INVESTMENT HIGHLIGHTS

• MOU signed with China Everbright and Henan Government

• Positive on the news on the novelty of tapping the world’s largest outbound tourist market

• We make no changes to our earnings forecast for now

• Maintain BUY with higher TP of RM4.06 (from: RM3.45)

Airasia signed a memorandum of understanding (MOU) with the China Everbright Group and the Henan Government at the One Belt One Road summit in Beijing to establish a low-cost carrier (LCC) in China. The joint-venture company (JV), known as Airasia (China) will operate out of Zhengzhou, the capital of Henan province in Central China. Apart from operating an LCC, the JV will invest in aviation related infrastructure, including a dedicated LCC terminal, an academy and MRO facilities.

Positive on the news. While the news of setting up a JV in China does not come as a surprise to us, the novelty of tapping into the world’s largest outbound tourist market with one of China’s largest state owned enterprises resonates positively with us. In addition, the venture would mark Airasia’s first attempt in setting up and operating an LCC terminal, an idea which it had floated before.

No changes to earnings pending further details. We make no changes to our earnings forecast following the news pending further details such as timeline and total investments required. China, for its immense size has relatively few LCCs whose focus is mainly on domestic routes, which presents Airasia with opportunities.

Maintain BUY with higher TP of RM4.06. However, we raise our target price to RM4.06 premised on a higher target forward price-toearnings ratio of 10x FY17 EPS (previously 8.5x), on par with its regional LCC peers. We are removing the discount to peers as AirAsia’s associates are expected to breakeven this year. Meanwhile, we anticipate further positive newsflow from the sale of its leasing arm, Asia Aviation Capital (AAC) and positive 1QFY17 results with its load factor hitting the elusive 90% mark for its Malaysia operations in its recently released 1QFY17 operating stats. Airasia remains as our top pick for aviation sector.

Source: MIDF Research - 15 May 2017