China Aviation Oil

[Squirrel]

I am not sure what you mean by the meat is gone. Say the profits stays the same at US45m at SPIA, converted to S$61m. How much would you pay for this kind of stable volume business? I don’t think 10x PE is demanding. And not to mention the cash balance of US$500m on balance sheet.

I am not sure why the SPIA business underperformed. But the company is trading at less than 7 PE, has a strong balance sheet and pays out decent dividends. And in my opinion, this half might be one of those less profitable halves due to price movements or certain operational issues. I won’t know for sure. I am happy to continue holding to see what comes next. It’s all about risk reward ratio.

hi Squirrel,

The "meat is gone" is refers to any potential for step jumps to revenue/profitability post early 2023.

In the absence of potential catalysts like business model change/capital recycling or the company is in play, I will avoid assigning individual values to their separate assets and then do some SOTP. But I do recognize that SPIA and its core trading business are not really synergistic and so never say ever - although I will conclude that is a 5 foot pole for a 3 ft guy like me.

Due to its trading business and the turnover days I calculated some time back (May2024 post), the 500mil of cash probably requires much more discounting for the OPMI. As the trading business scales, more working capital (and cash) is required too. I am generally looking for business models that don't need too much capital to scale (or if negative, would even be better!)

Regardless of what the cash is required for, what I always look for is safety, cushion. Even if the cash is being set aside for margin requirements, for its business to work, it’s still balance sheet strength.

The catalyst to me is simple. SPIA recovering to prior peak earnings. It might or might not happen but I guess literally, my cash is on it happening within the next few years. And I don’t think anyone should bet against it. The current market cap is relatively cheap even if it is only for the SPIA business. Needless to say, there is still all the remaining businesses that comes “free” with it.

[weijian]

hi Squirrel,

The "meat is gone" is refers to any potential for step jumps to revenue/profitability post early 2023.

In the absence of potential catalysts like business model change/capital recycling or the company is in play, I will avoid assigning individual values to their separate assets and then do some SOTP. But I do recognize that SPIA and its core trading business are not really synergistic and so never say ever - although I will conclude that is a 5 foot pole for a 3 ft guy like me.

Due to its trading business and the turnover days I calculated some time back (May2024 post), the 500mil of cash probably requires much more discounting for the OPMI. As the trading business scales, more working capital (and cash) is required too. I am generally looking for business models that don't need too much capital to scale (or if negative, would even be better!)

Regardless of what the cash is required for, what I always look for is safety, cushion. Even if the cash is being set aside for margin requirements, for its business to work, it’s still balance sheet strength.

The catalyst to me is simple. SPIA recovering to prior peak earnings. It might or might not happen but I guess literally, my cash is on it happening within the next few years. And I don’t think anyone should bet against it. The current market cap is relatively cheap even if it is only for the SPIA business. Needless to say, there is still all the remaining businesses that comes “free” with it.

hi Squirrel,

IMHO, if we decide to put in real money - We should position ourselves to make choices between "good" and "great", rather than choosing between "good" and "bad".

I am not saying a great balance sheet is a bad thing. In fact, it is a good thing. But a great balance sheet that has the necessary structure/resolute from the decision makers to make efficient capital allocation, is the great thing.

Finally, I do not think most of us would bet against SPIA recovering to peak earnings. But whether we decide to stay on the sidelines, is another thing. Since I read about CAO on your blog and looked into it in detail (matter of fact, I reviewed in detail on all 3 local companies mentioned on your blog - HLS, CAO and YZJFH), I have followed it for some time. So far, nothing has changed my mind about staying on the sidelines.

Nonetheless, when things change, I am more than ready to change my mind - on anything and everything.