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AirAsia will be entering into another Shareholder Agreement with Japanese counterparts to revive its aspiration of AirAsia Japan (AAJ). The shareholder structures:

1. AirAsia Berhad – 49% effective stakes (33% voting shares + 16% non-voting shares)

2. Octave Japan Co – 19%.

3. Rakuten Inc – 18%

4. Noevir Holdings – 9%

5. Alpen Co – 5%

Tentatively, the authorised capital of AAJ is estimated at JP¥7bn or ~RM220m (higher than the previously terminated joint venture of JP¥5bn). We expect AirAsia’s funding portion of RM108m to be generated through its internal funds.

AAJ is targeted to commence operation by summer 2015. Currently, the team is working with relevant Japanese authorities to obtain the necessary operational approvals.

Financial impact

We do not expect AAJ to make any material impact to AirAsia’s bottomline in FY14. However, there will be start-up losses of RM100m (up to RM108m investment cost) in FY15- 16 at associate level. Note that AirAsia incurred RM80.5m losses from its previous AAJ venture (July 2012-June 2013).

Pros / Cons

Positive on AirAsia re-entering Japan market existing, which will enhance the group’s network and positioning AirAsia Group (including AirAsia X) as Asia’s largest LCC player.

AAX together with its new JV into Thailand’s TAAX and Indonesia’s IAAX will provide strong feed into the new AAJ and vice versa.

Similar to previous ventures, we believe AAJ will leverage on AirAsia’s existing low cost expertise and strong brand name (AirAsia to provide technical, operational and commercial support to AAJ).

Nevertheless, Japan is not an easy market despite the low penetration rate of LCC carrier, given the huge losses encountered by AirAsia’s first attempt into the market. AirAsia is likely to learn from its bitter past experience and strive to profitability within 3 years.

Risks

World crisis (ie. war, terrorism and epidemic outbreak), delay in KLIA2 completion, high jet fuel price and development of high speed train between Singapore and Pulau Pinang.

Forecasts

Unchanged, pending confirmation of Japan JV.

Rating

HOLD

Positives – 1) Beneficiary of strong air traffic into Malaysia, in line with government initiatives to boost tourism sectors; 2) Largest and lowest cost LCC in Asia with strong brand name; and 3) Strong ancillary income.

Negatives – 1) High jet fuel cost; 2) Strengthening of US$; and 3) Stiff competition from MAS and Malindo Air.

Valuation

Maintained Hold with unchanged Target Price of RM2.22 based on 20% discount to SOP. The recent hike in fuel price due to Iraq crisis, may impair investors’ sentiment on AirAsia

Source: Hong Leong Investment Bank Research - 2 Jul 2014