Venturing into Vietnam

AirAsia announced that it has executed a shareholders agreement and a share subscription agreement with Gumin Company Limited, Mr. Tran Trong Kien and Hai Au Aviation Joint Stock Company (HAA) to formalize cooperation between AirAsia, Gumin, Mr. Tran and HAA to establish a low-cost carrier (LCC) in Vietnam. Some salient terms about the agreements as well as the loan agreement: - HAA to increase its paid-up capital to VND1tn (RM194mn) for the purpose of this joint venture operation; - AirAsia to subscribe for 30% of HAA’s enlarged share capital for VND300bn (RM58.2mn); - AirAsia and Gumin will have their respective interest of 30% and 69.9% in HAA while Mr. Tran will have 1 share of HAA; - AirAsia and Gumin will provide loans amounting to USD2mn (RM8.84mn) and USD4mn (RM17.68mn) to HAA. - Other transaction document to be entered into between AirAsia and HAA include the brand licensing agreement to licence the use of the AirAsia brand to the HAA for a fee.

Our view

We are positive on this venture as it will strengthen AirAsia’s network in South East Asia. Importantly, the total capital committed to HAA by AirAsia is only RM67.0mn or as little as 1% of AirAsia’s shareholder funds. As such, we think it worth the effort and money to explore Vietnam’s aviation market, the 5th

largest market in South East Asia after Indonesia, Thailand, Malaysia and Singapore, with a population of 95mn. As HAA is expected to operate both domestic and international flights in Vietnam, HAA can leverage on AirAsia’s strong brand name and capture meaningful market share in the international segment. Currently, there are two existing players in the market namely, Jetstar Pacific and VietJet Air, which started low-cost carrier business models back in 2007 and 2011 respectively. Jetstar Pacific is owned by national carrier Vietnam Airlines (70%) and Qantas (30%) while VietJet is private owned by Sovico Holdings, HDBank and other institutional investors. Jetstar Pacific and VietJet have fleet size of 18 and 45 aircraft respectively, mostly Airbus A320 family fleet, serving both domestic and international destinations. Looking at the total fleet size, we opine that the LCC market in Vietnam is not over-crowded and not dominated by a single airline company yet, like Malaysia and Indonesia dominated by AirAsia and LionAir. Also, judging from the bullish profit guidance from the CEO of Vietjet, we believe there are ample room for growth for a new comer. Note that the CEO of Vietjet said that VietJet expect net profit to climb by 30% in 2017, after its bottomline almost doubled over in 2016.

Forecast

As the venture into Vietnam is still at a preliminary stage, pending successful application for airline operator’s certificate by HAA, we maintain our earnings projections for FY17-18.

Risk

A foreseeable risk include operational conflicts between AirAsia and Gumin in the future. Information on Gumin is scarce and not mentioned in the announcement. Meanwhile, Mr. Tran Trong Kien is a chairman of Buffalo Tours, a leading inbound tour company in Asia.

Valuation

We maintain our target price at RM3.02 based on unchanged 9x CY17 EPS. As the share price has advanced 37% YTD, we believe the market has largely priced in those corporate exercises, i.e.: disposal of AAC and special dividend, listing of AAI and PAA, highlighted in various media reports. As such, we downgrade AirAsia to Sell from Hold.

Source: TA Research - 4 Apr 2017