AirAsia Aviation Group Limited (AAAGL) is venturing into Cambodia via a joint venture with Sivilai Asia. This latest move is positive for AAAGL in its quest to become a dominant ASEAN low cost carrier. However, we expect the recovery of Cambodia’s tourist arrivals will be gradual, only to return to the pre-pandemic level in 2026-27, which means the gestation period for the venture will be long. Reiterate MARKET PERFORM and TP of RM0.60.

Maiden foray into Cambodia. Wholly-owned AAAGL has entered into a joint venture agreement with Sivilai Asia (a consultancy management firm that aims to operate hospitality businesses in Cambodia) to establish a low-cost carrier in Cambodia. AAAGL and Sivilai Asia will hold 51% and 49% stake, respectively, in the joint venture company known as AirAsia Cambodia with an initial capital of USD5m (RM22m). Cambodia marks the fifth Southeast Asian destination that AirAsia will be foraying into after Malaysia, Indonesia, Thailand and the Philippines. The joint venture is expected to commence operations in late 2023. Pre-pandemic, AirAsia operated 90 weekly flights from Malaysia and Thailand to Cambodia and is currently flying about 49 weekly flights.

Entry into Cambodia is positive but turning profitable could take longer than expected. This latest development by Capital A is a step in the right direction in its quest to become a dominant ASEAN low cost carrier player. The foray into Cambodia enables AAAGL to operate in the various existing markets where it already has presence and operations, thus enhancing its scalability, network connectivity and further reduce operating costs. This latest move by AirAsia provides greater access to its domestic market and connecting it to the international markets across ASEAN. Specifically, Cambodian passengers will be able to connect to over 150 other destinations in over 20 countries where AAAGL operates to by connecting to flights operated by other AAAGL’s airlines. However, we expect the recovery of Cambodia’s tourist arrivals to be gradual, only returning to the pre pandemic level in 2026-27 which means the gestation period for venture will be long.

Low penetration rate of low-cost carrier market in Cambodia translates to strong growth prospect. Experts have projected flight revenue in Cambodia to grow at a 2022-2026 CAGR of 37% to an estimated USD147m (RM646m). Presently, there are six registered Cambodian airlines which are operating namely Bassaka Air, Cambodia Airways, Cambodia Angkor Air, JC International Airlines, Lanmei Airlines, and Sky Angkor Airlines. However, there is only one low-cost or hybrid local airline based in Cambodia with a fleet of four aircrafts. Given Cambodia’s population of 17m people and 6.6m international tourist arrivals in 2019 (1.2m international tourists arrivals in 9MYTD22), there is potential for growth in Cambodia. Amplifying the growth potential are: (i) Cambodia’s low cost carrier market penetration of 28% which offers room for growth as compared to other ASEAN countries including Malaysia, Thailand and the Philippines having penetration in excess of 50%, and (ii) experts’ projections of Cambodia’s international tourist arrivals to hit about 7m in 2026 or 2027, and up to 7.5m in 2028.

Source: Kenanga Research - 12 Dec 2022