Highlights

• We expect continuation of recovery for air travel demand in 2017 to benefit MAHB and AirAsia, leveraging on strong growth of tourist arrivals, especially on Northeast Asia sector (despite slower growth in domestic market). Ministry of Tourism and Culture is targeting 31.8m tourist arrivals in 2017F (vs. actual 25.7m in 2015 and target of 30.5m in 2016E), through its various initiatives and campaigns in plan for 2017. Based on MAHB statistics, international traffic has been growing strongly since 2H16, driven mainly by China and Thailand sectors.

• We have imputed a relatively conservative passenger traffic growth for MAHB at 6.0% and 5.3% and AirAsia at 7.0% and 5.8% for 2017-2018.

• Overall capacity growth in the system to be circa 6-7% yoy (MAS: <3.0% yoy; MAA: ~6.8% yoy; AAX: ~4.8% yoy; Malindo: ~38.2% yoy) in 2017, which shall be well absorbed by the improving air travel demand (driven by tourist arrivals especially from China).

• Given a balance supply-demand environment in 2017, we expect yield to sustain into 2017, as market players are more rational nowadays (aiming for profitability) and unlikely to engage on stiff competitions and pressure yields.

• Despite recent upturn in jet fuel price (in tandem with crude oil price), the price is considerably low at US$65/bbl, providing ample opportunity for airlines’ profitability. AirAsia group has hedged 74% of its requirement in 2017 at US$60/bbl, while MAS hedged 60-70% at US$65/bbl.

• Net impact of RM depreciation on aviation players differs:- 1) MAHB: Positive impact from the higher translated earnings contribution of wholly owned ISGA in EU€. 2) AirAsia: Negative impact from higher transacted cost structure (jet fuel, maintenance and debts) denominated in US$. However, management expects sustainable earnings in 2017, driven by the improved load factor, operation efficiency and sustainable yields in offsetting the impact from weakened RM.

Risks

• World crisis (i.e. war, tourism and epidemic outbreak), delay in KLIA2 completion, high jet fuel price and the development of high speed train between Singapore and Pulau Pinang.

Forecasts

• MAHB – Maintain forecast.

• AirAsia – Conservatively cut earnings forecast for FY16-18 by 0.2%, 6.8% and 4.2% respectively, after imputing higher fuel costs and impact from RM depreciation

Rating

Overweight ↔

• Demand for air travel is expected to remain on the uptrend for in 2017-18, benefitting aviation sector.

Valuation

• Maintain HOLD on MAHB with unchanged target price of RM6.60 based on DCFE. MAHB is facing uncertainties related to its ability to recoup PSC MARC (for KLIA Asean) and ongoing terrorism upheavals in Turkey.

• Maintain BUY on AirAsia with lower target price of RM3.60 (from RM3.85) based on SOP, after accounting for lower earnings

Source: Hong Leong Investment Bank Research - 13 Jan 2017