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.

AirAsia 3.0. Leveraging on the group’s strengthening core airline business and integration of digitalization, management is creating new business platforms to build new revenue stream, expand user base and improve user engagement and experience, which will eventually further enhance the group’s earnings. Management revealed that 3 business platforms to be introduced/enhanced: 1) AirAsia.com website; 2) BIGPay (digital banking and money application); and 3) Teleport (cargo & logistics). Management also indicated it has invested a minimal amount of USD25m to-date, and would not need much further capex, as AAG already has a solid existing platform with internally developed talents and resources and large customer base. Hence, AAG does not engage in stiff competition or offer discounts/rebates to build market.

AirAsia.com website will be developed into an all-in-one travel and lifestyle marketplace. From currently only providing online travel solutions, AirAsia.com will explore other online/application solutions including e-commerce (online retail), online media, news and entertainment, and ride hailing (transportation and food delivery). The combined market size of these businesses in ASEAN is expected to grow exponentially to USD240bn by 2025 from USD72bn in 2018.

BIGPay is digital money application for debit card, e-wallet, online payment and currency changer, which will complement AirAsia.com website platform. Upcoming services include the lucrative remittance (ease cross border transactions with minimal charges) and lending services (work together with banks in respective markets). Currently, BIGPay has 500k users on its platform.

Teleport platform is providing cargo and logistic business, working in tandem with AirAsia.com website and BIGPay. AAG has set up Teleport to consolidate the group’s cargo segment and logistic services for its own as well as third party online retailing. The key advantage that Teleport provides is shortening the delivery time to 12 hours (as compare to conventional process of 138 hours), while leveraging on the group’s network. Teleport is currently expanding its market reach by collaborating with third party airlines. Management explained that Teleport was already profitable in 2018 with revenue of RM206m. The management is targeting revenue of RM400m in 2019.

Forecast. Unchanged, as we do not expect material earnings contribution in the near term from the implementation of the new business platforms.

Maintain BUY with unchanged TP: RM3.20 based on 10% discount to SOP: RM3.55. AAG continues to deliver strong traffic growth and gain market share for all its markets with its low cost and efficient cost-structure, while the loss-making competitor airlines are unlikely to maintain their competitive pricing approach. Management’s strategic planning with continuous innovation has kept the airline ahead of its competitors.

Source: Hong Leong Investment Bank Research - 7 May 2019