By Isabella Zhong

AirAsia (AIRASIA.MY) now has its sights on Vietnam. The low-cost carrier announced last Friday that it will be launching a new airline joint venture in the Southeast Asian country with two local partners. 

Nomura analyst Ahmad Maghfur Usman has more details on the joint venture:

AirAsia announced that it is setting up an airline JV in Vietnam with three local Vietnamese partners, Gumin Company Limited and Mr. Tran. AirAsia would have a 30% stake in the JV (the cap for foreign ownership in a local airline), while Gumin will take up a majority 69.9% stake with 0.1% to be owned by Mr. Tran. Separately, AirAsia and Gumin will also be providing a loan of USD2mn and USD4mn, respectively, to the JV. The JV will require capitalisation of VND1tn (MYR194mn), of which AirAsia’s portion would equate to an investment of MYR58.2mn, which will be internally raised.

The new airline is expected to kick off operations in 2018 with a two aircraft fleet that will focus on mainly domestic routes.

Reasons abound for AirAsia to embrace Vietnam. The number of tourist arrivals in Southeast Asia’s fifth largest aviation market has grown at an average 11% annual clip over the past years and has been picking up speed – it grew at a spectacular 35% clip during the first two months of the year.

Rising living standards, a growing middle class and improved airport infrastructure mean there is still plenty of room for air travel to grow in Vietnam. Usman expects the Vietnamese aviation market to grow 20% this year. The analyst notes:

Vietnam has the advantage of a strategic location, whereby airlines can use narrow-body aircraft to fly to all main locations in North Asia, Southeast Asia, and India, with an average flight time of about 5 hours from Hanoi or Ho Chi Minh City. This presents opportunities to grow the international segment further, which are the targeted growth opportunities for the carriers in Vietnam.

However, Vietnam is also a fiercely competitive market and AirAsia’s entrance is expected to only intensify competition. It could be a case of short-term pain for long-term gain for AirAsia, argues Usman.

We reckon that, over the initial two years, this JV will not be profitable but holds solid long-term prospects given Vietnam’s growth potential in air travel demand. AirAsia will also leverage on its existing ASEAN hubs to provide passenger traffic feeds.

Usman has a reiterated his buy rating on AirAsia with a MYR3.72 a share target price, which implies 19% upside. AirAsia shares are up 35% this year and trade at eight times forward earnings.

http://blogs.barrons.com/asiastocks/2017/04/05/is-airasia-making-a-smart-move-with-vietnam-expansion/