Highlights/ Comments

• Jet fuel price plunge d significantly to US$84/bbl (dropped 32.8% vs. US$125/bbl in early 2014), in-line with the slump in WTI crude oil price to US$65/bbl, after recent OPEC meeting concluded decision not to cut oil production.

• While OPEC maintained its output, shale oil exploration continued to expand in US and Canada . W orld crude oil supply is expected to increase further, while oil demand remains weak given the slowdown of major economies (Europe, China and Japan). Hence, oil price is expected to remain weak in the near term. Furthermore, the expected sanction lift on Iraq crude oil export will likely exacerbate the current oversupply situation.

• Lower jet fuel price is beneficial to AirAsia , given jet fuel contributed 60-63% of its operational cost. AirAsia has only hedged 43% of jet fuel requirement for 4Q14 at US$117/bbl, 21% for 1Q15 at US$116/bbl and 10% for 2Q15 at US$114/bbl. AirAsia is no doubt at a significant advantage position given the low hedged position.

• On the other hand, US$ has also appreciated against regional currencies (RM, THB and IDR). Currently the exchange rate is RM3.45/US$ (RM depreciated 4.5% vs. RM3.30/US$ in early 2014). Major components of AirAsia’s cost structure (i.e. jet fuel, maintenance, leasing, interest, etc) are denominated in US$.

• AirAsia has guided for signs of air travel recovery and stronger yields in 4Q14 (post MH370 and MH17 incident s, Sabah kidnapping incidents , Thailand political crisis and Indonesia election in 9M14).

• We have conservatively assumed average yields (including surcharge) to drop further in 2015, as AirAsia needs to boost air-travel amid the expected weak consumer sentiment (implementation of GST and subsidy rationalization). However, the higher ancillary income (introduction of WiFi, duty -free and fly -through) is expected to offset the lower yield environment.

Risks

• World crisis (ie. war, terrorism and epidemic outbreak); surge in jet fuel price; US$ appreciation; weak air travel demand; and high speed train infrastructure bet ween Singapore and Pulau Pinang.

Forecasts

• After imputing for potentially lower yield, lower jet fuel cost and higher US$, we have increased FY14-16 earnings by +7.5% , +22.4% and +17.1% respectively.

Rating

BUY

Positives

• 1) Sustaining lowest cost LCC operator in Asiawith largest network and strong brand name; 2) Low jet fuel price; 3) Increasing ancillary income; and 4) Routes rationalization of major competitor MAS .

Negatives

• 1) Higher cost of living faced by consumers(from GST implementation and subsidy rationalization); and 2) Regional air-demand slowdown and political issues.

Valuation

• Upgrade to Buy with higher TP of RM3.15 (from RM2.57) based on unchanged 10% discount to SOP.

Source: Hong Leong Investment Bank Research - 8 Dec 2014