CAO Singapore Co., Ltd. Gains Revival

China Aviation Oil Holding Company (CAOHC) signed an agreement with BP Asia Investment Co., Ltd. and ARNADA on December 5th, 2005 on putting capital into its Singapore subsidiary.

Promise in overseas markets

Since the disclosure of suffering a loss of US$550 million at the end of 2004, CAO Singapore Co., Ltd. and its parent company have been making an open search for strategic investors. According to the debt reformation plan, CAOHC and new investors will subscribe new shares and put a capital of US$130 million to re-establish CAO Singapore Co., Ltd.     After tender biddings and negotiations, an agreement was finally signed with BP and ARANDA. A new mode for CAO Singapore Co., Ltd. to introduce strategic investors was formed. CAOHC will subscribe US$75.77 million and hold 51% equity. BP and ARANDA will respectively subscribe US$44.00 million and US$10.23 million and hold 20% equity and 4.65% equity.     The greatest success in the reformation is that CAOHC still holds the controlling equity. According to a Chinese analyst, CAOHC has given up around 25% equity in the reformation but still remains to be the largest shareholder. While giving equity to BP and ARANDA so as to introduce strategic investors, 10% equity in CAO Singapore Co., Ltd. with a value of US$22 million is sold to creditors to compensate for the debt of US$530 million. Besides, five conventional shares with a per-share face value of 0.05 Singapore dollars will be combined into one conventional share with a per-share face value of 0.25 Singapore dollars.     According to analysts, with the joint efforts of BP, ARANDA and CAOHC the prospect of the reformation should be very optimistic. The combined strength of the three companies can fully survive badly-beaten CAO Singapore Co., Ltd.   

W eight of reformation

The fundamental reason for smooth negotiation and contract signing is the monopoly position held by CAOHC in two aspects.     One aspect is the price of aviation oil in China. The price of aviation kerosene in China is 60% higher than the price in Japan and 2.5 times the price in Singapore. The domestic price sometimes more than doubles the average international price. Experts point out that the reason for such price situation is that CAAC implements a system in which aviation oil supply/marketing is monopolized by CAOHC.     The other aspect is that CAOHC controls 100% imported aviation oil and 75% aviation oil market supply. The monopoly position held by CAOHC in aviation oil import has always been the focus of attention to creditors and is also an important precondition for them to finally agree to the reformation scheme.     It is estimated that CAOHC holds more than 50% share in the Chinese aviation oil market.  Imported aviation oil accounting for over 30% of the domestic demand is also totally controlled by CAOHC.     It is reported that one third of aviation oil needed in China is imported through CAO Singapore Co., Ltd. The company has therefore controlled an aviation oil market with a value of around US$1.0 billion in China mainland.     Experts are frank in saying that to CAO Singapore Co., Ltd. in great risk today the monopoly right can guarantee the company to gain sustained high profits and the reason why BP and ARANDA agree to help the company to complete the reformation is that they are attracted by the monopoly position in the hands of CAOHC.

Exploration into deep-seated causes

Survey reports made by international energy agencies show that the demand of kerosene and aviation oil in China in 2005 is 7.4% higher than 2004 and the demand in 2006 will be 9% higher than 2005.     According to experts, BP has always been engaged in upstream operations. With the equity participation this time BP can easily become a raw material supplier for CAO Singapore Co., Ltd. and reap more profits in the Chinese aviation oil market. It is also a part of its “China strategy”. ARANDA will also make a major step forward in its involvement in the Chinese energy sector and gain a foothold beforehand for the future opening of related sectors in China.    Analysts also point out that the motive force for BP and ARANDA to hold equity in CAO Singapore Co., Ltd. is not to gain profits from the equity participation but to get into the Chinese aviation oil export market through a curve and open up the import and export link in the Chinese oil/gas industrial chain. This move will also greatly facilitate the expansion of their shares in the Chinese aviation oil import market.    The participation of BP and ARANDA will play a positive role in improving the supervision and management level of CAO Singapore Co., Ltd.     If foreign companies can get into the Chinese aviation oil market and set rules before the energy sector is opened, they can have a chance to achieve monopoly operations and late comers will be hard put in competition. CAO Singapore Co., Ltd. should therefore use the strength of overseas giants to raise its level of risk supervision and management and improve its ability in internationalization and commercial functioning. It should also use the new capital to consolidate the assets foundation of the new company, improve its profit-earning capacity and increase the shareholder value.