Company announcement. Late last week, the Group revealed that its main profit contributor; the Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIAFSC) would be facing losses in 4Q08. This loss was incurred mainly from the sharp decline in oil prices during the quarter, alongside the decline in the regulated domestic prices in the PRC in Dec 08. The estimated loss, subject to a final audit, is estimated to be around US$33m, and hence CAO will incur a net loss of around US$11m from its 33% stake in SPIAFSC.

Full-year contribution from SPIAFSC. We had initially estimated profit contribution of US$9.8m for 2H08 from SPIAFSC (1H08 was US$15.4m). We had already assumed a lower contribution for 2H08 versus 1H08 due to the already lower crude oil prices during 3Q08 compared to 1H08. 3Q08 profit contribution was US$5.2m, which was within our expectations.

However, the 4Q08 loss was unexpected. Incorporating the US$11m in losses, overall profit contribution from SPIAFSC should arrive at US$9.6m for FY08. Changes to our forecasts. Forward estimates of profit/loss contributions from SPIAFSC prove to be ever elusive due to future crude oil prices being an unknown factor. With crude oil prices currently back below the US$40/bbl handle, we are lowering our estimates of contribution from SPIAFSC for FY09 and FY10. Estimates for the Group’s two other business-arms (Jet fuel procurement and trading activities) remain unchanged.

Valuation and recommendation. We have updated the market-risk parameters and EBITDA cash flow inputs to our DCF model and derived a new target-price of S$0.65, compared to our previous S$0.705. Our terminal growth rate remains at 1.0%.

We therefore downgrade the stock from a NEUTRAL to a SELL call with a new target price of S$0.65, implying an 11% downside.