In their Aug 18 note, Tan and Lim expect room for continued China aviation recovery as international outbound flights from China had only reached 85% of 2019 levels at the third week of August, up from 72% at last August.
"This momentum is supported by favourable travel policies, which have boosted connectivity and passenger volumes in 1H25. We expect this rebound to drive strong earnings momentum in 2H25F," note Tan and Lim.
They expect margin upside too from increased trading of sustainable aviation fuel, a new commodity, thanks to favourable policies in Europe.
Taking into account higher margin assumptions from fuel trading, they have raised their earnings forecast for FY2025 and FY2027 by 5 to 7%.
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Their higher target price of $1.45 is based on 10x FY2026 earnings, which is CAO's own 10-year historical mean.
Re-rating catalysts include a strong recovery in outbound China flight volumes, strong and sustained gross profit margin improvement and higher-than-expected oil prices that can boost associate profits.
On the other hand, downside risks include significant deregulation of China’s jet fuel industry and intensifying competition in the other regions where CAO has a smaller presence, such as US and Europe.
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In her separate note on Aug 18, Liu Miaomiao of PhillipCapital has also become more bullish on CAO.
For the coming FY2026 and FY2027, Liu has raised her earnings forecast by 5.7% and 4.8% respectively to US$85 million and US$88 million to reflect stronger-than-expected demand.
Besides pointing out the operational growth, Liu, citing CAO's cash hoard of $515 million, equivalent to 66% of its market cap, is in an "opportune time" to return value to shareholders through increasing the dividend payout ratio or special dividend.
"State-owned enterprises have been encouraged to raise dividends," says Liu. CAO's controlling shareholder is China National Aviation Fuel Group, with a stake of 51.5%.
Liu has upgraded her call from "accumulate" to "buy" along with a higher target price of $1.50 from 90 cents previously.
CAO shares changed hands at $1.28 as at 11.25 am, up 4.92% for the day and up 39.13% year to date.
