Latest / Investor Exchange / China Aviation Oil Dominates Jet Fuel Supply

Transcript

China Aviation Oil Dominates Jet Fuel Supply · Investor Exchange

• 0:02
  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
• 0:08
  So imagine owning like the only gas station on the busiest highway leading right
• 0:13
  into the world's second largest economy. Yeah, that would be a pretty nice setup.
• 0:17
  Right. I mean, as long as those cars keep coming, you just keep getting paid.
• 0:20
  So today we're doing a deep dive into China Aviation Oil or CAO.
• 0:26
  A fascinating company. It really is. We've got this March 2026 report,
• 0:31
  and our mission is to basically figure out exactly how this company operates
• 0:36
  as the ultimate tool booth for the Asia-Pacific aviation industry.
• 0:40
  It's a brilliant position to be in, honestly.
• 0:42
  CAO is the largest physical jet fuel trader in the Asia-Pacific region. Wow.
• 0:47
  Yeah. So when you analyze them, you're essentially looking at a proxy for China's
• 0:51
  outbound travel and just general aviation growth.
• 0:53
  OK, that makes sense. Like if planes are flying in and out of China,
• 0:56
  CAO is literally supplying the fuel for that economic engine.
• 0:59
  Right. So let's look at how busy that toll booth actually was in the 2025 financial year.
• 1:04
  The headline revenue hit 16.4 billion U.S. dollars.
• 1:08
  A massive number. It is. But the real story is their net profit,
• 1:12
  which jumped nearly 42 percent. Yeah, huge jump.
• 1:15
  And their earnings per share, which is a key metric for you as an investor,
• 1:19
  just soared right alongside it, up over 41 percent.
• 1:22
  But wait, here's where the math feels kind of off to me. How so?
• 1:26
  Well, global oil prices were actually lower during this period.
• 1:30
  Right, they were. So how exactly do you boost profits by 42% when the underlying
• 1:37
  commodity you sell is getting cheaper?
• 1:39
  Well, it really comes down to their physical trading model.
• 1:42
  You see, they aren't just holding oil and hoping the price goes up.
• 1:45
  They are actively moving it.
• 1:47
  Because travel demand surged so much, their total supply and trading volume
• 1:50
  jumped over 18%. Oh, I see.
• 1:53
  So they made up for the cheaper price tag by simply selling a massive amount more fuel.
• 1:58
  Exactly, yeah. Plus, you have to factor in their crown jewel asset,
• 2:01
  which is their stake in the Shanghai Pudong Airport Supply Company.
• 2:05
  It's known as SPIA. Yeah, SPIA.
• 2:08
  So that's the actual operation physically pumping the fuel into the planes,
• 2:11
  right? Like right on the tarmac at one of China's biggest hubs.
• 2:15
  Spot on. And SBIA alone saw a 29% profit increase. Oh.
• 2:20
  They just had, you know, way more planes pulling up to the pump,
• 2:22
  which directly fed right into CAO's bottom line.
• 2:25
  That kind of operational success creates a new problem, though.
• 2:28
  Like, what do you actually do with all that cash? It's a good problem to have. For sure.
• 2:32
  Because sitting on a net cash position of nearly $700 million sounds great.
• 2:37
  But, I mean, inflation beats that if it just sits in a bank account.
• 2:41
  Absolutely. I see they're eyeing acquisitions and investments in sustainable aviation fuel, or SAF.
• 2:47
  But SAF is notoriously expensive to produce compared to traditional jet fuel.
• 2:52
  Does sinking capital into that actually make sense right now?
• 2:55
  It does when you look at the regulatory horizon, because global environmental
• 2:59
  mandates are increasingly forcing airlines to blend SAF into their fuel mixes.
• 3:04
  Right. Those regulations are definitely coming. Yeah, so by using the record
• 3:07
  profits from traditional jet fuel to build out their SAF infrastructure now.
• 3:12
  CAO is basically future-proofing their toll booth. Ah, I get it.
• 3:15
  They're making sure they're still on the gas station when those global regulations inevitably change.
• 3:20
  It's exactly like a traditional automaker using gas guzzler profits to fund their EV transition.
• 3:27
  That is a perfect analogy. Yeah. And they aren't ignoring you,
• 3:31
  the shareholder, in the meantime.
• 3:32
  Oh, good. Because of that massive cash generation, they actually bumped up the
• 3:37
  dividend by over 33%. Up to 4.96 Singapore cents, right? Yes.
• 3:42
  And that combination of cash on hand and proactive growth is exactly why OCBC
• 3:47
  upgraded the stock to a BUY rating. Right.
• 3:51
  They also raised their fair value target significantly, going from $1.60 up to $2.48.
• 3:57
  Okay, but let's pressure test this a bit. A $700 million cash pile and a near
• 4:02
  monopoly on imports is a massive moat.
• 4:05
  But no investment is a sure thing. No, definitely not. I mean,
• 4:08
  international flight recovery could stall or geopolitical tensions could flare up.
• 4:12
  Specifically, you know, with the ongoing conflict in the Middle East,
• 4:16
  jet fuel prices are incredibly volatile. Right.
• 4:18
  If the cost of their supply suddenly spikes, doesn't that squeeze their margins?
• 4:22
  Well, it certainly introduces volatility.
• 4:25
  Historically, severe price spikes do dampen overall travel demand slightly.
• 4:29
  Which means fewer planes to refuel. Exactly.
• 4:32
  But CAO's management doesn't just sit back. They actively mitigate this by diversifying
• 4:38
  where they buy their fuel geographically. Oh, smart. Yeah.
• 4:41
  And they also rapidly adjust their physical trading strategies on the fly to
• 4:45
  bypass location-specific disruptions.
• 4:48
  It's a very active defensive playbook. So they have the levers to pull when
• 4:52
  the market gets choppy. They do.
• 4:53
  Well, here is a final provocative thought for you to chew on.
• 4:57
  CAO's massive success relies really heavily on its near-monopoly status in China's
• 5:02
  jet fuel import market. Yeah, that's a huge factor. Right.
• 5:05
  So if regulatory shifts ever alter that monopoly or, you know,
• 5:08
  if the ongoing restructuring of CAO's parent company fundamentally changes CAO's
• 5:13
  role, how secure is that tollbooth moat for long term investors?
• 5:17
  It's the ultimate question of whether the rules of the highway might change.
• 5:20
  This content is intended to serve strictly and only as an informational,
• 5:24
  independent, objective summary of recent events.