Highlights

• Japan, China and South Korea have imposed ban on airlines registered in Thailand due to poor safety records. Based on detail of the ban, Thai airlines cannot increase frequencies to their existing routes or add new routes (including chartered flights) to these countries.

• We believe that Thai AirAsia (TAA) growth plan will be affected by the imposed ban from these countries. Thai AirAsia has planned for the delivery of additional 5 new A320s (existing 40 A320s fleet) this year, which will be deployed on hot routes (China – Beijing, Shanghai & Shenzhen; Japan – Tokyo & Osaka; S.Korea – Seoul & Busan), given the strong recovery of tourism industry.

• At the moment, AirAsia management has not altered its existing fleet deployment plan to TAA, as TAA expect the ban to be momentary (currently Thailand government is aggressive pursuing ramifications to uplift the ban through enhance safety procedures). Alternatively, TAA could redeploy the additional fleets to other high demand destinations such as ASEAN and India.

• We do not expect the ban to be pro-longed, given the significance of the tourism industry in Thailand. Furthermore, Thai government has pledged to ensure agreements with these 3 countries will be met to satisfy its stakeholders.

• We are relatively negative on the ban, which may impair the potential growth of TAA in the short term. The main risk is prolonged ban. However, we are not overly concern on the utilization of the additional 5 A320s, given that TAA should still be able to redeploy fleet to other profit-making routes or redeploy the fleets to other associates within AirAsia group to better utilize the fleets.

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

• Unchanged

Rating

• Buy

Positives

• 1) Sustaining lowest cost LCC operator in Asia with 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 2) Regional air-demand slowdown and political issues.

Valuation

• Maintained BUY with target price of RM3.30 based on unchanged 10% discount to SOP.

Source: Hong Leong Investment Bank Research - 3 Apr 2015