CAO is on track even without new assets

By WONG WEI KONG


TIME may be running out for China Aviation Oil (Singapore) or CAO to announce a much-anticipated asset injection - which has been one factor keeping its shares on the boil this year. But while a failure to secure new assets may knock its share price in the near term, it should not prove a major blow, given the other positives in favour of the company.


CAO has been one of the strongest performing Chinese stocks on the Singapore Exchange (SGX) this year. Year-to-date, CAO shares are up 131 per cent, even after the recent market volatility, with the stock closing at $2.31 yesterday. That compares with the 87 per cent gain posted by Cosco Corp (Singapore) - the biggest Chinese stock on the SGX - and the 8.1 per cent rise by the benchmark Straits Times Index.

CAO had in 2004 precipitated Singapore's biggest financial scandal since the collapse of Barings. The China-based jet fuel trading company ran into trouble when it racked up losses of US$550 million from speculative trading of oil options. It managed to stay afloat after creditors agreed to cancel 46 per cent of its US$510 million debt, and after it secured fresh funding from oil giant BP and Temasek Holdings. Its former CEO, Chen Jiulin, went to jail.

As part of the rehabilitation effort and to put the company on a stronger footing, a non-binding memorandum of understanding (MOU) was signed between CAO, its parent company China National Aviation Fuel Group Corporation (CNAF) and BP in December 2005, regarding the possible injection of operating assets by CNAF and BP into CAO.

Since then, CAO, CNAF and BP have been in active discussions to identify suitable assets that are synergetic and complementary to CAO's business. But nothing has materialised.

The MOU, however, expires on Oct 28 this year, and CAO has said it will not be extended. Giving an update earlier this month, CAO cautioned that while CNAF has indicated that it will propose an asset for injection before the MOU expires, BP may not at the moment have 'suitable assets for injection'.

The market will definitely be disappointed if CAO fails to announce an asset injection by the time the MOU expires. That should not, however, detract from the progress the company has made over the last two years. The share price gains, while reflecting an element of asset play, also reflect the remarkable comeback by CAO, largely away from the limelight.

Indeed, there have been some notable milestones. CAO shares resumed trading in March 2006, after their suspension as a result of the scandal. The stock hit a high of $1.85 and settled at $1.64 on the first day of trading - but many were sceptical the gains would hold. In May 2006, however, CAO posted a net profit of $342.2 million for the first three months of 2006 - its first quarter of profit following the oil trading fiasco. This was helped by a $312 million one-time waiver of debts under its restructuring plan.

In February 2007, CAO declared dividends for the first time since the scandal. On the back of net profits of about $369 million for the financial year 2006, it declared a final dividend of two cents per share, saying the payout was a sign that it had finally turned the corner.

Three months later in May, CAO paid off its last remaining debts, amounting to US$73.3 million, four years ahead of schedule. This month, the company said net profit for the second quarter of 2007 climbed to US$140.2 million from US$8.2 million a year ago, boosted by the sale of an asset.

More importantly - given the scandal three years ago - CAO has strengthened its corporate governance and risk control structures and revamped its management.