributions are from its ‘strategic assets’, which are equity-accounted, especially its 33% stake in Shanghai Pudong International Airport Aviation Fuel Supply (SPIA) that, as at 9MCY16, accounted for c.64% of its profit before tax.

Figure 1: Three key net earnings drivers

SOURCES: CIMB, COMPANY REPORTS

Post reporting a stellar 9MCY16 net profit, we believe CAO is poised for a structural re-rating. In our view, CAO’s baseline earnings could rise due to the expansion of China’s international airports (including Beijing and Shanghai); while global earnings would be propelled by increasing penetration of the US market since CAO entered the LAXFUEL consortium in CY14 and the kick-starting of the refuelling business in Hong Kong International Airport (HKIA) in 2015. LAX and HKIA are listed as two of the top 20 busiest airports in the world. At the same time, we believe its cash pile of c.US$232.8m as at end-Sep ‘16 and clean balance sheet (negligible debt) will allow it to pursue M&A opportunities for growth.

China Aviation Oil

Associate Contribution

Supply

1) Jet Fuel Supply China – fixed cost-plus

2) Jet Fuel Supply International

3) Aviation Marketing (International)

Gross Profit

Trading

1) Jet Fuel (reported as Middle Distillate division)

2) Other Fuels (reported as Other Fuels division)

1) Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA) – largest contributor.

2) China National Aviation Fuel TSN-PEK Pipeline Transportation Corporation

3) China Aviation Oil Xin Yuan Petrochemicals Co. Ltd.

4) Oilhub Korea Yeosu Co Ltd5) CNAF Hong Kong Refuelling Limited


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Investment thesis Link to China’s burgeoning international aviation market, which is set to rise with China’s increased urbanisation and ‘going-out’ policies China Aviation Oil (CAO) is the sole jet fuel importer to China, supplying 30-40% of China’s overall jet fuel supply. Imported (or bonded) jet fuel can only be utilised by outbound flights from China. Hence, in our view, CAO can be considered a proxy for China’s international aviation growth.

China’s international travel catches up. Domestic passenger turnover still takes the lion’s share of China’s aviation market. However, industry data shows that international passenger turnover has caught up, especially in the past 3 years. A report from OAG (an airline data aggregator) has shown that China’s international carrier capacity growth has averaged 12% p.a. for the past five years, faster than the domestic market, which has only grown an average of 8% p.a., signifying that Chinese airlines are now increasing their international routes. Furthermore, outbound travel for China (resident departure from China) has recorded a CAGR of c.14.2% since 2007 (Figure 2).

Figure 2: International carrier capacity growth averaged 12% p.a. vs. 8% p.a. for domestic carrier capacity growth

SOURCES: CIMB, CEIC, OAG

In our view, this enhanced growth trend in long-haul travel will gain momentum, spurred by the:

i) expansion of China’s middle class. A report by Oxford Economics for InterContinental Hotels Group (IHG) estimates the number of Chinese households earning above US$35,000 per annum – a key income level beyond which international travel becomes more affordable – rose by 21m from 2003 to 2013. An additional 61m households are forecasted to pass this threshold by 2023. China’s 13th Five-Year Plan includes special mention of increasing the urbanisation rate to 60% by 2020 (from the previous 56.1%), especially for rural areas;

ii) better outbound aviation infrastructure. China’s 13th Five-Year Plan includes civil infrastructure expansion of major airport hubs, clearer positioning for metropolitan airports and improved coverage for remote areas. The Civil Aviation Administration of China (CAAC) has apparently forecasted that the country will have 260 airports by 2020 and, according to Hong Kong International Airport Authority (HKIA) – in its website “threerunwaysystem” and CAAC; four out of five of China’s busiest international airports (Beijing, Shanghai Pudong, Guangzhou Baiyun, Shenzhen Bao'an) are due for expansion/enhancement (Figure 3); and

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Figure 3: Planned new constructions and enhancements

SOURCES: CIMB, Threerunwaysystem website (HKIA); CAPA

iii) continued implementation of the ‘One Belt, One Road’ plan by China. This key initiative mainly aims to boost connectivity between China and c.60 countries, and connect East Asia and Europe by building infrastructure and boosting financial and trade ties. According to Ernst and Young (EY) in its report “Key connectivity improvements along the Belt and Road in telecommunication and aviation sectors”, countries along ‘the Belt and Road’ have become the focus of international route expansion by Chinese carriers as civil aviation enterprises are encouraged to ‘go out’ and compete in the international aviation market. As China continues on these ‘outward-looking’ initiatives, it could enhance international travel and prospects for CAO, in our view.

Figure 4: China’s One Belt, One Road initiative Figure 5: Major international routes developed by the top four Chinese airlines in 2015

Note: Blue route is the “21st Century Maritime Silk Road”. Red routes are the “Silk Road Economic Belt”

SOURCES: CIMB, CHINA-BRITAIN COUNCIL

SOURCES: CIMB, ERNST & YOUNG

CAAC forecasts CY17F transport turnover to grow by 11.8%. According to CAAC, China’s aviation industry recorded a 10MCY16 transport turnover of 79.4bn tonne-km (a “tonne-km” represents the transport of one tonne of passenger/cargo over one kilometer), registering a 12.6% yoy jump from 10MCY15’s figures. Of this, transport turnover for international routes rose by 17.0% to 28bn tonnes-km, trumping the 10.4% growth in domestic turnover routes. For 2017, the CAAC forecasts growth of 11.8% for total transport turnover. In our view, international routes could continue expanding given the abovementioned factors.

Expansion Plan(Estimated Year of Completion)

Beijing Daxing Airport New airport being constructed in Daxing District. First phase with four runways (2019)

Shanghai Pudong Will complete and operate a fifth runway (by 2018) and a satellite concourse (2019)

Shenzhen Bao'an Will construct a third runway (2018-2021), a satellite concourse (2020) and a fourth terminal (2025)

Guangzhou Baiyun Will construct a fourth and fifth runway (2025), a second (2018) and a third (2025) terminal

Airport


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Figure 6: Traffic Handled

SOURCES: CIMB, CAAC

Higher refuelling volumes with Shanghai Pudong capacity expansion 33% stake in Shanghai Pudong International Airport Aviation Fuel Supply (SPIA). CAO has a stake in the exclusive refueller for Shanghai Pudong International Airport. This associate has been a major contributor to CAO’s historical PBT (average of c.63% of PBT during CY10-15) and contributed about 64% of 9MCY16 PBT.

According to the Centre for Aviation (CAPA), Shanghai Pudong International Airport is the largest airport serving Shanghai and among the busiest airports in China. It has registered a CAGR of 6.9% for passenger count from CY10 to 9MCY16. It is also the third-busiest airport in the world in terms of cargo traffic. At present, it hosts domestic, regional and international passenger and cargo services and is a major hub for airlines, including Air China, China Eastern Airlines and Shanghai Airlines.

33% capacity expansion by 2019F. We understand that the fourth runway was completed in 2015 in time for the opening of Shanghai’s Disneyland in June 2016, enabling passenger throughput to hit above 60m by Nov ‘16. Come end-2017F, we expect the fifth runway to be completed and, in 2019F, we believe another satellite terminal is due for completion, taking Shanghai Pudong’s passenger capacity up to 80m (+33%). We believe the completion of the fifth runway and the satellite terminal could spur another lift-off for this associate’s contribution in 2017F and 2019F.

Figure 7: SPIA accounts for c.64% of CAO’s 9MCY16 PBT Figure 8: SPIA Passenger Count and Refuelling Volumes on an uptrend

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

Diversifying from ‘Just China’ CAO’s growing international presence. In its bid to diversify geographically, CAO has leveraged the connections of its parent company CNAF, networks built with suppliers and international logistics companies, and Chinese airline peers to market and supply jet fuel internationally, since 2011. It has also been stealthily laying the groundwork for a strong ‘support supply network’ via its strategic assets in order to reach the broader market.

Traffic Handled Oct-16YoY

Growth (%)

10MCY16 YTD YoY Growth (%)

Total Transport Turnover (1billion tonne-kilometers) 8.6 12.7% 79.4 12.6%Domestic Routes 5.5 13.8% 51.4 10.4%International Routes 3.1 10.7% 28.0 17.0%

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Key milestones include when its joint-venture CNAF HKR won the third refuelling licence in Hong Kong in 2013 and when it joined the LAXFUEL consortium (the largest jet fuel consortium in the US) in 2014.

Figure 9: CAO's international milestones


As at 1HCY16, CAO’s international revenue accounted for 51.0% of total revenue versus 20% in CY10. It has grown its network to 42 airports outside China (i.e. in the US, Europe and Hong Kong). Its aviation marketing volumes for jet fuel registered a 6-year CAGR of 44.2% in metric tonnes supplied from 0.2m tonnes in CY11 to 1.8m tonnes as at 9MCY16 (surpassing full-year CY15 supply).

Figure 10: Group revenue by geographic locations


20110.2 million tonnesStart up

20120.6 million tonnes22 airports

20130.7 million tonnes30 airports

20141 million tonnes34 airports

1H 20150.6 million tonnes>30 airports

Won third refuelling

licence in Hong Kong

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China, 49.0%

South Korea, 0.8% USA, 7.5%

Hong Kong, 9.5%

Indonesia, 0.8%

Singapore, 15.8%

Middle East, 1.7%

Europe, 3.0%

Malaysia, 1.9%Other

Regions, 8.8%

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China, 80%

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Figure 11: CAO’s international presence and supply locations open it to significant global opportunities


Taking part in two of the world’s busiest airports outside China. According to Airports Council International (ACI), Los Angeles International Airport (LAX) and Hong Kong International Airport (HKIA) are two of the top 20 busiest airports in the world as at CY15. CAO has successfully penetrated the US market; its subsidiary, North American Fuel Corporation (NAFCO), secured three new supply contracts with airline companies at Los Angeles Airport (LAX), exceeding 15% of total jet fuel demand at LAX. We believe that CAO can ride the growth of these two hubs.

Figure 12: LAX and HKIA are two of the busiest airports in the world in CY15

SOURCES: CIMB, Airports Council International (ACI)

Expansion for HKIA. To meet future air traffic growth and keep pace with the swift capacity expansion of its regional peers (i.e. Shanghai, Shenzhen and Changi), Hong Kong’s Airport Authority (AA) kick-started construction to expand HKIA into a three-runway system (3RS) in Aug ‘16. We understand that the project is quite substantial and, upon completion (estimated in 2023), it is forecasted to lift HKIA’s annual passenger capacity by 30m to 102m


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passengers by 2030, thus potentially driving refuelling demand up by 40%. This is a long-run positive to CAO’s joint-venture - CNAF Hong Kong Refueling Limited (CNAF-HKR) in our view. As at 9MCY16, CNAF-HKR was still contributing losses but this was because it just commenced operations in Aug ‘15. CAO targets to turn breakeven by end-CY18F. We have imputed break-even for CNAF-HKR in our CY18F share of JV and associate contribution forecasts

Healthy balance sheet to back up operations and opportunistic growth Immediate needs - Net cash and enough for dividend payouts. CAO reached a net cash position after it settled debts from its Scheme of Arrangement exercise in 2007. It has also been conservatively managing its balance sheet. As at end-Sep ‘16, reported net cash was US$202.8m, which we deem as sufficient to support CAO’s CY16-18F dividend payment of US$24.2m-26.9m (CAO adopted a 30% dividend payout policy with effect from 2015).

In the longer run - M&A activities. CAO plans to reach c.US$110m of net profit in 2020 and we believe it is not ruling out M&A to achieve this target. CAO has been acquiring ‘strategic synergistic assets’ to lay the foundation for its aim to be an integrated player. We also note that it has grown its supply and trading network to be around the world’s busiest airports and to have access to upcoming mega-city hubs.

Figure 13: CAO has stealthily been acquiring supporting assets to enhance international presence and gain scale


Focused on not repeating history Back in 2004, CAO reported estimated losses of c.US$550m from speculative oil derivatives trading by its previous CEO Chen Jiulin, which nearly caused the company to go under. Post a lengthy corporate restructuring, the company was able to right the boat and now has BP as a strategic investor. BP was initially brought in in 2006 to provide CAO with trading expertise and risk management assistance and to participate in CAO’s procurement business. Post the scandal, CAO is taking risk management very seriously, in our view. It has a three-tier structure whereby there is risk management at the board level, company risk meetings at the tactical/policy level and risk management at the department level. Market risks are monitored daily, monthly and quarterly to reflect different levels of risk exposure and performance. Most importantly, the head of risk management has direct access to the risk management committee while the group’s risk management department has two different specialised teams. One focuses on market, operations and product risk management while the other focuses on credit risk management, providing efficient support to businesses and timely reporting to management and the board.

Procurement Optimisation and Trading

Physical Delivery

Derivatives Hedging Storage

Freight/Transport

- Term Contracts- Spot Market- Tenders

- Airports- Airlines- Terminals

- Capitalising on profit enhancement opportunities- Supported by large volume of supply to China- Protected by robust risk management policies

OKYC Xin Yuan

TSN-PEKCL SPIA CNAF-HK

- Time Charter- Spot Charter- Pipelines

Associate andJoint Venture

Roles in Supply Chain


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Figure 14: CAO’s risk management structure is three-tiered, with dual reporting lines


Figure 15: Three-tiered management structure


Tiers of risk management Composition The Responsibility

Risk Management Committee (RMC) at the Board Level

Senior directors who are familiar with risk management and chaired by a BP director. The committee is beyond what is required for the governance of a public listed company.

To set up the risk management framework, risk management policy and risk appetite of the organisation; to review the new business and ultimate limits for risk control.

Company Risk Meeting (CRM) at the Tactical/Policy Level

*Head of Risk Management (as the chairman)*CEO, CFO and COO*Head of key functional departments

To discuss and review all risk topics arising from daily operation of the company

Risk Management Department at the Operation Level

Comprised of professionals in risk control Monitoring, analysing, reporting and mitigation of below market, credit, operational, compliance, enterprise and other risks


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Financials Record 9MCY16 As at 9MCY16, CAO set a new record by reporting a net profit of US$71m (versus CY15’s US$60.5m and peak of US$68.8m in CY13). The stellar earnings were a culmination of both volume growth and associate contributions.

Record high volumes (+67.2% yoy) being handled for both the middle distillate and other fuels divisions. Middle distillate volumes (includes jet fuel supply and trading and gasoil) jumped by c.47.4% yoy in 9MCY16, largely, we suspect, due to enhanced trading activities given the wide contango spreads in 2016 and the jump in international supply of jet fuel to other countries, especially to the US (a product of its entry into LAXFUEL). The other fuel and oil products volumes leapt by more than 100% in the same period, with the expansion of trading crude oil to China and fuel oil to the Middle East market.

Significant jump in associate contributions (+62.9% yoy) as:

i) SPIA’s contributions grew on the back of higher refuelling volumes (9MCY16 volume of 3.2m metric tonnes was the same as full-year CY15 volumes), with higher capacity in Shanghai Pudong airport (fourth runway was completed in 2015) and mark-to-market gains from higher jet fuel prices (it has to hold inventory of 15 days);

ii) share of profits from TSN-PEKCL increased 30.9% to US$2.5m on higher pipeline transportation volume; and

iii) significant jump in OKYC’s contributions of US$3.9m (>100% yoy) on the back of strong tank storage leasing activities and favourable mark-to-market gains from CAO’s cross currency interest rate swap (CRS) contracts.

Figure 16: Results Comparison


Forecast CY16F net profit of US$80.7m. We note CAO typically reports weaker fourth quarter results, which we believe is largely due to fewer trading activities being performed. Hence, we forecast upside of just 13.0% from 9MCY16 net profit of US$71.0m. We assume CY16F volumes for both middle distillate and other fuel products could register yoy growth of 44.9% and aggregate at 29.2m metric tonnes. We forecast SPIA’s jet fuel refuelling volumes to grow by 12.3% yoy to 4.3m metric tonnes in CY16F.

3Q 3Q yoy % qoq % 3QCY16 3QCY15 yoy % CY16 CY15 chg chg Cum Cum chg

Revenue 3,939.9 2,399.4 64.2 30.3 8,427.5 7,004.4 20.3 Operating costs (3,929.5) (2,386.5) 64.7 30.4 (8,394.0) (6,977.0) 20.3 EBITDA 5.0 10.1 (51.0) (11.1) 21.6 21.4 1.1 EBITDA margin (%) 0.1 0.4 0.3 0.3 Depn & amort. (0.3) (0.4) (28.0) (3.1) (1.0) (1.2) (18.7) EBIT 4.7 9.7 (51.9) (11.5) 20.7 20.2 2.2 Interest expense (0.7) (0.2) 209.4 209.4 (1.1) (0.8) 25.0 Interest & invt inc 0.4 (0.9) 141.4 20.7 0.8 (0.2) 526.3 Associates' contrib 19.5 9.7 na na 53.0 32.5 62.9 Pretax profit 23.9 18.3 30.4 (3.6) 73.5 51.7 42.1 Tax (0.7) (0.6) 13.6 (42.5) (2.5) (1.9) 34.3 Tax rate (%) 2.8 3.2 3.4 3.6 Exceptionals - - na na - - naMinority interests - - na na - - naNet profit 23.2 17.7 31.0 (1.7) 71.0 49.9 42.4 EPS (S cts) 2.7 2.0 31.0 (1.7) 8.2 5.8 42.4

Volumes (million metric tonnes) 10.7 5.8 84.6 22.1 24.3 14.5 67.2 Middle Distillates 5.2 3.3 58.5 39.8 13.7 9.3 47.4 Other Fuels 5.5 2.5 118.8 9.0 10.6 5.2 102.7

SPIA Associate Contribution 17.4 9.9 76.3 335.6 47.0 30.8 52.6 Percentage of SPIA contribution vs Associate Earnings Reported (%)

89.4% 101.6% 88.7% 94.7%

FYE Dec (US$ m)


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Figure 17: CAO traditionally reports weaker 4Q net profits, hence we forecast 4Q16F to see similar trends


Gross profit: Lower margins on narrower contango spread CY17F and CY18F volume growth of 12.6% and 12.5%, respectively. We forecast CY17F and CY18F middle distillate segment volumes to grow by 10.7% and 10.6%, respectively, slightly lower than passenger throughput growth of 11.8% forecasted by CAAC in 2017F. We understand jet fuel consumption typically lags behind passenger throughput growth given improving jet fuel efficiencies. For other fuels, we factor in growth of c.15% p.a. as we project moderation post this year’s growth gains. Our overall assumptions spur volume growth in CY17F and CY18F by 12.6% and 12.5%, respectively.

Figure 18: Steady yoy growth of 12.6-12.5% for volumes traded in CY17-18F


Narrower CY17-18F GP margins of 0.36-0.31%. We understand that CAO typically earns higher margins on its middle distillate segment (where the jet fuel supply and trading division sits) during a period of wide volatility in jet fuel pricing and especially after there has been a recovery in jet fuel prices post a significant dip (i.e. in 2009 and current year). We believe this is because more trading activities are performed when there is a significant contango spread as opposed to a backwardation period. As we expect crude oil price to continue on an uptrend, but at narrower bands (versus the spread seen in CY14-16), we believe GP margins could also narrow.

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Associate contributions – Better SPIA growth in CY18F SPIA takes a breather in 2017. We forecast SPIA’s CY17F refuelling volumes to grow by a modest 6.0% (about half the pace of growth in CY16F) due to capacity constraints in Shanghai Pudong airport until end-2017, when the fifth runway is estimated to be completed. For CY18, we forecast better volume growth of 12.5% (similar to CY16F trend when the fourth runway was added in 2015) on account of higher capacity. Our forecasts represent volume CAGR of 10.2% during CY15-CY18F.

Other associates see higher volume CAGR of 13.4% during CY15-18F, largely as we forecast contributions from TSN-PEKCL and China Aviation Oil Petrochem to grow by 5% yoy. For CNAF-HKR, we are forecasting a breakeven in CY18 as we believe CAO is targeting to make profits 3 years after kick starting in CY15. That said, SPIA’s contributions are highly likely to remain the major swing factor, at least in the near future, in our view.

Figure 19: Steady yoy growth of 12% for volumes traded


CY15-18F EPS CAGR of c.14.3% Our assumptions result in our net profits achieving yoy growth of 32% in CY16F, 3% growth in CY17F and 13% in CY18F. Catalysts for further growth are: i) higher volumes, ii) higher margins, and iii) higher contributions from SPIA.

41.9 38.9

53.8 54.361.1

1.7 2.2

2.9 3.1

3.2

(10.0)

-

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m

SPIA Contribution TSN-PEKCL China Aviation Oil Petrochem Xinyuan Oilhub Korea Yeosu CNAF-HKR


13

Figure 20: Net profit forecasts : slight breather in CY17F; and stronger return in CY18F


Balance sheet and cashflow: Stable barring any significant acquisitions In a net cash position for CY16F-18F. We forecast the company could continue in a net cash position given it has no large capex requirements in the near future. As mentioned above, the cash hoard of c.US$233m as at end-9MCY16 can easily fund its dividend payout needs for CY16F-18F of c.US$24.2m-26.9m, leaving cash for other purposes, including M&A.

Cashflow generation is also strong given CAO receives the lion’s share of SPIA’s income via dividend (SPIA typically dividends up to 90% of its earnings). For CY16-18F, we forecast dividends from SPIA of 85% as we believe SPIA may save some of its income to fund its current capacity expansions. We expect CAO to stay free cash flow positive in CY16-18F.

Figure 21: Expect CAO to remain free cash flow positive with increasing cash balance in CY16F-18F


FYE Dec CY14 CY15 CY16F CY17F CY18FRevenue (US$m) 17,061.0 8,987.5 9,977.1 13,391.1 16,887.0 Middle Distillates 13,507.6 7,009.5 6,918.6 9,698.0 12,512.5 Other Fuels 3,553.4 1,978.0 3,058.5 3,693.1 4,374.5

Volume (m metric tonnes) 20.4 20.2 29.2 32.9 37.0 Middle Distillates 12.1 11.9 16.8 18.6 20.5 Other Fuels 8.3 8.3 12.4 14.3 16.4

Total Growth (%) 23.6% -1.1% 44.9% 12.6% 12.5%Middle Distillates Growth 16.0% -1.7% 41.2% 10.7% 10.6%Other Fuels Growth 36.6% -0.1% 50.1% 15.0% 15.0%

GP (US$m) 27.4 35.4 44.0 47.9 53.0 Middle Distillate 32.2 36.9 41.5 45.1 49.7 Other Fuels (4.8) (1.4) 2.4 2.8 3.3

Margins 0.16% 0.39% 0.44% 0.36% 0.31%Middle Distillate 0.24% 0.53% 0.60% 0.47% 0.40%Other Fuels -0.13% -0.07% 0.08% 0.08% 0.08%

Associate contribution (US$m) 43.2 42.6 57.9 59.0 66.4

SPIA Contribution (US$m) 41.9 38.9 53.8 54.3 61.1 SPIA Volumes (m metric tonnes) 3.5 3.8 4.3 4.5 5.1 SPIA Volume Growth (%) 8.5% 9.4% 12.3% 6.0% 12.5%

Net profit (US$m) 53.2 61.3 80.7 83.5 92.3 Net profit growth (%) -22.6% 15.1% 31.8% 3.4% 10.5%

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Free-Cash-Flow (LHS) Dividend Payable (LHS) Cash Balance (RHS)


14

Valuation Initiate with Add and target price of S$2.00 We initiate coverage on CAO with a target price based on a CY18F P/E valuation of 13x. We value CAO at a P/E multiple higher than 8.8x (8-year historical mean) as we opted to ascribe a narrower discount of c.20% to the peer average of 16.6x CY18F P/E vs. the current discount of c.40%. as: i) we believe CAO’s earnings are set to grow substantially post its stellar net

profit showing in 9MCY16 (+c.40% yoy vs 9MCY15) where it charted a new high in net profits;

ii) it has successfully expanded its aviation supply network beyond China and into two of the busiest global airport bases, which could propel earnings further, in our view; and

iii) including net cash per share of 23.4 UScts, which once stripped out, implies CY17F P/E is only c.8.3x.

We also believe its share price could be catalysed by further M&A, which it could embark on to fulfill its ambitious earnings target of c.US$110m by 2020F.

CAO remains at a discount to closest peer. We believe CAO’s closest peer comparison is World Fuel Services (WFS), which supplies fuel and logistics services to marine shipping, aviation and trucking companies around the world. The company first started out as a marine fuel brokerage company but entered the aviation fuel market via an acquisition in 1988. Thus far, the organisation’s growth has been supplemented by strategic acquisitions (nearly one acquisition each year), with the latest aviation-centric acquisition being the aviation fuelling operations of certain Exxonmobil affliates at 83 international airport locations for a price tag of US$260m.

In terms of aviation volumes marketed and handled, WFS is larger than CAO. However, we note that CAO trades at a significant c.25% discount to WFS’s CY17F P/E of 14.6x and c.8.0% discount to WFS’s CY17F P/BV of 1.41x. This is in spite of CAO’s higher 3-year EPS CAGR of 14.3% (vs. WFS’s 8.1%), higher CY17F ROE of 12.3% (vs. WFS’s implied estimated CY17F ROE of 9.5%) and greater CY17F dividend yield of 2.7% (vs. WFS’s 0.5%).

For further comparison purposes, we also benchmark the company against other airports (i.e. SPIA and Beijing airport), aviation refuellers (Bangkok Aviation Fuel Services), other locally-listed airport/airline service providers (i.e. SATs) and other marketing and refining companies (Brightoil Petroleum). Again, we note that the stock trades at significant discounts to its peers' average CY17F P/E of 19.1x and CY17F P/BV of 2.2x. This is our basis for ascribing the narrower valuation discount between CAO and peers in arriving at our target price, which would be further justified by CAO finding an M&A target to boost earnings growth ahead, in our view.

It is also worth highlighting that CAO is one of the few companies among global peers that is currently in a net cash position. Its closest peer, WFS, is in a net debt position.


15

Figure 22: CAO forward P/E Figure 23: CAO forward P/E / CAO rolling P/BV


Figure 24: Peers Comparison

SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG

4.00

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Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

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+1SD: 11.4x

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-1SD: 6.3x

+2SD: 14.0x

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Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Rolling P/BV (x)

-1SD: 0.8x

8-yr Ave (11-15): 1.3x

+1SD: 1.8x

+2SD: 2.2x

Bloomberg PriceTarget

PriceMarket

Cap3-year

EPSP/BV (x)

Recurring ROE (%)

Dividend Yield

Net Gearing

Company Ticker Recom. (lcl curr) (lcl curr) (US$ m) CY16F CY17F CY18FCAGR

(%) CY17F CY17F CY17F CY16

China Aviation Oil CAO SP Add 1.51 2.00 913 11.2 10.9 9.9 14.3% 1.3 12.3% 2.7% -34.8%

Airport and Airport ServicesSATS Ltd SATS SP Hold 5.07 4.95 3,960 24.0 22.5 20.4 7.0% 3.4 15.8% 3.3% -24.2%Airports of Thailand PCL AOT TB NR 395.0 NA 15,920 28.8 26.1 22.8 9.3% 4.2 17.0% 1.8% -23.4%Beijing Capital International 694 HK NR 7.34 NA 4,099 15.5 13.8 12.9 10.4% 1.4 10.2% 2.9% 52.4%Shanghai International Airport 600009 CH NR 26.78 NA 7,478 18.3 16.2 14.7 11.6% 2.1 13.3% 1.9% -35.8%Simple Average 21.7 19.7 17.7 9.6% 2.8 14.1% 2.5% -7.8%

Airport RefuellersBangkok Aviation Fuel Services BAFS TB NR 36.75 NA 661 24.2 na na na na na na 0.4%Simple Average 24.2 na na na na na na na

Transportation fuel supplier and tradersWorld Fuel Services Corp INT US NR 44.43 NA 3,131 17.8 14.6 13.2 8.1% 1.41 9.5% 0.5% 9.9%

Brightoil Petroleum Holdings L 933 HK NR 2.40 NA 3,145 28.9 22.9 17.8 4.1% 1.90 9.3% 1.7% 70.5%

Simple Average 23.3 18.7 15.5 6.1% 1.7 9.4% 1.1% 40.2%

Total Simple Average 18.7 16.4 14.4 10.0% 1.9 11.9% 2.1% -0.8%Total Simple Average (excld. CAO) 23.1 19.2 16.6 7.8% 2.2 11.7% 1.8% 16.2%

Core P/E (x)


16

Risks Significant plunge in crude oil price. CAO’s margins might be affected if there is a significant plunge in crude oil prices as more trading activities are performed in a contango versus a backwardation. Associate contributions could also be impacted as SPIA and CNAF-HK have to keep inventories of 15 days and 8 days, respectively, both these associates could see swings in contributions due to mark-to-market effects. On the GP level, a mitigation factor is that the jet fuel supply to China is a based on cost-plus pricing.

Weaker China international aviation growth. CAO’s main jet fuel supply revenue from China relies on international travel. If there is slower-than-expected growth in such travel due to more sluggish GDP expansion, this could impact CAO’s baseline China jet fuel supply revenue.

Loss of sole importer licence for China. While it is highly unlikely in our view, CAO’s monopoly on imported jet fuel could be affected if China decides to liberalise the segment. However, we believe that any impact from this could be mitigated as CAO has diversified globally and its ties to existing supplier networks for jet could provide a natural barrier to entry for new entrants.

Trading division brings variability in earnings. CAO is also exposed to normal risks of physical trading, i.e. market risk, counterparty risk and translation risk. Also, given trading is done opportunistically, i.e. more trading optimization activities during a steep contango period and fewer during a backwardation period, it introduces some variability to CAO’s GP margins and returns.

Lower-than-expected contributions from associates. As associates account for a large part of CAO’s PBT, we believe any slowdown could have a domino effect on earnings. Moreover, CNAF-HK could take longer than expected to breakeven, lowering associates’ contributions.

Slower-than-expected penetration of international markets. CAO aims to be a global fuels provider. However, if its international penetration is slower than expected, it could delay the achievement of this goal and slow the growth rate of its earnings, in our view.


17

Background China’s well-backed integrated jet and other fuels supply player China Aviation Oil (Singapore) Corporation Ltd (CAO) was incorporated in Singapore on 26 May 1993 and was then listed on the mainboard of the Singapore Exchange Securities Trading Limited on 6 December 2001.

Its parent company, with 51% of total issued shares in CAO, is a large state-owned enterprise, China National Aviation Fuel Group Corporation (CNAF), which is the largest aviation transportation logistics service provider in China. CNAF has a diverse portfolio of businesses, comprising aviation fuel distribution, storage and refuelling services at 200 airports in China.

The other strategic investor, BP investments Asia Limited (a subsidiary of oil major BP), holds 20% of the total issued shares of CAO.

CAO and its wholly-owned subsidiaries, China Aviation Oil (Hong Kong) Company Limited (CAOHK) and North American Fuel Corporation (NAFCO), supply jet fuel to airline companies at airports outside the PRC, including locations in the Asia Pacific, North America, Europe and the Middle East. At the same time, CAO and its wholly-owned subsidiaries, China Aviation Oil (Europe) Limited (CAOE) and NAFCO, engage in international trading of jet fuel and other oil products.

Figure 25: Organisation chart


* Excluding treasury shares

Three main earnings drivers The two divisions that make up the revenue line of CAO are the jet fuel supply and trading and trading of other oil products, while its strategic acquisitions in ‘oil-related assets’ are equity-accounted and form the third key net profit driver for CAO.

BP InvestmentsAsia Limited

China National Aviation Fuel Group

CorporationPublic

China Aviation Oil (Singapore)

Corporation Ltd

North American Fuel Corporation

China Aviation Oil (Europe) Limited CAOT Pte. Ltd.

China Aviation Oil (Hong Kong)

Company Limited

100% 100% 100% 100%

20.17% 51.31% * 28.52%*

CNAF Hong Kong Refueling Limited

39%

China National Aviation Fuel TSN-

PEK Pipeline Transportation Corp

Ltd

China Aviation Oil Xinyuan

Petrochemicals Co. Ltd

Oilhub Korea Yeosu Co. Ltd

Shanghai Pudong International Airport

Aviation Fuel Supply Co Ltd



33% 49% 26%39%

100% 100%


18

Figure 26: Three main earnings drivers


Middle distillate division (jet fuel supply and trading). CAO started out as the sole supplier of imported jet fuel to China. In 2008, it moved into trading jet fuel to optimise its margins when there was the opportunity to do so (typically during a contango). Then in 2011, in its bid to diversify geographically, CAO leveraged the connections of its parent company CNAF and Chinese airline peers to market and supply jet fuel internationally. Key milestones include when it won the third refuelling licence in Hong Kong, supported by its joint-venture CNAF HKR, in 2013, and when it joined the LAXFUEL consortium (the largest jet fuel consortium in the US) in 2014. Today, the Group supplies to more than 42 airports outside China, including in Europe (e.g. Amsterdam and Frankfurt), North America (e.g. Los Angeles and Anchorage), Asia Pacific (e.g. Hong Kong) and the Middle East (e.g. Dubai and Istanbul).

This division is the dominant contributor to CAO’s GP margins (i.e. ~90%) Volumes-wise, the division’s contribution reduced from c.90% in 2010 to 56.5% in 9MCY16.

Trading of other oil products. CAO kick-started this division in 2009 to diversify its income streams from jet fuel. Products that CAO have traded are petrochemicals, fuel oil, gas oil, aviation gas and, most recently, crude oil. However, the petrochemicals trading was halted in Sept 2015. The contribution of this division to CAO’s revenue line grew from 2010 to 2015 but it was also the source of variability in CAO’s gross profit (GP) line, reporting gross losses in CY10, CY14 and CY15 on account of swings in the product cycle.

Volumes-wise, the division has caught up, with volumes increasing from 6.9% in CY10 to 43.5% in 9MCY16.

Figure 27: As at 9MCY16, other fuel volumes have caught up to account for c.43.5% of total volumes supplied and traded by CAO

Figure 28: As at 9MCY16, middle distillates still accounted for the majority of GP reported


Jet Fuel Supply and Trading

China

International

Aviation Marketing

Trading of Other Oil Products

Gas Oil

Fuel Oil

Avgas

Oil-Related Assets

Storage Tanks & Jetties

Pipelines

Airport Refuelling Facilities

0.5 0.84.2 6.1

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0

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30


Mill

ion

Met

ric T

onne

s

Other Fuels Middle Distillates

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19

Oil-related assets. CAO has stakes in five strategic assets that form a strong supporting foundation for its position as a supplier and trader globally. The largest contributor is Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA), with TSN-PEKCL being the second. Its latest acquisition was in CNAF Hong Kong Refuelling Limited in Aug ‘15. As mentioned above, associate and JV contributions make up c.60-70% of CAO’s PBT historically, with SPIA taking up the lion’s share.

Figure 29: CAO's Strategic Assets


Growth largely driven by 4-to 5-year plans 2010-2014. CAO’s path has largely been shaped by its forward plans, much like China’s 5-year plans. Back in 2010, its aims included i) to be the leading jet fuel supplier/trader in Asia Pacific, ii) to be an important player in Asia Pacific for other oil products, and iii) to invest in synergistic assets. It managed to become the largest physical trader in Asia Pacific for jet fuel, it consolidated its market position in China, expanded into new markets in Asia, the Middle East, Europe and US and forged strategic alliances with major Chinese airlines to supply jet fuel at more than 20 locations globally.

2020 vision. Its vision for 2020 is to be a global leader in international aviation oil supply and trading and a reputable global supplier and trader of other oil products. It has also enhanced its goals and now aims to be a niche player in future clean transport fuels.

Strategic Asset Stake Background Other Majority Shareholders 9MCY16 contribution

(US$m)Shanghai Pudong International Airport Aviation Fuel Supply Company (“SPIA”)

33% -Exclusive jet fuel supplier to Shanghai Pudong International Airport'-Business activities include: procurement, sales, transportation, storage and refuelling of jet fuel '-Owns all refuelling facilities at Shanghai Pudong International Airport'-Provides jet fuel sales and refuelling services to more than 80 domestic and foreign airlines

Shanghai International Airport Co Ltd (40%)Sinopec Shanghai Gaoqiao Company (27%)

47

China National Aviation Fuel TSN-PEK Pipeline Transportation Corporation Ltd (“TSN-PEKCL”)

49% - Key asset is a 185km long pipeline transporting majority of jet fuel requirements of Beijing Capital International Airport and Tianjin Binhai International Airport

China National Aviation Fuel Logistics 2.5

China Aviation Oil Xin Yuan Petrochemicals Co. Ltd (“Xin Yuan”)

39% -Provides storage services and trades in jet fuel and other oil products'-Owns the 50,000 cubic metres Shuidong storage tank farm near Shuidong harbour in Maoming City, Guangdong Province-In May 2014, incorporated a wholly owned subsidiary – Maoming Xinyuan – to engage in storage and trading of petroleum products

Juzhengyuan Petrochemical Co. Ltd (60%);China National Aviation Fuel Group (1%)

0.3

Oilhub Korea Yeosu Co Ltd (“OKYC”)

26% -Operates the largest commercial oil storage terminal in Korea (1,300,000M3)'-Able to support trading activities to Europe, West Coast of United States and Southeast Asia-Strategically located near GS Caltex’s refinery

Korea National Oil Corporation (29%), SK Energy Co., Ltd., GS Caltex Corporation, Samsung C&T CorporationLG International CorpSeoul Line Corporation

3.9

CNAF Hong Kong Refuelling Limited (“CNAF HKR”)

39% (via China Aviation Oil

(Hong Kong) Company

Limited (“CAO HK”))

-One of three licensed into-plane refuellers at Hong Kong International Airport-Located near Hong Kong International Airport at Chek Lap Kok-equipped with state-of-the-art fuelling facilities including Euro V-compliant fuelling trucks as well as a comprehensive fuelling management system.

Shenzhen Cheng Yuan Aviation Oil Company (37%), China United Petroleum (Holding Company Limited (14%) and Cheer Luck Investment Limited (10%)

-0.7


20

Figure 30: CAO’s 2020 vision


Highly experienced senior management Highly experienced senior management. CAO is currently led by CEO Meng Fanqiu, who has been instrumental in transforming CAO’s global integrated value chain. He is supported by a capable management team, in our view, with industry experience that spans 15-29 years.

Figure 31: Senior management


Name Title Roles and responsibililitiesMeng Fanqiu Chief Executive Officer / Executive

Director-Responsible for the effective management and operations of the entire business of the Group.-Overall in charge of developing and implementing the strategic directions of the business to enhance the competitiveness and profitability of the Group.-Former Division Director of the Planning and Development Division of China National Aviation Fuel Group Corporation.-Former Member of Corporate Governance Assessment Committee which was constituted during the restructuring of CAO.

Wang Chunyan Chief Financial Officer -Directs and manages the Group’s overall financial plans and accounting practices. -He is responsible for the treasury, accounting, budget, tax and audit functions of the Group and also assists the CEO to oversee the IT and risk management functions. -He is also a Director of China Aviation Oil (Hong Kong) Company Ltd, CNAF Hong Kong Refuelling Limited and CAOT Pte Ltd.-More than 20 years of experience in China’s petroleum industry. Prior to joining CAO, Mr Wang was the Deputy Head of Financial Assets Division at ShengliPetroleum Administrative Bureau, a subsidiary of Sinopec Group.

Teo Lang Lang Jean Chief Operating Officer -Responsible for managing the trading, aviation marketing and operations functions of the Group and performance targets for all trading businesses ofthe Group, and the product portfolio currently includes jet fuel, gasoil, fuel oil and avgas, as well as having oversight of the Group’s aviation marketing business.-Director of North American Fuel Corporation.-Has more than 15 years of experience in the oil trading industry. Prior to joining CAO, she was a senior trader of distillates products at Cargill International PteLtd.

Wang Zhaopeng President, CAOHK -Directs and manages the day-to-day business operations in Hong Kong and also oversees the joint venture operations of CNAF Hong Kong Refuelling Limited.'-His responsibilities include executing the Group’s business strategies and corporate plans, leading the financial and reporting functions, as well as overseeing the risk management across all functions at CAOHK.'-Has over 29 years of experience in the petroleum and chemical industry in China covering all facets of business operations.

Zhang Xingbo President, NAFCO -Directs and manages the day-to-day business operations of the Group’s activities in North America including its business strategies and corporate plans. -He is also responsible for NAFCO’s financial and reporting functions, and oversees the risk management function across all operations at NAFCO.'Has over 20 years of experience in the oil industry, having accumulated extensive experience in China National Aviation Fuel Group Corporation’s (“CNAF”) procurement, trading and international business divisions in Asia Pacific and Europe.


21

BY THE NUMBERS

SOURCE: CIMB RESEARCH, COMPANY DATA

9.0%

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P/BV vs ROE

Rolling P/BV (x) (lhs) ROE (rhs)

-40%-30%-20%-10%0%10%20%30%40%

4.15.16.17.18.19.1

10.111.112.1

Jan-12A Jan-13A Jan-14A Jan-15A Jan-16F Jan-17F

12-mth Fwd FD Normalised P/E vs FD Normalised EPS Growth

12-mth Fwd Rolling FD Normalised P/E (x) (lhs)

Diluted Normalised EPS Growth (rhs)

Profit & Loss

(US$m) Dec-14A Dec-15A Dec-16F Dec-17F Dec-18FTotal Net Revenues 17,061 8,988 9,977 13,391 16,887Gross Profit 27 36 44 48 53Operating EBITDA 12 24 29 30 33Depreciation And Amortisation (1) (2) (2) (2) (1)Operating EBIT 11 22 27 29 31Financial Income/(Expense) (3) (1) (1) (1) (2)Pretax Income/(Loss) from Assoc. 47 42 58 59 66Non-Operating Income/(Expense) 0 0 0 0 0Profit Before Tax (pre-EI) 55 64 84 87 96Exceptional ItemsPre-tax Profit 55 64 84 87 96Taxation (2) (2) (3) (3) (3)Exceptional Income - post-taxProfit After Tax 53 61 81 84 92Minority InterestsPreferred DividendsFX Gain/(Loss) - post taxOther Adjustments - post-taxPreference Dividends (Australia)Net Profit 53 61 81 84 92Normalised Net Profit 53 61 81 84 92Fully Diluted Normalised Profit 53 61 81 84 92

Cash Flow

(US$m) Dec-14A Dec-15A Dec-16F Dec-17F Dec-18FEBITDA 12.41 23.90 28.59 30.32 32.78Cash Flow from Invt. & Assoc.Change In Working Capital 35.64 33.14 7.27 15.94 (31.68)(Incr)/Decr in Total Provisions 2.74 (4.50) 0.00 0.00 0.00Other Non-Cash (Income)/Expense 2.59 1.77 1.15 1.12 1.95Other Operating Cashflow 1.32 3.49 1.67 1.62 1.52Net Interest (Paid)/Received (3.08) (1.04) (1.15) (1.12) (1.95)Tax Paid (2.12) (2.32) (3.05) (3.16) (3.49)Cashflow From Operations 49.51 54.45 34.48 44.73 (0.86)Capex (0.47) (0.44) (0.44) (0.44) (0.44)Disposals Of FAs/subsidiaries 0.00 0.00Acq. Of Subsidiaries/investmentsOther Investing Cashflow 35.46 37.61 49.23 50.18 56.46Cash Flow From Investing 34.99 37.17 48.79 49.74 56.02Debt Raised/(repaid) (28.61) 0.00 0.00 0.00 0.00Proceeds From Issue Of SharesShares RepurchasedDividends Paid (13.69) (12.77) (24.22) (25.06) (27.68)Preferred DividendsOther Financing Cashflow (1.55) (0.25) (1.15) (1.12) (1.95)Cash Flow From Financing (43.85) (13.02) (25.38) (26.18) (29.63)Total Cash Generated 40.65 78.60 57.89 68.28 25.52Free Cashflow To Equity 55.89 91.62 83.27 94.46 55.15Free Cashflow To Firm 87.58 92.66 84.43 95.59 57.11


22

BY THE NUMBERS… cont’d

SOURCE: CIMB RESEARCH, COMPANY DATA

Balance Sheet

(US$m) Dec-14A Dec-15A Dec-16F Dec-17F Dec-18FTotal Cash And Equivalents 94 171 226 292 315Total Debtors 931 337 957 1,112 1,402Inventories 38 57 160 174 220Total Other Current Assets 0 0 0 0 0Total Current Assets 1,063 564 1,342 1,578 1,937Fixed Assets 7 6 6 6 5Total Investments 270 266 274 283 293Intangible Assets 2 2 2 2 2Total Other Non-Current Assets 8 8 8 8 8Total Non-current Assets 287 281 290 298 308Short-term Debt 0 0 0 0 0Current Portion of Long-Term DebtTotal Creditors 790 247 977 1,162 1,466Other Current LiabilitiesTotal Current Liabilities 790 247 977 1,162 1,466Total Long-term Debt 0 0 0 0 0Hybrid Debt - Debt ComponentTotal Other Non-Current Liabilities 0 0 0 0 0Total Non-current Liabilities 0 0 0 0 0Total Provisions 6 6 6 6 6Total Liabilities 796 253 983 1,168 1,472Shareholders' Equity 554 593 649 708 772Minority InterestsTotal Equity 554 593 649 708 772

Key Ratios

Dec-14A Dec-15A Dec-16F Dec-17F Dec-18FRevenue Growth 9.6% (47.3%) 11.0% 34.2% 26.1%Operating EBITDA Growth (62.5%) 92.6% 19.6% 6.0% 8.1%Operating EBITDA Margin 0.073% 0.266% 0.287% 0.226% 0.194%Net Cash Per Share (US$) 0.11 0.20 0.26 0.34 0.36BVPS (US$) 0.64 0.69 0.75 0.82 0.89Gross Interest Cover 3.55 21.48 23.41 25.64 16.01Effective Tax Rate 3.39% 3.64% 3.64% 3.64% 3.64%Net Dividend Payout Ratio 24.5% 29.8% 30.0% 30.0% 30.0%Accounts Receivables Days 21.94 25.74 23.73 28.19 27.16Inventory Days 1.62 1.94 3.99 4.56 4.27Accounts Payables Days 19.35 21.13 22.54 29.25 28.49ROIC (%) 4.7% 11.4% 16.6% 18.6% 22.5%ROCE (%) 1.95% 3.86% 4.31% 4.20% 4.19%Return On Average Assets 3.85% 5.68% 6.61% 4.83% 4.57%

Key Drivers

Dec-14A Dec-15A Dec-16F Dec-17F Dec-18FASP (% chg, main prod./serv.) -11.4% -46.7% -23.4% 19.2% 12.1%Vol. sales grth (%,main prod/serv) 23.6% -1.1% 44.9% 12.6% 12.5%No. Of Petrol Stations N/A N/A N/A N/A N/A


23

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26

investment decision. This document does not constitute a public offering of securities. CIMB is not registered with the Spanish Comision Nacional del Mercado de Valores to provide investment services. Sweden: This report contains only marketing information and has not been approved by the Swedish Financial Supervisory Authority. The distribution of this report is not an offer to sell to any person in Sweden or a solicitation to any person in Sweden to buy any instruments described herein and may not be forwarded to the public in Sweden. Switzerland: This report has not been prepared in accordance with the recognized self-regulatory minimal standards for research reports of banks issued by the Swiss Bankers’ Association (Directives on the Independence of Financial Research). Taiwan: This research report is not an offer or marketing of foreign securities in Taiwan. The securities as referred to in this research report have not been and will not be registered with the Financial Supervisory Commission of the Republic of China pursuant to relevant securities laws and regulations and may not be offered or sold within the Republic of China through a public offering or in circumstances which constitutes an offer or a placement within the meaning of the Securities and Exchange Law of the Republic of China that requires a registration or approval of the Financial Supervisory Commission of the Republic of China. Thailand: This report is issued and distributed by CIMB Securities (Thailand) Company Limited (“CIMBS”) based upon sources believed to be reliable (but their accuracy, completeness or correctness is not guaranteed). The statements or expressions of opinion herein were arrived at after due and careful consideration for use as information for investment. Such opinions are subject to change without notice and CIMBS has no obligation to update its opinion or the information in this research report. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient are unaffected. CIMB Securities (Thailand) Co., Ltd. may act or acts as Market Maker, and issuer and offerer of Derivative Warrants and Structured Note which may have the following securities as its underlying securities. Investors should carefully read and study the details of the derivative warrants in the prospectus before making investment decisions. AAV, ADVANC, AMATA, AOT, AP, BA, BANPU, BBL, BCH, BCP, BDMS, BEAUTY, BEC, BEM, BH, BIG, BLA, BLAND, BTS, CBG, CENTEL, CHG, CK, CKP, COM7, CPALL, CPF, CPN, DELTA, DTAC, EGCO, EPG, GLOBAL, GLOW, GPSC, GUNKUL, HANA, HMPRO, ICHI, IFEC, INTUCH, IRPC, ITD, IVL, KAMART, KBANK, KCE, KKP, KTB, KTC, LH, LHBANK, LPN, MAJOR, MINT, MTLS, PLANB, PS, PTG, PTT, PTTEP, PTTGC, QH, ROBINS, RS, S, SAMART, SAWAD, SCB, SCC, SCN, SGP, SIRI, SPALI, SPCG, SPRC, STEC, STPI, SUPER, TASCO, TCAP, THAI, THANI, THCOM, TISCO, TKN, TMB, TOP, TPIPL, TRUE, TTA, TTCL, TTW, TU, TVO, UNIQ, VGI, VIBHA, VNG, WHA. Corporate Governance Report: The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.

Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result Description: Excellent Very Good Good N/A

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and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand) Co. Ltd, CIMB Securities Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as “U.S. Institutional Investors” as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds, and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc. CIMB Securities (USA) Inc does not make a market on the securities mentioned in the report. Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

Spitzer Chart for stock being researched ( 2 year data )

China Aviation Oil (CAO SP)

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2016, Anti-Corruption 2016. AAV – Very Good, n/a, ADVANC – Very Good, Certified, AEONTS – Good, n/a, AMATA – Excellent, Declared, ANAN – Very Good, Declared, AOT – Excellent, Declared, AP – Very Good, Declared, ASK – Very Good, Declared, ASP – Very Good, Certified, BANPU – Very Good, Certified, BAY – Excellent, Certified, BBL – Very Good, Certified, BCH – not available, Declared, BCP - Excellent, Certified, BEM – Very Good, n/a, BDMS – Very Good, n/a, BEAUTY – Good, Declared, BEC - Good, n/a, BH - Good, Declared, BIGC - Excellent, Declared, BJC – Good, n/a, BLA – Very Good, Certified, BPP – not available, n/a, BTS - Excellent, Certified, CBG – Good, n/a, CCET – not available, n/a, CENTEL – Very Good, Certified, CHG – Very Good, n/a, CK – Excellent, n/a, COL – Very Good, Declared, CPALL – not available, Declared, CPF – Excellent, Declared, CPN - Excellent, Certified, DELTA - Excellent, Declared, DEMCO – Excellent, Certified, DTAC – Excellent, Certified, EA – Very Good, Declared, ECL – Good, Certified, EGCO - Excellent, Certified, EPG – Good, n/a, GFPT - Excellent, Declared, GLOBAL – Very Good, Declared, GLOW – Very Good, Certified, GPSC – Excellent, Declared, GRAMMY - Excellent, n/a, GUNKUL – Very Good, Declared, HANA - Excellent, Certified, HMPRO - Excellent, Declared, ICHI – Very Good, Declared, INTUCH - Excellent, Certified, ITD – Good, n/a, IVL - Excellent, Certified, JAS – not available, Declared, JASIF – not available, n/a, JUBILE – Good, Declared, KAMART – not available, n/a, KBANK - Excellent, Certified, KCE - Excellent, Certified, KGI – Good, Certified, KKP – Excellent, Certified, KSL – Very Good, Declared, KTB - Excellent, Certified, KTC – Excellent, Certified, LH - Very Good, n/a, LPN – Excellent, Declared, M – Very Good, Declared, MAJOR - Good, n/a, MAKRO – Good, Declared, MALEE – Very Good, Declared, MBKET – Very Good, Certified, MC – Very Good, Declared, MCOT – Excellent, Declared, MEGA – Very Good, Declared, MINT - Excellent, Certified, MTLS – Very Good, Declared, NYT – Excellent, n/a, OISHI – Very Good, n/a, PLANB – Very Good, Declared, PSH – not available, n/a, PSL - Excellent, Certified, PTT - Excellent, Certified, PTTEP - Excellent, Certified, PTTGC - Excellent, Certified, QH – Excellent, Declared, RATCH – Excellent, Certified, ROBINS – Very Good, Declared, RS – Very Good, n/a, SAMART - Excellent, n/a, SAPPE - Good, n/a, SAT – Excellent, Certified, SAWAD – Good, n/a, SC – Excellent, Declared, SCB - Excellent, Certified, SCBLIF – not available, n/a, SCC – Excellent, Certified, SCN – Good, Declared, SCCC - Excellent, Declared, SIM - Excellent, n/a, SIRI - Good, n/a, SPALI - Excellent, Declared, SPRC – Very Good, Declared, STA – Very Good, Declared, STEC – Excellent, n/a, SVI – Excellent, Certified, TASCO – Very Good, Declared, TCAP – Excellent, Certified, THAI – Very Good, Declared, THANI – Very Good, Certified, THCOM – Excellent, Certified, THRE – Very Good, Certified, THREL – Very Good, Certified, TICON – Very Good, Declared, TISCO - Excellent, Certified, TK – Very Good, n/a, TKN – Good, n/a, TMB - Excellent, Certified, TOP - Excellent, Certified, TPCH – Good, n/a, TPIPP – not available, n/a, TRUE – Very Good, Declared, TTW – Very Good, Declared, TU – Excellent, Declared, UNIQ – not available, Declared, VGI – Excellent, Declared, WHA – not available, Declared, WHART – not available, n/a, WORK – not available, n/a.

Companies participating in Thailand’s Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorized into:

Rating Distribution (%) Investment Banking clients (%)Add 58.4% 5.4%Hold 29.6% 1.4%Reduce 11.6% 0.4%

Distribution of stock ratings and investment banking clients for quarter ended on 31 December 20161626 companies under coverage for quarter ended on 31 December 2016

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16

Price Close


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- Companies that have declared their intention to join CAC, and - Companies certified by CAC

CIMB Recommendation Framework Stock Ratings Definition: Add The stock’s total return is expected to exceed 10% over the next 12 months. Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months. Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months. The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition: Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation. Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation. Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition: Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark. Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark. Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

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