We remain positive on AAG post management update on the group’s business direction. Management will continue to: 1) strengthen its core airline business; 2) invest in digitalization to improve cost structure and enhance revenue; and 3) leveraging on existing business platform to evolve the group into a new AirAsia 3.0 with new business revenue streams including e-commerce, digital banking and logistic service provisions. Maintain BUY recommendation with unchanged TP: RM3.20 (based on 10% discount to SOP: RM3.55).

Strengthen current airline business. While AirAsia Group (AAG) is already the largest LCC (low cost carrier) and 4th largest carrier in Asian region, it will continue to strengthen its core business in existing markets (i.e. Malaysia, Thailand, Indonesia, Philippines, India and Japan) while exploring opportunity into Vietnam and China to enforce its network in Asian region. Management guided strong earnings potential from Thailand, Indonesia, Philippines and India in 2019, after expansion for market share in 2018. Management is also considering the idea of converting its fleet of A320s into the larger and more efficient A321s, given the group’s current high load factor of >85%.

Digitalization. AAG continues to intensify its digitalization effort and leverage on its large amount of BIG data and real-time insights. The group is focusing on: 1) improving cost efficiency; and 2) enhancing revenue stream. To date, management has achieved an estimated cost improvement of circa 5% as compare to its target of 10-15% improvement. Management believes understanding customer behaviour will lead to better targeted products development to further enhance both ticket prices and ancillary income.

Source: Hong Leong Investment Bank Research - 30 Apr 2019