News/

• AirAsia’s 49% owned AirAsia Indonesia (IAA) flight QZ8501 from Surabaya to Singapore has been reported missing in the early morning 28 Dec 2014. There were 7 crew members and 155 passengers on-board the flight: 1. Indonesian – 155 pax; 2. South Korean – 3 pax; 3. Malaysian – 1 pax; 4. Singaporean – 1 pax; 5. British – 1 pax; and 6. French – 1 pax.

• The flight had requested for an unusual flight route deviation due to bad weather condition, before it lost contact with Indonesia Air Traffic Control.

• Both the Indonesian and Malaysian government have instructed their armed forces (air and navy) to launch joint search and rescue operations,

Comments

• The latest QZ8501 incident of AirAsia Group is likely to have a deep impact on regional air travel sentiment, after two MAS incidents back in March (missing flight MH370) and August (flight MH17 being shot down in Ukraine).

• Our expectation of potential air travel demand recovery in 2015 is now hampered by the latest air incident. We have now turned more cautious on the outlook of air travel demand, at least in the near term. Any meaningful rebound in air travel demand may only be realized in 2016.

• Similar to MH370 incident, AirAsia Group’s liability is likely to be fully covered by insurance and hence, no direct impact to its finances. However, we expect AirAsia Group (including AirAsia X) to further cut its yields in 2015 in order to stimulate air travel demand, leveraging on the low jet fuel price.

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 between Singapore and Pulau Pinang.

Forecasts

• We have cut our assumed yields for FY15 and FY16 by 5% and 1% respectively, to account for the weakening demand. As a result, FY15-16 earnings have been cut by 17.6% and 3.8% respectively.

Rating

• Trading Sell

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); 2) Regional air-demand slowdown and political issues; and 3) Series of aircraft mishaps, including missing flight QZ8501.

Valuation

• Cut to Trading Sell with lower Target Price of RM2.64 based on 10% discount to SOP.

Source: Hong Leong Investment Bank Research - 29 Dec 2014