Highlights/ Comments

• AirAsia has entered into Shareholders Agreement and Share Subscription Agreement for the purpose of setting up a new Joint Venture Low Cost Carrier in Vietnam i.e. AirAsia Vietnam (AAV). AirAsia will hold 30% stake in the JV (as allowed by Vietnam Government), while Gumin Company (CEO: Mr. Tran Trong Kien) will hold 70% minus 1 share and Mr. Tran Trong Kien (Kien) will hold 1 share. Kien is also the Chairman and CEO of Thien Minh Group (TMG), a leading conglomerate in travel and hospitality industry.

• The JV will require VND1.0tn (RM194m) capital, which AirAsia will contribute RM58.2m for its 30% stake (internal funding). AirAsia and Gumin will extend intercompany loan of US$2m (RM8.84m) and US$4m (RM17.68m) respectively to AAV, for the purpose of startup.

• However, the JV still needs to obtain the license of air transportation business from the Ministry of Transport of Vietnam and other necessary licenses/permits with the view of commencement of the operations of the business. Nevertheless, the JV is expected to commence operations by early 2018.

• We are positive on AirAsia establishing a new hub in Vietnam. This will help penetrating into Vietnam’s growing market potential given its fast expanding economy as the government opens up the economy and encourages foreign investments. Vietnam also has a huge population of 95m. For the past 2 years, Vietnam experienced the fastest growth of air travel growth in the world.

• AAV will operate from 3 hubs (Hanoi, Ho Chi Minh and Danang) and focus on increasing connectivity within the domestic market as well as regionally to South East Asia, China, Korea and Japan.

• We expect AAV to implement similar AirAsia’s modus operandi i.e. utilize Airbuses, lease fleet from AirAsia (through AAC), leverage on ICT, similar product structures and etc. Hence, we expect AAV to thrive on lean cost structure disciplines and strong connectivity (leveraging on AirAsia Group) as well as Kien’s experience in TMG, despite facing two established LCC players – VietJet and Jetstar Pacific.

Risks

• World crisis (i.e. war, terrorism and epidemic outbreak), shutdown of KLIA2, surge in jet fuel price and high speed train infrastructure between Singapore and P. Pinang.

Forecasts

• Unchanged. We expect startup losses for AAV in the first few years of operation, similar to AirAsia’s past experience with TAA, IAA, PAA and AAI. However, the losses shall be relatively minimal given AirAsia’s huge earnings base.

Rating

BUY ↔

• Despite the concern of weak ringgit, AirAsia is expected to remain on growth trajectory from the strong capacity expansion, high load factors and low jet fuel costs. Asset monetization and JV/Associates IPO exercises in 2017 will enhance AirAsia’s valuation.

Valuation

• Maintain Buy with unchanged TP of RM3.60 based on unchanged 10% discount to SOP

Source: Hong Leong Investment Bank Research - 3 Apr 2017