China Aviation Oil

[Squirrel]

I am not sure what you mean by the meat is gone. Say the profits stays the same at US45m at SPIA, converted to S$61m. How much would you pay for this kind of stable volume business? I don’t think 10x PE is demanding. And not to mention the cash balance of US$500m on balance sheet.

I am not sure why the SPIA business underperformed. But the company is trading at less than 7 PE, has a strong balance sheet and pays out decent dividends. And in my opinion, this half might be one of those less profitable halves due to price movements or certain operational issues. I won’t know for sure. I am happy to continue holding to see what comes next. It’s all about risk reward ratio.

hi Squirrel,

The "meat is gone" is refers to any potential for step jumps to revenue/profitability post early 2023.

In the absence of potential catalysts like business model change/capital recycling or the company is in play, I will avoid assigning individual values to their separate assets and then do some SOTP. But I do recognize that SPIA and its core trading business are not really synergistic and so never say ever - although I will conclude that is a 5 foot pole for a 3 ft guy like me.

Due to its trading business and the turnover days I calculated some time back (May2024 post), the 500mil of cash probably requires much more discounting for the OPMI. As the trading business scales, more working capital (and cash) is required too. I am generally looking for business models that don't need too much capital to scale (or if negative, would even be better!)

Regardless of what the cash is required for, what I always look for is safety, cushion. Even if the cash is being set aside for margin requirements, for its business to work, it’s still balance sheet strength.

The catalyst to me is simple. SPIA recovering to prior peak earnings. It might or might not happen but I guess literally, my cash is on it happening within the next few years. And I don’t think anyone should bet against it. The current market cap is relatively cheap even if it is only for the SPIA business. Needless to say, there is still all the remaining businesses that comes “free” with it.

[weijian]

hi Squirrel,

The "meat is gone" is refers to any potential for step jumps to revenue/profitability post early 2023.

In the absence of potential catalysts like business model change/capital recycling or the company is in play, I will avoid assigning individual values to their separate assets and then do some SOTP. But I do recognize that SPIA and its core trading business are not really synergistic and so never say ever - although I will conclude that is a 5 foot pole for a 3 ft guy like me.

Due to its trading business and the turnover days I calculated some time back (May2024 post), the 500mil of cash probably requires much more discounting for the OPMI. As the trading business scales, more working capital (and cash) is required too. I am generally looking for business models that don't need too much capital to scale (or if negative, would even be better!)

Regardless of what the cash is required for, what I always look for is safety, cushion. Even if the cash is being set aside for margin requirements, for its business to work, it’s still balance sheet strength.

The catalyst to me is simple. SPIA recovering to prior peak earnings. It might or might not happen but I guess literally, my cash is on it happening within the next few years. And I don’t think anyone should bet against it. The current market cap is relatively cheap even if it is only for the SPIA business. Needless to say, there is still all the remaining businesses that comes “free” with it.

hi Squirrel,

IMHO, if we decide to put in real money - We should position ourselves to make choices between "good" and "great", rather than choosing between "good" and "bad".

I am not saying a great balance sheet is a bad thing. In fact, it is a good thing. But a great balance sheet that has the necessary structure/resolute from the decision makers to make efficient capital allocation, is the great thing.

Finally, I do not think most of us would bet against SPIA recovering to peak earnings. But whether we decide to stay on the sidelines, is another thing. Since I read about CAO on your blog and looked into it in detail (matter of fact, I reviewed in detail on all 3 local companies mentioned on your blog - HLS, CAO and YZJFH), I have followed it for some time. So far, nothing has changed my mind about staying on the sidelines.

Nonetheless, when things change, I am more than ready to change my mind - on anything and everything.

[Squirrel]

There has been a flurry of analyst rerating China Aviation Oil over the past year. The share price has taken on a rather impressive run after these updates and in many of the cases, upgrades to their Target Prices.

Having gone through the reports from DBS, OCBC, Phillip Securities and CGS, there is a notable piece of information that I personally deem important, missing.

The phase 4 upgrade of the Shanghai Pudong International Airport. As discussed before, SPIA is evidently a volume-based business. Any increases to the capacity of the airport it is operating out of is a game changer. The analysts perhaps have the view that an increase in capacity might not mean an increase in actual volume.

According to an online article from Yicai,

“With passenger traffic approaching the limit, Pudong Airport began planning the expansion in January 2022. According to the plan, the airport will serve 130 million passengers a year by 2030, operating 805,000 flights and delivering 5.9 million tons of cargo.”

For comparison, in 2024, the airport served 76.8 million passengers, operated 528,074 flights and delivered 3.77 million tons of cargo. Current information available up to Sep 2025 indicates that total passenger count for 2025 is on track to reach 84 million.

https://www.thesquirrelsdrey.com/post/ch...he-takeoff

[Squirrel]

With the release of the FY2025 results, analysts are revising their TPs for China Aviation Oil upwards. Now I am seeing a range of $2.50 - $2.63 from 4 houses.

In this current bullish market in SG, it is getting more and more difficult to find undervalued companies that provide a significant margin of safety, like China Aviation Oil.

There still remains significant catalysts for more rerating upwards for CAO, such as expansion of the Shanghai Pudong airport, restructuring flows from the merger at the parent level, potential M&A activity in CAO after merger of Sinopec and CNAF, and perhaps a question mark on what the US-Israel-Iran war might bring to the table. Trying hard to get this right, since honestly, I don't have many other shortlisted candidates to invest in with my long time held investment criteria.

Be great to hear from people on their views of CAO's current valuation.

[weijian]

Here are some of my thoughts from a valuation standpoint. Based on end FY25 financials, CAO's NAV is ~1.6sgd and so with market price >2sgd, it is at least 20% premium above book. So the question really is this: Does CAO deserves to trade at above book? If yes, the 2nd question is: Has CAO been re-rated from NAV multiple to earnings multiple?

First question: Trading >NAV?

- CAO is debt free and BS can be simplified to be largely made up of cash (~50%), working capital (~30%) and associate (~20%). Most of the cash is deposited with the Parent's financial arm. The Parent also accounts for a large disproportion of working capital (Parent accounts for ~50% of receivables but only ~15% of sales). So from a liquidation perspective, up to ~80% of the BS needs to have some discount due to this "close working relationship" and if this liquidity is tied up onshore, a 10% withholding tax for the company to declare the money out as dividends.

- Next, let's look at the associate (~20% of BS) which is largely made of up its crown jewel SPIA. SPIA's value is calculated based on associate accounting, ie. "cost + share of profit - dividends paid out". From this formula, we can see that the more dividends declared --> less valuable SPIA becomes on paper. This definitely doesn't make sense, especially so the longer it happens and CAO has held SPIA since 2002. I have not dwelled deep enough to look at SPIA's accounting but I would assume it is relatively conservative - its PPE are worth more than its depreciated value and its exclusive license to jet fuel supply at Shanghai Pudong Airport has a lot of commercial value if it can be sold to someone.

- In summary, a revalued NAV (RNAV) for CAO probabl means that 80% of the BS (cash/working capital) needs a discount, while 20% of its BS (SPIA) will have a large revaluation surplus. Before the current run-up in the last 6 months or so, has CAO ever traded at >NAV in his public market history? Probably not. So if Mr Market revalues it >NAV, it may imply that the Parent's planned reorg might have some surprises for the 80% of its BS (cash/working capital). What is exactly going to happen at the re-org? It is anyone's guess. Is Mr Market more optimistic than it should be? IT is anyone's guess too.

2nd question: Re-rated from NAV to earnings multiples?

- The more exciting question is whether Mr Market has re-rated CAO from NAV multiples to earnings multiples? That is really the holy grail for investors! If we still decide to look at our investments at NAV multiples while Mr Market has revalued it to earnings multiple and then the latter turns out to be right, then it would be a big Type 2 error.

- In general for Mr Market to switch from NAV to earnings multiples, using the New Keppel example, the decision makers first need to initiate and commit to a fundamental re-wire, successfully execute it and then show tangible results. These happens over a period of time. I would assume it is safe to say that CAO isn't undergoing any sort of business re-wiring so far. Of course, sometimes you don't need a re-wiring yourself to be re-rated. If your business has strong tailwinds for example construction demand in Spore for the next 3-5years, then your industry helps to re-rates you. Similarly I do not think there are strong tailwinds in the core oil trading + import/export business that CAO undertakes.

[weijian]

- In summary, a revalued NAV (RNAV) for CAO probabl means that 80% of the BS (cash/working capital) needs a discount, while 20% of its BS (SPIA) will have a large revaluation surplus. Before the current run-up in the last 6 months or so, has CAO ever traded at >NAV in his public market history? Probably not. So if Mr Market revalues it >NAV, it may imply that the Parent's planned reorg might have some surprises for the 80% of its BS (cash/working capital). What is exactly going to happen at the re-org? It is anyone's guess. Is Mr Market more optimistic than it should be? IT is anyone's guess too.

So it seems like Mr Market is expecting a chain offer to materialize out of the merger between CNAF (CAO's parent) and Sinopec. In this case, Sinopec is absorbing CNAF and then becomes the new controlling shareholder of CAO. As per Spore takeover code, this should trigger a chain offer but since CAO is not a large component of CNAF, it is also possible Sinopec could ask for a waiver and be approved of that.

In general, if the new owner has no "real intent" to add more shares but is only putting out an offer to satisfy the Takeover Code, the offer price is generally not fantastic. Popiah King's chain offer for Tat Seng Packaging is an example. But in CAO's particular case, its 2nd biggest shareholder is BP with a 20% stake. BP invested into CAO in 2006, as part of rescue plan to re-capitalize CAO from the 2004 trading loss. While BP still does business with CAO (~mid to high single digit of revenue), but it is probably time for BP to exit their stake after 20 years...So there might be some "deal" that is triggered by the re-structuring after all...

Responses to substantial and relevant questions raised for China Aviation Oil (Singapore) Corporation Ltd’s 32nd Annual General Meeting

Can the Board provide clarity on the expected implications of the controlling shareholder restructuring on the group’s listing status? At what stage will shareholders have clarity on whether the merger could trigger a mandatory general offer under the Singapore Takeover Code? What is the Board’s current assessment of this risk?

Response: This is not a restructuring of CAO, but a restructuring being carried out at the parent-entity level by our controlling shareholder, CNAF. At present, in accordance with applicable regulations, the relevant parties are carrying out the necessary approval and filing procedures. The Company will continue to monitor relevant developments in relation to the restructuring and fulfil its disclosure obligations as and when appropriate.

https://links.sgx.com/FileOpen/Responses...eID=884768

[weijian]

But in CAO's particular case, its 2nd biggest shareholder is BP with a 20% stake. BP invested into CAO in 2006, as part of rescue plan to re-capitalize CAO from the 2004 trading loss. While BP still does business with CAO (~mid to high single digit of revenue), but it is probably time for BP to exit their stake after 20 years...So there might be some "deal" that is triggered by the re-structuring after all...

BP has gone on record to say that there wouldn't be a deal (at least not triggered on their end).

Minutes of 32nd Annual General Meeting

9. Could the BP-nominated Director please comment on the Restructuring? Is BP considering selling its shares in the Company? BP-nominated Director, Dr Richard 

Yang Minghui’s Response: We are very optimistic about CAO’s future development and have never considered selling our shares. We intend to hold them for the long term.

https://links.sgx.com/FileOpen/Annex_1.a...eID=889181

[weijian]

- In summary, a revalued NAV (RNAV) for CAO probabl means that 80% of the BS (cash/working capital) needs a discount, while 20% of its BS (SPIA) will have a large revaluation surplus. Before the current run-up in the last 6 months or so, has CAO ever traded at >NAV in his public market history? Probably not. So if Mr Market revalues it >NAV, it may imply that the Parent's planned reorg might have some surprises for the 80% of its BS (cash/working capital). What is exactly going to happen at the re-org? It is anyone's guess. Is Mr Market more optimistic than it should be? IT is anyone's guess too.

So it seems like Mr Market is expecting a chain offer to materialize out of the merger between CNAF (CAO's parent) and Sinopec. In this case, Sinopec is absorbing CNAF and then becomes the new controlling shareholder of CAO. As per Spore takeover code, this should trigger a chain offer but since CAO is not a large component of CNAF, it is also possible Sinopec could ask for a waiver and be approved of that.

In general, if the new owner has no "real intent" to add more shares but is only putting out an offer to satisfy the Takeover Code, the offer price is generally not fantastic. Popiah King's chain offer for Tat Seng Packaging is an example. But in CAO's particular case, its 2nd biggest shareholder is BP with a 20% stake. BP invested into CAO in 2006, as part of rescue plan to re-capitalize CAO from the 2004 trading loss. While BP still does business with CAO (~mid to high single digit of revenue), but it is probably time for BP to exit their stake after 20 years...So there might be some "deal" that is triggered by the re-structuring after all...

Responses to substantial and relevant questions raised for China Aviation Oil (Singapore) Corporation Ltd’s 32nd Annual General Meeting

Can the Board provide clarity on the expected implications of the controlling shareholder restructuring on the group’s listing status? At what stage will shareholders have clarity on whether the merger could trigger a mandatory general offer under the Singapore Takeover Code? What is the Board’s current assessment of this risk?

Response: This is not a restructuring of CAO, but a restructuring being carried out at the parent-entity level by our controlling shareholder, CNAF. At present, in accordance with applicable regulations, the relevant parties are carrying out the necessary approval and filing procedures. The Company will continue to monitor relevant developments in relation to the restructuring and fulfil its disclosure obligations as and when appropriate.

https://links.sgx.com/FileOpen/Responses...eID=884768

The parenţ level restructuring has been completed and SIC has also confirmed that the new (merged) parent is not required to make a mandatory offer.

Completion Announcement on Restructuring of Controlling Shareholder

The Company has been informed by CNAF on 9 July 2026 that, the Securities Industry Council of Singapore has confirmed that China Petrochemical Corporation will not be required to make a mandatory offer under Rule 14.1 of the Singapore Code on Take-overs and Mergers for the Company as a result of the Restructuring.

https://links.sgx.com/FileOpen/Completio...eID=895910