■ Xinyuan is a minor contributor to CAO’s share of associates profit; hence sale will have negligible impact on CAO’s profitability, in our view.
■ Maintain Add and TP, based on 12.5x CY19F P/E (c.20% discount to peer average).
Disposing of Xinyuan interest via listing-for-sale
● As CAO is a subsidiary of a China state-owned enterprise (SOE), the proposed disposal will be via a listing-for-sale through the Beijing Equity Exchange. No tentative completion deadline was disclosed.
● Back in FY07, CAO disposed of a 41% stake (out of its total 80% stake then) in Xinyuan to Shenzhen Juzhengyuan Petrochemical Co Ltd (Juzhengyuan), then a 19%-stake owner in Xinyuan, for Rmb20.5m (~S$4.3m). The sale was on a “willingbuyer willing-seller” basis and at the original acquisition price CAO invested in Xinyuan in FY04, despite Xinyuan being a loss-making company.
● Xinyuan is mainly engaged in the storage tank leasing and trade of oil products in Southern China. Its key asset is a storage tank farm located in the city of Maoming, Guangdong Province, China with a total storage capacity of 79,000m3. In FY17, it reported utilisation leasing rate of 99%.
● Besides CAO, other current Xinyuan shareholders are Juzhengyuan with 60% stake, and China National Aviation Fuel Holding Company (CNAF) with a 1% stake.
Minor impact on CAO’s share of associates profit and net cash
● In 1Q18, Xinyuan contributed US$0.2m, or a mere 0.9%, to CAO’s share of associates profit of US$21.0m. Over FY08-17, Xinyuan has on average accounted for 1.6% of CAO’s share of associates profit, with its highest contribution at US$1.6m in FY14, but only due to reversal of prior year impairment provisions made. Hence, its disposal will have a negligible impact on CAO’s future associate profits, in our view.
● Assuming the sale is performed on a similar basis as in FY07, this could reap CAO Rmb19.3m (~US$3m), still a minor sum given that CAO had a net cash of US$171.5m (19.8UScts/share) as at end-1Q18.
● We believe the proposed sale could be CAO’s way of streamlining its portfolio assets, especially since it has exited the petrochemical trading business.
Focus will still be on SPIA
● Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA) continues to be CAO’s associate gem and accounted for 90.1% of its 1Q18 associate earnings.
● The Shanghai Pudong airport started trial runs on its fifth runway at end-17; this could drive FY18F refuelling volumes for SPIA.
● SPIA's 2019F volumes could grow further with the completion of the airport's satellite terminal to boost passenger capacity to 80m.
● CAO highlighted in end-17 that it is seeking synergistic M&A opportunities as it intends to expand its global jet supply and trading network. We are positive on CAO's expansion beyond being just a China-centric player.
Maintain Add and TP of S$2.03
● We continue to favour CAO as a proxy for China’s growing outbound travel, as well as its expanding international footprint and healthy balance sheet.
● Our TP is still based on 12.5x CY19F P/BV, c.20% discount to peer average of 15.8x to reflect its smaller market cap.
● Potential re-rating catalysts are higher product volumes and associate earnings, and possibility of M&As to fuel inorganic growth. Downside risks to our call include lower volumes, margins and associate earnings.
Source : CGSCIMB Research