Report Summary

• China Aviation Oil (CAO) could see significant valuation upside—up to 40%—from the merger of its parent, China National Aviation Fuel Group (CNAF), with Sinopec. The merger may unlock embedded equity value, but short-term operations are expected to remain largely unchanged.
• Bull case: If CAO becomes the dedicated international fuel trading platform for the merged entity, trading volumes could rise sixfold, driving substantial earnings growth and operating leverage. A general offer may trigger a re-rating, especially as much of CAO’s balance sheet is carried at historical cost.
• Bear case: CAO risks being absorbed into Unipec with reduced autonomy, potentially relegating it to an execution-only trading desk with lower margins and weaker earnings. Minority shareholder interests may be deprioritized, and talent migration could dilute CAO’s trading bench strength.
• Valuation: The report transitions to a sum-of-parts (SOP) valuation, reflecting associate earnings and net cash. Base case target price is S\$2.63 (upside of 37%), bull case could reach S\$3.76, and bear case S\$1.09. The substantial net cash position provides downside support.
• Operational outlook: FY25 net profit projected to grow 30% year-on-year to US\$102m, supported by strong outbound traffic, higher associate contributions, and resilient margins. FY26 growth may be flat due to China-Japan tensions, but recovery is expected in FY27.
• ESG: CAO is improving its ESG profile, targeting a 30% reduction in Scopes 1 and 2 emissions by 2030 and net-zero by 2050, while expanding its sustainable aviation fuel business.
• Risks and catalysts: Key catalysts include stronger China air traffic, margin expansion, and special dividends. Risks include CAO being viewed as redundant post-merger, earnings compression, and possible buyout or restructuring at a lower valuation.