The CAO Story

Beginnings

1993, 26 May - Incorporated in Singapore as a joint venture among China Aviation Oil Supply Corporation (CAOSC), China Foreign Trade Transportation Corporation (Sinotrans), and Neptune Orient Lines Ltd. (NOL); operated as a shipping agency.

1995, 14 February - Became a wholly-owned subsidiary of CAOSC.

Transformation, Phase One: Jet Fuel Procurement and International Oil Trading

1997, 28 June - Chen Jiulin appointed as Managing Director and Chief Executive Officer.

1997, 1 July - Company resumed operations after a period of dormancy and assumed procurement function of imported jet fuel from CAOSC.

Later, implemented open-tender basis for procurement, bulk purchases, and international standards for procurement.

1998 - Conferred Approved Oil Trader Award (later renamed as Member of Global Trader Programme) by the Singapore Government, which entitled CAO to a preferential tax rate on income generated through oil trading. Reported profits for first time.

1999 - Extended jet-fuel procurement activities to international oil trading in a wider range of products. Market share of China's imported jet fuel rose from 3% in 1997 to 83% in 1999, virtually 100% in 2001.

Transformation, Phase Two - 3-pronged Strategy: Strategic Investment, International Oil Trading & Jet Fuel Procurement

2001, 6 December - Launched initial public offer on Singapore Exchange. Proceeds ranked 1st among 2001 new listings.

2002, 23 July - Acquired a 33% stake in Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA/AFSC) of China.

2002, 31 July - Acquired 5% stake in Compania Logistica de Hidrocarburos (CLH) of Spain.

China Aviation Oil - A Decade of Challenges; A Bright Future

China Aviation Oil (Singapore) Corporation Ltd ("CAO") today celebrates its Tenth Anniversary, marking a decade which witnessed two major transformations that have lifted the Group from losses and obscurity to fast growth and a significant presence in the global oil and gas industry. CAO is now a Singapore Exchange-listed subsidiary of China's state-owned China Aviation Oil Holding Company ("CAOHC").

A decade has swept by swiftly. Amidst our celebrations, we should pause to remember CAOs's humble beginnings, record our thanks to those who have contributed to our growth through challenging times, and consider the opportunities that lie ahead,

CAO was established by the China Aviation Oil Supply Corporation ("CAOSC"), China's Foreign Trade Transportation Corporation ("Sinotrans") and Neptune Orient Lines Ltd. ("NOL") of Singapore on 26 May 1993. While its stated goal was to ensure steady, open-market jet fuel supply to China, it was in effect functioning as a shipping agency, transporting only 350,000 tonnes of jet fuel between 1993 and 1995, and incurring losses for the first few years.

Phase 1 Of Transformation - Rebuilding CAO; Focus Oh Jet Fuel Procurement & International Oil Trading

In February 1995, CAOSC bought out the other two shareholders and, after more than two years of dormancy, appointed a new Managing Director and CEO, Mr. Chen Jiulin, on 28 June 1997. The date 1 July 1997 marks the first phase of CAO's transformation, when the new management team revived the Company and moved rapidly to establish the jet fuel supply operations from scratch.

Mr Hu Youqing & Mr Chen Jiulin

The new management convinced parent CAOSC to purchase jet fuel via open tenders, in line with existing international practice. Despite being a CAOSC subsidiary, CAO participated in import tenders, competing directly with foreign oil companies. It also executed bulk purchases, offering better prices on higher volumes, secured competitive financing, and lobbied for higher industry standards. Through these efforts, CAO's share of tenders for China's jet fuel industry now stands at nearly 100%, compared to less than 3% in 1997. In the process, it has helped to achieve the original mission of ensuring cheaper and more stable jet fuel supply in China.

Jet fuel supply allows CAO to leverage on the Chinese economy - the fastest growing in the world. Indeed, China's aviation industry, growing at around 10-15% a year, significantly outpaces the country's already remarkable economic growth rate.

From its successes in jet fuel procurement, CAO built up a second prong of growth through international oil trading, across a range of energy-related products such as crude oil, gasoil, jet fuel, naphtha, fuel oil, as well as petrochemicals and other oil-based derivatives. There are three objectives to this business line - economies of scale allowing for greater cost savings, profit enhancement through multiple income streams, and positioning to exploit opportunities as China opens up to international markets. CAO currently has a team of ten experienced traders, and our geographical reach extends beyond China and ASEAN to the Far East and the United States. This way, we are able to effectively manage the risks of trading and maximize return.

International oil trading opens to CAO a business with economies of scale in turnover and profitability. It avails us of more opportunities to tap into the dramatic economic growth of a post-WTO China. While there are inherent risks, we have mitigated these through hedging and rigorous risk management procedures. Through these two operations CAO has been able not only to maximise value to shareholders and fulfill its corporate mission, it has also positioned itself for the next stage of growth.

Phase 2 Of Transformation- 3-pronged Strategy: Investment, International Trading & Procurement; Leveraging On China, Going Global

CAO entered its second phase of transformation through a public listing on the Singapore Exchange launched on 6 December 2001, which raised gross proceeds of S$80.6 million - the largest amount raised on SGX that year. By 2001, CAO's turnover also crossed the S$l billion mark, with total sales of S$1.05 billion.

With these proceeds, CAO embarked on its next stage of growth, to build a third prong through strategic investments in oil-related logistics and infrastructure facilities. In swift succession, CAO made two acquisitions in 2002. The first, a 33% stake in Shanghai Pudong International Airport Aviation Fuel Supply Company Ltd ("SPIA/AFSC") of China, announced on 23 July, 2002, broadens CAO's exposure to the Chinese jet fuel market with downstream infrastructure. The second, a 5% stake in Compania Logistica de Hidrocarburos ("CLH") of Spain announced on 31 July, 2002, is equal in size to the stakes held by Shell and bp, gives CAO board representation, and allows us to interact as equals with the world's oil majors. Meanwhile, we have reaped a 7% yield from the CLH investment in the first year.

CAO has begun building a new pillar of sustainable growth for the future. These strategic investments also support the other two divisions availing round-the-clock energy-trading opportunities, to take advantage of market opportunities in the global oil markets. CAO has now established a strategic investment footprint in two continents, Asia and Europe, and is now looking beyond the horizon to more opportunities, even as far, possibly, as the Americans.

These investments not only enhance and stabilise the earnings base for CAO; they also facilitate ownership of essential assets that can directly provide value to our end-customers through a network of oil infrastructure facilities, including pipelines and specialised resources. The Company is thus fulfilling its goal of "Leveraging on China, Going Global" by transforming itself into an integrated enterprise encompassing trading and investment-related activities with emphasis on industrial investment.

Some Industry Awards and Citations in 2002:

Ranked 29th most transparent company

· Ranked as one of the top companies in the 2002/2003 Singapore 1000 ranking directory: 112th based on 2001 turnover (2nd amongst overseas Chinese companies in Singapore) and 143rd by 2001 net profit.
· Gained rankings among leading players in Asia/Pacific petroleum trading by Houston-based Applied Trading Systems Inc.'s 6th Annual Industry Perception Survey.
· Ranked 29th most transparent among all companies by Singapore's Business Times, and most transparent of all among new issues by the Securities Investors Association (Singapore).
· Selected as an MBA case study by the national University of Singapore (the first overseas Chinese enterprise so honoured)
· Chinese Ambassador Zhang Jiuhuan called CAO the 'cream of overseas Chinese enterprises', having 'set an example for Chinese state-owned enterprises to follow when venturing overseas.

Management Principles Behind Past Growth & The Road Ahead

In charting our growth, CAO is guided by our "l-2-3" Concept of Management and Five Investment Principles. Under the "1-2-3" concept, "One" refers to aiming for rapid, continuous and steady growth; "Two" means to leverage on the twin pillars of strong business systems and good people, particularly in respect of its risk management system; while "Three" signifies our "Three-Pronged Strategy" outlined earlier.

Our Five Investment Principles encompass: 1) funding investments with controllable financial resources without overstretching ourselves; 2) differentiating CAO by creating a strong brand name through quality, price and service; 3) investing in asset-based businesses related to oil infrastructure; 4) creating economies of scale through our operations, and 5) leveraging on alliances with MNCs globally.

Singning ceremony with CLH shareholders' representative

These precepts have been behind our rapid transformation under the new management, and will be CAO's guide to future growth. Indeed, CAO's performance under the new management has been highly commendable. The initial capital of S$600,000 as at 1997 has grown to S$176 million at end-2002; turnover has risen from S$171 million to S$1.7 billion, while profit before tax has jumped from S$7 million to S$55 million between 1998 and 2002. Trading volume in 2002 was 4.8 million metric tonnes, up from 847,000 metric tonnes in 1998.

We live in a challenging world wracked by uncertainty such as the recent war in Iraq and global economic crisis. However, we believe that, anchored by these principles, CAO will be able to scale greater heights to become a more significant player in the international oil and gas industry.

Our Debt Of Gratitude

In our progress through the past decade, we owe a great debt to countless people who have helped us in one way or another. Special mention of a few is in order. IE Singapore, the Economic Development Board (EDB), Singapore Immigration and Registration (SIR) and the SGX among Singapore institutions; DBS Bank, Fortis Bank, BNP Bank and SG Bank among banks who have helped us expand the scope of our ventures; and the business and financial media for recording our achievements.

We have benefited from the support and help of the Chinese Embassy in Singapore and its past and present personnel, including the former ambassador Her Excellency Madam Chen Baoliu, and former Commercial Counsellor Mr. Dong Songgen; the current ambassador, His Excellency Mr. Zhang Jiuhuan, and current Commercial Counsellor Mr. Zhou Hongli. All have provided invaluable time, advise, assistance and efforts, including Mr. Zhou who gave guidance during the negotiations for the CLH stake.

Finally, we should record our thanks to Messrs. Hu Youqing and Jia Changbin, and all of the China Aviation Oil Holding Company (CAOHC) senior colleagues, who have charted the vision and paved the way for its fulfillment. Mr. Hu, the first Chairman of CAO, and Mr. Jia, the current CAOHC president and Chairman of CAO, have generously delegated authority over daily management, and created a benign operating environment that allows staff to develop their talents.

A Bright Future

CAOHC Management

The China oil market is an exceptionally profitable sector in which to do business. China became a net importer of oil and oil products in 1993, and since then imports have grown at a compounded annual rate of 4.9%, the fastest in the world. By 2000, they had reached 70 million metric tonnes. By 2010, imports of crude oil and products are forecast to exceed 100 million metric tonnes a year; by 2020, the figure should be 200 million metric tonnes. Imports as a percentage of consumption, currently around 15%, should reach 30-40% of total in the next 10-15 years. In this way, CAO is poised to benefit from continuous high growth in Chinese oil demand, and may uncover additional opportunities as time goes by.

CAO's future is bright. Expertise among management and staff runs deep. China's long-term growth prospects remain among the strongest in the world. By broadening our core competencies and collaborating with leaders in our industry, we are positioning ourselves for a presence and influence in the global arena over the long term.

《The Business Times》