airasia - credit suisse

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

12 October 2011 Asia Pacific/Malaysia

Equity Research Airlines

AirAsia (AIRA.KL / AIRA MK)

COMPANY UPDATE

When the going gets tough ... ■ … the tough get going: AirAsia reported over 20% traffic growth p.a. during

the 2008-09 financial crisis, as passengers downtraded from full-service carriers and rivals exited or reduced capacity. We expect AA to report a 10% traffic CAGR between FY10 and FY13, driven by annual 7% growth in fleet (three per year) and higher load factors. We expect AA to enjoy a 13% net profit CAGR, excluding forex, deferred tax and one-offs.

■ Stronger: In our view, AirAsia is in a strong position to weather an economic downturn. AirAsia's gearing halved in FY10 to 161% and should fall to below 100% by FY13. Both the Thai and Indonesian units have turned a corner, started reporting profits and repaying inter-company debt with AirAsia Berhad. The amounts will be fully settled by end-FY11, two years ahead of the schedule. New ventures, such as the AirAsia Go-Expedia tie-up to sell holiday packages online, plus CAE converting the training academy into a regional training centre, should fuel the future growth of its ancillary income.

■ Wrapped around your finger: The MAS tie-up should end the price war, and give AirAsia a de-facto monopoly in the Malaysia budget travel market. Tune Air’s stake in AA falls to 13% (from 23%) prompting, in our view, unwarranted concerns that CEO Tony Fernandes will no longer focus on AirAsia. However, Tony Fernandes stressed that AirAsia is his main focus. Moreover, AirAsia remains the more important holding, as Tune Air’s stake in AirAsia is worth 20% more than its ‘larger’ stake in MAS. Furthermore, unlike MAS, AirAsia can spread its wings beyond Malaysia via JVs in Thailand and Indonesia, and soon the Philippines and Japan.

■ Maintain OUTPERFORM: The stock looks inexpensive at 8x-10x P/E between FY11E and FY13E, but this falls to 7-8x P/E if one includes the unrecognised portion of income from its associates. Maintain OUTPERFORM with a RM4.55 target price.

Share price performance

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Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the FTSE BURSA MALAYSIA KLCI IDX which closed at 1419.64 on 11/10/11 On 11/10/11 the spot exchange rate was RM3.14/US$1

Performance Over 1M 3M 12M Absolute (%) -5.8 -8.0 50.0 Relative (%) -1.9 2.7 55.1

Financial and valuation metrics

Year 12/10A 12/11E 12/12E 12/13E Revenue (RM mn) 3,992.7 4,964.3 5,561.9 6,184.7 EBITDA (RM mn) 1,669.6 1,908.6 2,101.9 2,392.6 EBIT (RM mn) 1,148.7 1,271.3 1,405.5 1,612.8 Net income (RM mn) 1,067.9 821.1 860.2 1,084.6 EPS (CS adj.) (RM) 0.39 0.30 0.31 0.39 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (RM) n.a. 0.29 0.36 0.42 EPS growth (%) 109.9 -23.1 4.8 26.1 P/E (x) 8.4 10.9 10.4 8.3 Dividend yield (%) 0.93 0.93 0.93 0.93 EV/EBITDA (x) 8.9 7.6 6.8 5.9 P/B (x) 2.5 2.1 1.7 1.5 ROE (%) 34.2 20.6 18.1 19.2 Net debt/equity (%) 161.3 125.0 101.9 81.9

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM* Price (11 Oct 11, RM) 3.24 Target price (RM) 4.55¹ Chg to TP (%) 40.4 Market cap. (RM mn) 9,000 Enterprise value (RM mn) 14,454 Number of shares (mn) 2,777.88 Free float (%) 73.6 52-week price range 4.14 - 2.16 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.

Research Analysts

Annuar Aziz 603 2723 2084

[email protected]

12 October 2011

AirAsia

(AIRA.KL / AIRA MK) 2

Focus charts and table Figure 1:European pax traffic growth: legacy vs. LCCs Figure 2: Asian pax traffic growth: legacy vs. LCCs

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Figure 3: AirAsia’s net gearing—FY07-FY13E Figure 4: Market value of Tune’s holdings

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AirAsia MAS

Market Value (RM mn)

Source: Company data, Credit Suisse estimates Source: Company data,

Figure 5: Key domestic LCC penetration (Jan-Jul-2011) Figure 6: CY12E comparative P/E inc AirAsia’s associates

56.5

38.5

24.2

18.9

9.1

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Japan

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6.8 6.9 7.0 8.0 8.7 9.1 9.5 9.9 11.7

18.5 27.4 48.0

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Source: CAPA Source: Company data, Credit Suisse estimates

Figure 7: Key assumptions Key assumptions FY09A FY10A FY11E FY12E FY13E Pax traffic growth (%) 20.7 12.6 15.1 6.8 7.3 ASK growth (%) 17.4 10.9 12.3 6.8 7.3 Load factor (%) 75.0 77.9 80.0 80.0 80.0 Rev / ASK growth (%) -5.1 13.3 10.7 4.9 3.7 Avg fare growth (%) -17.4 5.3 6.2 4.3 1.3 Avg ancillary growth (%) 46.5 39.2 29.5 12.5 10.0 Avg fuel cost 68 92 114 120 120

Source: Company data, Credit Suisse estimates

12 October 2011

AirAsia


When the going gets tough … Survivor Despite the weaker economic environment, we expect AirAsia (AA) to continue to record 10% passenger traffic growth between FY10 and FY13. This will be driven, in our view, by:

■ travellers who are downtrading from full-service airlines,

■ market share gains as rivals exit or reduce capacity, and

■ the creation of a new market.

During the 2008-09 global financial crisis, we saw evidence of travellers downtrading from full-service carriers (FSCs) to low-cost carriers (LCCs). In both Asia and Europe, we saw a distinct switch from mid-2008, with LCC traffic growing YoY even as FSC traffic fell. AirAsia reported 22% passenger traffic growth in FY08, and 21% in FY09. We expect AA to report a 10% traffic CAGR between FY10 and FY13 which should drive a 13% core net profit CAGR (excluding forex, deferred tax and one-off items).

Stronger AirAsia, in our view, is in a better position to weather an economic downturn. AirAsia's gearing halved in FY10 to 161% and should fall to below 100% by FY13. Both the Thai and Indonesian units have turned a corner, started reporting profits and repaying inter-company debt to AirAsia Berhad. The amounts will be fully settled by end-FY11, two years ahead of the schedule. New ventures, such as the AirAsia Go-Expedia tie-up to sell holiday packages online, plus CAE converting the training academy into a regional training centre, should fuel the future growth of its ancillary income.

Wrapped around your finger AirAsia and MAS formed an alliance to unlock RM1.2 bn in annual synergies, and cemented the deal in a share-swap by the major shareholders which resulted in Tune Air’s stake in AirAsia falling to 13% (from 23%). It ends the price war, giving AirAsia a de-facto monopoly in the Malaysia budget travel market. In our view, concerns that CEO Tony Fernandes is both distracted and diluted by the tie-up with MAS are unwarranted. Tony Fernandes has always stressed that AirAsia is still his main focus, despite all the other investments, adding that the job of turning around MAS was for the new CEO. AirAsia remains the more important holding, as Tune Air’s stake in AirAsia is worth 20% more than its ‘larger’ stake in MAS. Furthermore, we believe that there is greater long-term potential upside for AirAsia. Unlike MAS, which is confined to ‘just’ Malaysia, AirAsia has spread its wings via JVs in Thailand and Indonesia, which over the next 12 months will be joined by two new overseas ventures: the Philippines and Japan.

Attractive valuations We reiterate our OUTPERFORM rating on AirAsia, with a sum-of-the-parts-based target price of RM4.55 (40% potential upside). The stock looks inexpensive at 8x-10x P/E between FY11E and FY13E, but this falls to 7-8x P/E if one annualises the unrecognised portion of income from its associates. Note that between FY06 and FY09, which covered the last financial crisis, European LCC leaders Ryan Air and EasyJet traded at a median forward P/E of 16x-17x.

We expect AirAsia’s traffic to grow, despite the weak economic environment …

… like it did in 2008-09 as travellers switch to cheaper alternatives

Now in a strong position to weather a slowdown, with lower gearing and a stronger ancillary income base

Despite the MAS tie-up, AirAsia remains Tony Fernandes’ main focus, as it can grow beyond Malaysia

Maintain OUTPERFORM with a RM4.55 target price

12 October 2011

AirAsia


Key financial data Figure 8: Key financial data 2009A 2010A 2011E 2012E 2013E

P&L (RM mn) Revenue 3,178.9 3,992.7 4,964.3 5,561.9 6,184.7 EBIT 876.8 1,148.7 1,271.3 1,405.5 1,612.8 Forex impact 91.1 288.1 117.0 0.0 0.0 Interest income 6.3 66.0 50.1 64.8 79.9 Interest cost (374.3) (377.9) (406.9) (439.4) (479.3) Exceptional items 22.5 (25.6) (66.1) 0.0 0.0

Profit before tax 622.3 1,099.3 965.4 1,030.8 1,213.5 Income tax (11.2) (2.6) (19.3) (20.6) (24.3) Deferred taxation (104.8) (28.8) (125.0) (150.0) (104.6)

Net profit 506.3 1,067.9 821.1 860.2 1,084.6 Net profit ex-gains & def tax 497.6 834.2 895.3 1,010.2 1,189.2

Balance sheet (RM mn) Non current assets 9,177.4 10,350.6 10,827.6 11,457.8 12,288.2 Cash 746.3 1,501.0 2,498.5 3,450.6 4,517.8 Others 1,471.3 1,083.5 1,526.9 1,654.5 1,786.8

Current assets 2,217.6 2,584.4 4,025.4 5,105.2 6,304.6 Short-term loans (secured) 540.2 554.0 495.7 495.7 495.7 Other liabilities 1,166.1 996.4 1,615.1 1,809.6 1,980.5

Current liabilities 1,706.3 1,550.3 2,110.7 2,305.2 2,476.2 Long-term loans 7,067.7 7,302.9 7,922.5 8,660.8 9,518.2 Others 0.0 456.3 456.3 456.3 456.3

Non current liabilities 7,067.7 7,759.2 8,378.8 9,117.2 9,974.6 Net assets 2,621.0 3,625.4 4,363.4 5,140.5 6,142.1 Share capital 275.8 277.3 277.3 277.3 277.3 Reserves 2,345.2 3,348.1 4,086.1 4,863.2 5,864.7

Shareholders' equity 2,621.0 3,625.4 4,363.4 5,140.5 6,142.1

Cash flow (RM mn) Operating profit 622.3 1,099.3 965.4 1,030.8 1,213.5 Depreciation 424.6 520.9 637.3 696.5 779.8 Change in working capital (262.6) 218.1 175.3 66.8 38.7 Taxes paid (3.8) (2.6) (19.3) (20.6) (24.3) Others (44.2) (212.3) 0.0 (0.0) (0.0)

Cash flow from operations 736.3 1,623.4 1,758.6 1,773.5 2,007.7 Capex (1,923.8) (1,903.5) (1,239.3) (1,476.7) (1,714.8) Others 262.0 27.6 0.0 0.0 0.0

Cash flow in investing activities (1,661.8) (1,875.9) (1,239.3) (1,476.7) (1,714.8) Net proceeds from loans 1,008.9 990.3 561.3 738.3 857.4 Others 514.3 15.9 (83.1) (83.1) (83.1)

Cash flow from financing 1,523.1 1,006.2 478.2 655.2 774.3

Net change in cash 597.7 753.7 997.6 952.1 1,067.2


12 October 2011

AirAsia


Survivor Credit Suisse’s economists expect economic growth to moderate but not a recession in 2012. Despite the weaker economic environment, we expect AirAsia (AA) to continue to record 10% passenger traffic growth between FY10 and FY13. This will be driven, in our view, by:

■ travellers who are downtrading from full-service airlines,

■ market share gains, and

■ the creation of a new market.

Figure 9: AirAsia’s traffic growth assumptions

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The experience of 2008-09 During the last financial crisis in 2008-09, we saw that passenger traffic for LCCs grew. As shown below, AirAsia reported 22% passenger traffic growth in FY08, and 21% in FY09. This growth was largely at the expense of legacy carriers, as passengers downtraded from full-service to budget airlines, and expanded capacity to fill the void left by the airlines that have either cut capacity or ceased operations.

Figure 10: AirAsia’s traffic growth FY07-FY10

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Source: Company data

We expect AirAsia’s traffic to grow, despite the weak economic environment …

… like it did in 2008-09 as travellers switch to cheaper alternatives

AirAsia saw pax traffic growth of over 20% p.a. during the 2008-09 financial crisis

12 October 2011

AirAsia


Given the poor economic environment, we expect price-sensitive travellers to switch to cheaper alternatives. During the 2008-09 global financial crisis, we saw evidence of travellers downtrading from FSCs to LCCs. The following charts compare the passenger traffic of both legacy airlines and budget carriers in Europe. It is clear that passengers are switching to budget carriers, with a distinct shift from July 2008 onwards.

Figure 11:Lessons from Europe: European passenger traffic growth: legacy vs. LCCs

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Even in Asia, as shown in the following chart, the situation is very much the same. From July 2008 onwards, legacy carrier traffic has fallen, while AirAsia has remained on its growth trajectory.

Figure 12: Lessons from Asia: Asian passenger traffic growth: legacy vs. LCCs

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Filling the void During the economic turmoil of 2008-09, a number of LCCs had stopped operations in Asia, most notably Indonesia’s Adam Air (unlisted) and Thailand’s One-Two-Go (unlisted). At the same time, other LCCs such as Nok Air (unlisted) had cut capacity to remain afloat. This left a void to be filled by relatively strong LCCs, including AirAsia. As shown in the following chart, AirAsia has seen its market share increasing in both Thailand and

LCCs traffic outgrew legacy carriers in Europe …

… and in Asia too!

Filling the void left by the rivals that have either cut capacity or ceased operations

12 October 2011

AirAsia


Indonesia. These market share gains, in our view, were driven in part by the reduction in alternative capacity.

Figure 13: AirAsia: Thai market share Figure 14: AirAsia: Indonesia market share

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Out of nothing at all AirAsia’s growth will not be driven solely by ‘filling the void’. Passenger traffic also benefited from a combination of new routes and an increase in capacity. In 2008-09, AirAsia launched new routes including KL-Dhaka, Singapore-Indonesia (within Indonesia, Jakarta, Bandung, Bali, Yogyakarta, etc). Over this period, AirAsia added capacity on routes such as KL-Singapore and KL-Bangkok.

More importantly, in our view, LCCs have the ability to ‘create’ demand. For example, Bandung, Indonesia has opened up to become a shopping haven for Malaysians (and others in ASEAN) because of the direct flights to the city. This is a small, almost purely leisure, market that is economical only for airlines operating on an LCC model.

Fares: Under pressure? A central pillar of the budget airline business model is high asset utilisation rates, which in turn are dependant on strong traffic numbers. AirAsia operates on a load active-yield passive mode, thus will price the ticket accordingly to achieve the desired load factor. Thus, if faced with increased competition or lower demand, AirAsia will stimulate demand by lowering fares. We estimate that if AirAsia lowers its fares by RM1 per passenger, we would have to reduce our net profit forecast by RM16-20 mn (1.5-2.3%).

Figure 15: Sensitivity to changes in total fares Change in total Net profit (RM mn) Change in forecast (%) Target Change

fares (RM) FY11 FY12 FY13 FY11 FY12 FY13 price (RM) (%)

10 1,003 1,057 1,244 22.2 22.9 14.7 5.81 27.7

5 912 959 1,164 11.1 11.4 7.3 5.32 16.9

2 858 900 1,117 4.4 4.6 2.9 5.03 10.5

1 839 880 1,101 2.2 2.3 1.5 4.92 8.2

0 821 860 1,085 - - - 4.55 n/a

-1 803 841 1,069 -2.2 -2.3 -1.5 4.73 3.9

-2 785 821 1,053 -4.4 -4.6 -2.9 4.63 1.8

-5 730 762 1,005 -11.1 -11.4 -7.3 4.33 -4.8

-10 639 663 925 -22.2 -22.9 -14.7 3.84 -15.6


Growth was also driven by new unique routes …

… that are economically viable only though an LCC

A RM1 cut in total fares results in a fall in net profit by up to 2.3%

12 October 2011

AirAsia


Stronger AirAsia is in a strong position to weather an economic downturn. AirAsia's gearing halved in FY10 to 161% and should fall to below 100% by FY13. Both the Thai and Indonesian units have turned a corner, started reporting profits and repaying inter-company debt with AirAsia Berhad. The amounts will be fully settled by end-FY11, two years ahead of the schedule. New ventures, such as the AirAsia Go-Expedia tie-up to sell holiday packages online, with CAE converting the training academy into a regional training centre, should fuel the future growth of its ancillary income.

Competitive cost structure In our view, one of the key reasons for AirAsia’s ability to weather both competition and a tough operating environment is its low operating costs. As shown below, AirAsia has the lowest cost/ASK in the region.

Figure 16: Regional CASK comparison

1.6 2.1 2.3 2.7 2.7 2.8

5.6 5.6 5.91.3

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Cost/ASK (US cents)


AirAsia has maintained strict control over its non-fuel costs, as shown in the flat ex-fuel C/ASK chart below. At the same time, the company has been able to raise its revenue/ASK (RASK) over the same period of time. More importantly, as shown in Figure 18, AirAsia has been able to widen the RASK-CASK gap to improve its profitability.

Figure 17: AirAsia’s cost/ASK Figure 18: AirAsia’s CASK vs. RASK

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Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Now in a strong position to weather a slowdown, with lower gearing and a stronger ancillary income base

AirAsia has the lowest cost/ASK in the region

AirAsia has maintained control over its non-fuel costs, and widened the RASK-CASK gap

12 October 2011

AirAsia


Managing its gearing AirAsia’s net debt to equity ratio almost trebled to 339% in FY08, due largely to the cost of unwinding the fuel hedges. Unsurprisingly, the high net gearing ratio, coupled with the aggressive aircraft delivery programme, was a major overhang of the stock. AirAsia dealt with this gearing by:

■ growing ancillary income to boost revenue/ASK,

■ deferring aircraft deliveries, and

■ listing the associates, to prepare them to eventually take ownership of its aircraft (currently leased from AirAsia Berhad).

AirAsia reduced its fleet roll-out to better “match cash flows” and contain its gearing. The company effectively halved its expansion by deferring deliveries to 2015/16, taking on 10-14 aircraft each year, instead of the 23-24 aircraft as previously planned. FY11 deliveries were halved to eight aircraft, due to “infrastructural constraints” at the current LCC terminal (new LCCT will be ready in 2012). Moreover, it would allow AirAsia to optimise its fleet, without the risk of underutilised aircraft

Figure 19: AirAsia’s net gearing FY07-FY13E

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AirAsia’s gearing halved between FY08 and FY10 to 161%. Going forward, AirAsia is looking at options to allow its Thai and Indonesian associates to be financially independent and to take ownership of its aircraft. This would include aircraft-related debt, which should help de-gear the company even further.

Dealing with inter-company debt Inter-company debt ballooned to over RM820 mn in FY09, largely from AirAsia Berhad advancing the associates’ share of RM1 bn cost to unwind the fuel hedge in FY08. AirAsia has established a framework to structure the repayment of the amounts outstanding to the parent company by the overseas associates.

AirAsia’s net debt to equity ratio grew to 339% in FY08 …

… but halved between FY08 and FY10 to 161%

Associates to eventually own its aircraft and de-gear the company even further

Inter-company debt ballooned to over RM820 mn in FY09 …

12 October 2011

AirAsia


Figure 20: AirAsia’s inter-company debt

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Repayments started in FY10, as shown above, with the debt likely to be fully settled by FY13. However, as of 2Q FY11, Thailand fully settled the amount outstanding. The remaining RM238 mn is owed by Indonesia, which management expects to fully settle by end-FY11—two years ahead of schedule.

Backed by a strong team There is a view that CEO Tony Fernandes is too thinly stretched with his many investments through the unlisted Tune Group (Hotels, Mobile Telco, etc), F1 racing, the tie-up with MAS and most recently with English football club Queen’s Park Rangers (QPR).

However, we believe AirAsia would not have grown so successfully if its day-to-day operations were dictated solely by Mr Fernandes. Therefore, in our view, concerns that the CEO is too thinly stretched by his other investments are unwarranted.

Consider the following:

■ Other co-founders: Kamaruddin Meranun is the Deputy CEO, while Connor McCarthy remains an active board member, with a purview on safety reviews and procurement.

■ Management team: A complete team is already in place with over 20 senior individuals covering various portfolios from engineering and flight operations, to corporate finance and in-flight services.

■ New additions: The team was strengthened by two key appointments in 2010. Mr Bo Lingam was appointed chief operating officer (COO). The new Chief Financial Officer (CFO), Mr Andrew Littledale, takes over from Mr Rozman Omar, who is now the Regional Head of Finance overseeing the turnaround and listing of the Thai and Indonesian associates.

Tony Fernandes is not the CEO of his various other interests. Each business, including AirAsia’s overseas units, has its own CEO and management team to run its own affairs. For example Azran Osman-Rani is CEO of AirAsia X, while indy-rocker Jason Lo heads Tune Talk.

… but is expected to fully settled by end-FY11—two years ahead of schedule

12 October 2011

AirAsia


Separation from AirAsiaX AirAsia X (AAX; unlisted) is a long-haul low-cost carrier, operating 22 wide-body aircraft exclusively on medium- and long-haul flights (over four hours). AirAsia owns 16% of AAX, with the remaining shares held by Virgin Group, Orix, private equity firm Manara Group and Aero Ventures, a private company owned by Tony Fernandes, Kamarudin Meranun, Lim Kian Onn, Kalimullah Hassan and ex-AirCanada CEO Robert Milton.

Figure 21: AirAsiaX shareholders

Aero Ventures

52%

Orix

11%

Virgin Group

10%

AirAsia

16%

Manara Group

11%


There was a concern that AAX would dilute AirAsia’s proven short-haul model. These concerns were heightened with the speculation of a merger between AirAsia and AAX. Management recognises this problem and ‘recognises the need for AirAsia and AirAsia X to remain focused on their respective markets’.

■ Ultimately, the company plans to spin off AAX in an IPO (expected in 1H 2012).

■ AAX has ceased shared services including engineering, treasury and flight operations.

■ AAX took over employment of its staff (pilots, cabin crew and ground staff), and assumed control of its own commercial and marketing team. AAX’s management has even moved out to another building to further cement this separation.

■ Post-IPO, AirAsiaX will be both financially and operationally independent, except in these core areas: usage of the AirAsia brand name and website (under a 30-year brand licence agreement) and the AirAsia Training Academy.

Opportunities to make money AirAsia has made great strides in growing its ancillary income base, as shown below, with large increases in the average ancillary spend. This is the amount spent by passengers on items such food, duty-free items, gifts and check-in baggage. In 1H FY11, AirAsia enjoyed a 23% increase in the ancillary spend per passenger.

AirAsia owns 16% of AirAsia X, a long-haul low-cost carrier

Concerns that AAX would dilute AirAsia’s proven short-haul model …

… so management has ceased sharing services with AAX …

... and plans to spin off AAX to refocus exclusively on its short-haul business model

AirAsia’s 1H FY11 the ancillary spend per passenger grew 23% YoY

12 October 2011

AirAsia


Figure 22: AirAsia’s ancillary spend per passenger

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FY07A FY08A FY09A FY10A FY11E FY12E FY13E FY14E

-10

0

10

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30

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50

Growth (YoY)

Anc/ pax Growth

Ancillary Spend per Pax (RM)

0

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FY07A FY08A FY09A FY10A FY11E FY12E FY13E FY14E

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Growth (YoY)

Anc/ pax Growth

Ancillary Spend per Pax (RM)


AirAsia is targeting an average ancillary spend of RM60 per pax within the next three years. This will be driven by increased take-up rates of existing services (insurance and Red Box courier), higher rates of existing services (check-in baggage fees) and new key initiatives such as ‘Priority Baggage’ and counter check-in fees (to encourage the free web check in).

Together in electric dreams Average ancillary revenues from online revenues should start seeing decreasing returns to scale in Malaysia, as shown in Figure 22. The exception to this, in our view, would be hotel bookings through its joint venture with Expedia, the world’s largest online travel company. Launched in August 2011, the JV combines AirAsiaGo with Expedia-branded storefronts in Japan, India and ASEAN. It sells air tickets, hotel rooms and holiday packages. AirAsia contributes its seat inventory, while Expedia contributes the hotel inventory at a cost.

Regional training centre Offline ancillary revenues have a greater chance of making significant growth: the cargo business could forge a potential tie-up with Malaysia Airlines’ cargo division (see section on the MAS tie-up). However, the training joint venture with CAE of Canada, to create the ‘Asian Aviation Centre of Excellence,’ could prove to be a very promising new venture.

This JV offers comprehensive training for pilots, cabin crew, maintenance and ground personnel, not only of AirAsia, but also of third-party operators. Nonetheless, there are preferential training rates for AirAsia, due to ‘higher asset utilisation and lower maintenance spend’. The Asian Aviation Centre of Excellence started operations on 1 July 2011, with six CAE-built full-flight simulators (FFSs): four for the Airbus A320, one for the A330/340 and one for the B737 Classic.

Potential impact of the new ancillary ventures Management has yet to articulate the potential contributions to AirAsia’s ancillary income. Neither JV, signed earlier this year, have yet to become operational. Nonetheless, we feel that both could potentially have a significant impact on the company’s ancillary income. We estimate that a RM1 increase in AirAsia’s ancillary income per pax would raise net profit forecast by RM16-20 mn (1.5-2.3%).

Targeting RM60/pax ancillary spend within three years

Teams up with Expedia to sell hotel and holiday packages online

Cargo could forge a potential tie-up with MAS

Ties up with CAE to turn academy into a regional training centre

RM1 increase in ancillary spend would raise net profit by 1.5-2.3%

12 October 2011

AirAsia


Figure 23: Sensitivity to changes in ancillary income Increase in ancillary Net profit (RM mn) Change in forecast (%)

spend/pax (RM) FY11 FY12 FY13 FY11 FY12 FY13

Base case 821 860 1,085 - - -

1.0 839 880 1,101 2.2 2.3 1.5

2.0 858 900 1,117 4.4 4.6 2.9

5.0 912 959 1,164 11.1 11.4 7.3

10.0 1,003 1,057 1,244 22.2 22.9 14.7


12 October 2011

AirAsia


Wrapped around your finger AirAsia and MAS have formed an alliance to unlock RM1.2 bn in annual synergies, and cemented the deal in a share-swap by the major shareholders which resulted in Tune Air’s stake in AirAsia falling to 13% (from 23%). In our view, concerns that CEO Tony Fernandes is both distracted and diluted by the tie-up with MAS are unwarranted. Tony Fernandes has always stressed that AirAsia is still his main focus, despite all the other investments, adding that the job of turning around MAS was for the new CEO. AirAsia remains the more important holdings, as Tune Air’s stake in AirAsia is worth 20% more than its ‘larger’ stake in MAS. Furthermore, we believe that there is greater long-term potential upside for AirAsia. Unlike MAS which is confined to ‘just’ Malaysia, AirAsia has spread it wings via JVs in Thailand and Indonesia, which over the next 12 months will be joined by two new overseas ventures: the Philippines and Japan.

The collaboration agreement In August 2011, MAS and AirAsia signed a deal to establish a 5+5 year ‘Comprehensive Collaboration Framework’ (CCF) to “enhance the national aviation eco-system,” reinforce core competencies and exploit potential synergies. Under the deal, MAS will focus exclusively on the premium segment and AirAsia on the budget segment.

Figure 24: Old shareholding structure Figure 25: Current shareholding structure


To align their interest and ensure compliance, there will be common shareholders and common directors. Thus Tune Air and Khazanah are proposing a share-swap, resulting in Tune Air having a 20.5% stake in MAS, and Khazanah a 10% stake in AirAsia. AirAsia’s CEO Tony Fernandes and deputy CEO Kamaruddin Meranun are now directors of MAS. In turn, MAS director Azman Yahya joins AirAsia’s board. A Joint Collaboration Committee (JCC) will coordinate activities, investigate potential synergies and resolve deadlocks.

Figure 26: Key committees under the collaboration Committee Chairman Members

Exco Md. Noor Yusof Tony Fernandez

Kamaruddin Meranun

Rashdan Yusuf

Joint Collaboration Azman Yahya Tony Fernandez

Committee Rashdan Yusuf

Azran Osman-Rani


The (then) MAS CEO had resigned, allowing MAS to be run by an Executive Committee (EXCO) for an interim period. The EXCO, comprising Tony, Kamaruddin, MAS Chairman Md. Noor Yusof and MAS Executive Director Rashdan Yusoff, will be disbanded with the appointment of a new MAS CEO.

AirAsia and MAS formed an alliance to unlock RM1.2 bn in annual synergies

Tune Air swaps 10% stake in AirAsia for a 21% stake in MAS

AirAsia CEO and deputy CEO are now directors of MAS

Joint Collaboration Committee to coordinate synergistic activities

12 October 2011

AirAsia


There is a 30-month lock-in period for MAS’s and AirAsia’s shares involved in the share-swap deal. To sweeten the deal, one AirAsia warrant would be given for every 30 MAS’s shares held, and one MAS warrant per 10 AirAsia’s shares. These proposed 2.5-year warrants are subject to shareholder approval at the November 2011 EGM.

Focussing on core competencies Under the deal, each airline will focus on its core competencies, as shown below. Therefore, MAS as a group will focus exclusively on the premium segment and its Firefly unit will cease its budget jet operations. This has effectively ended the price war between AirAsia and Firefly, which competed on the trunk routes between Peninsular Malaysia and the East Malaysian states of Sabah and Sarawak. Note that Firefly’s turbo-prop operations will continue, albeit with premium offerings.

Figure 27: Pre-deal market focus Figure 28: Post-deal market focus AIRASIA MAS / FIREFLY

Overalp withFirefly

Budget Premium

AIRASIA MAS / FIREFLY

Budget Premium


Firefly has started to progressively scale back its jet operations, starting with flights on the Johor Baru-Kuching and Johor Baru-Kota Kinabalu routes. This exercise is expected to be completed by November, by which time Firefly’s jet service and MAS’s narrow-body regional flights will be folded into a new regional full-service airline, codenamed Sapphire.

MAS is reviewing its regional network, and is most likely to shrink as it exits underperforming routes. This will reduce the overall competitive pricing pressures and be positive for yields. The exit of MAS from the budget segment also provides opportunity for AirAsia to expand service domestically and regionally. The absence of price competition from MAS/Firefly is good for AirAsia’s total fares outlook. We estimate that a RM1 increase in AirAsia’s total average (including ancillary) would raise net profit forecasts by RM16-20 mn (1.5-2.3%).

Better negotiating power En bloc, MAS’s and AirAsia’s lobbying and negotiating power has increased greatly. This has shifted the balance of power away from key supplier and vendors, most notably Malaysia Airports (MAHB). Now MAHB will have to deal with a large single block that accounts for over 80% of its passenger traffic.

The relative loss of negotiating power, coupled with its previously stormy relationship with AirAsia, in our view, could put MAHB at a distinct disadvantage. This is most evident in the government’s recent decision to defer MAHB’s airport tax and landing charge increases after strong en block lobbying by MAS and AirAsia.

Figure 29: MAHB’s ‘new’ airport charges that were deferred New (RM) Existing (RM) Change (%)

Passenger service charge – main terminal 65 51 27

Passenger service charge – LCC terminal 32 25 28

Landing charges 30% over 3 years

Parking charges 64% over 3 years


30-month lock-in period for shares involved in the swap

MAS to focus exclusively on the premium segment, and AirAsia on the budget segment

Deal ends price war between AirAsia and Firefly

Firefly to exit the budget segment by November 2011

MAS likely to shrink routes, giving AirAsia scope to expand network

MAS’s and AirAsia’s lobbying and negotiating power has increased greatly

Relative loss of negotiating power by Malaysia Airport

12 October 2011

AirAsia


Let’s work together Potential RM1.2 bn in savings from the tie-up, based on a study by an international consultant, is an annual sum that could accrue to AirAsia and MAS combined. This will come from a combination of synergistic cost savings and lesser price competition.

MAS as a group will focus exclusively on the full service segment. Thus, its budget airline Firefly will cease jet operations. Note that Firefly’s turbo-prop operations will continue, albeit with premium offerings. MAS will review its regional network, and is most likely to shrink as it exits underperforming routes. These moves will reduce the overall competitive pricing pressure and be positive for yields of both carriers. Firefly’s jet operations, plus MAS’s narrow-body regional network, will be folded into a new regional full-service airline, codenamed Sapphire.

Details of other initiatives are still being worked out by the Join Collaboration Committees. The key areas of cooperation include:

■ ‘Pseudo inter-lining’: With MAS reducing its regional network, AirAsia will selectively be looking into acting as a feeder for MAS’s long-haul network. This form of ‘pseudo interlining’ will leverage off AirAsia’s “Fly-Thru” service, which allows passengers to connect to their next flight without the need to clear immigration, for a fee.

■ Engineering (MRO) activities. AirAsia outsources much of its engineering needs; this provides an opportunity for MAS to be its outsourcing agent.

■ Training of pilot and cabin crew: MAS could centralise its training facilities with AirAsia’s joint venture with CAE of Canada. Depending on the structure, training could become a profit centre instead of a cost centre.

■ Cargo: MAS can leverage off AirAsia’s regional network and its Red Box courier service which can act as a consolidator and feeder for MAS Cargo’s inter-continental operations.

■ Procurement of aircraft, engines and parts: (1) Larger discounts from the bulk purchase of aircraft, such as joint procurement of the wide-body Airbus A330 for AirAsiaX and MAS’s medium-haul routes. (2) Better economies of scale with greater commonality of parts and spares. (3) MAS can also leverage off AirAsia’s strong relationship with Airbus for better deals. Note that AirAsia is the largest single buyer of the A320 and the A320-NEO. Tony Fernandes was conferred the title of Officer of the Legion d’Honneur by the French government for his outstanding contributions to the aviation industry.

■ Better negotiating power: Suppliers are at a disadvantage, as they now have to negotiate en bloc. For instance, MAHB appears to suffer the relative loss of negotiating power. It has publicly announced and gazetted that increases in airport tax and landing charges were deferred at the last minute.

■ Catering: AirAsia to explore MAS’s catering facilities in KLIA which are being run by Lufthansa’s LSG-Sky Chef.

Committed to AirAsia AirAsia’s CEO Tony Fernandes stressed that AirAsia remains his main focus. He reiterated that his role in MAS is primarily advisory. He had said, “As a board member, I can only give advice”, stressing that the task “to turn around MAS, is a job of the new CEO.” Despite the tie-up, Tony Fernandes said that he will resist the measures that would be detrimental to AirAsia. For instance, he claimed to have resisted suggestions that AirAsia adopt full interlining capabilities so that it could act as a more effective feeder for MAS, as it is a departure from the LCC model.

Potential RM1.2 bn in savings from the tie-up

Firefly’s jet unit and MAS’s regional fleet to be folded into a new regional full-service airline

AirAsia will selectively be looking into acting as a feeder for MAS’s long-haul network

Joint procurement means larger discounts on aircraft and spares

AirAsia’s CEO Tony Fernandes stressed that AirAsia remains his main focus

12 October 2011

AirAsia


With the appointment of Ahmad Jauhari (AJ) as the new CEO MAS, the MAS Exco will be disbanded. We think this will be positive for AirAsia as it frees up CEO Tony Fernandes and Deputy CEO Kamaruddin Meranun.

AirAsia remains the core investment Despite all the other investments, Tony Fernandes has always stressed that AirAsia is still his main focus. The other investments within the Tune Group have their own CEO and management teams. However, in the case of AirAsia, both Tony Fernandes and partner remain at the helm of the company, as CEO and Deputy CEO, respectively. Although there are cross-selling opportunities, in our view, the other units are ultimately promoting AirAsia. For example, QPR jerseys flash the AirAsia brand across television in Europe and Asia, while AirAsiaX feed European travellers into AirAsia’s regional network.

Figure 30: Tune Air’s holdings Figure 31: Market value of Tune’s holdings

13

21

5

10

15

20

25

AirAsia MAS

(%)

1,149

959

850

900

950

1,000

1,050

1,100

1,150

1,200

AirAsia MAS

Market Value (RM mn)


More importantly, as illustrated above, AirAsia remains the more important holding for AirAsia. Despite having a “larger” 21% stake in MAS versus its 13% stake in AirAsia, Tune Air’s holdings in AirAsia is worth 20% more than its ‘larger’ stake in MAS.

Furthermore, we believe that there is greater long-term potential upside for AirAsia. At the end of the day, MAS is a Malaysian carrier that is ‘confined’ to Malaysia. AirAsia on the other hand is an ASEAN airline, with joint ventures in Thailand and Indonesia. As a group, AirAsia is the second largest Asian airline (by fleet size) and carries over 35% more passengers than Singapore Airlines. The group is set to grow even more, with the start of two new start-up airlines overseas.

AirAsia’s overseas ventures True to its name, AirAsia sees itself as not just an ASEAN brand, but an Asian airline. To this end, over the next 12 months the company will start two new overseas joint ventures: Philippines and Japan. However, AirAsia is not stopping here, and is actively engaged in talks to start up another LCC joint venture in North Asia.

Figure 32: AirAsia’s new JVs AirAsia Philippines AirAsia Japan

Stake (%) 40 49*

Start-up 4Q 2011 3Q 2012

Hub Airport Clark Airport, Manila Tokyo Narita Airport

Initial target market International Market Domestic market

Source: Company data * 33% voting rights

AirAsia remains the core investment for Tony Fernandes and Kamarudin Meranun

Tune Air’s stake in AirAsia is worth 20% more than its ‘larger’ stake in MAS

AirAsia can grow beyond Malaysia

AirAsia will start two new overseas ventures over the next 12 months

12 October 2011

AirAsia


The overseas partners AirAsia Philippines (AAP) will be the first one to kick off, having just received a temporary permit to operate international flights from Clark Airport from October 2011. (The approval for a permanent permit is still pending). Starting with two aircraft, AAP will mount flights to Singapore, Hong Kong and Macao. By end-2012, AAP is expected to have a fleet of four aircraft, which will grow to 15 aircraft in the next three to five years with operations expected to start in October 2011. AirAsia owns 40% of AAP, with the remaining 60% held by their local partners: ex-PLDT Chairman Antonio (Tonyboy) Cojuangco, Michael Romero (Harbour Centre Port Holdings) and AAP CEO Marianne Hontiveros.

Figure 33: AAP’s shareholding structure

Antonio

(Tony boy )

Cojuangco

20%

Michael

Romero

20%

AirAsia

Berhad

40%

Marianne

Hontiv eros

20%


Is there more in store for Singapore? AirAsia plans to start ‘night-stopping’ aircraft (parking overnight) in Singapore, to allow it to mount lucrative peak-hour morning flights from the Changi airport. The company has reportedly also advertised for local cabin crew. We believe that this could potentially be a prelude to AirAsia receiving an AOC licence in Singapore. If true, this could be a significant positive development for the company, potentially at the expense of Tiger Airways.

Growth potential abroad Despite the growth of Asia-based budget carriers including AirAsia, we believe that there is still room to grow. The market is far from its saturation point. If one looks at the Malaysian market, as shown below, only every other Malaysian takes a return flight each year. This pales in comparison to Singaporeans who on average take almost four return flights per year. The situation is even more acute in countries such Thailand, where only one in every three Thai take a round trip flight each year.

AirAsia Philippines (AAP) to start operations in 4Q11

Plans to start parking aircraft in Singapore

LCC travel market is far from its saturation point

12 October 2011

AirAsia


Figure 34: Annual round trip flight per capita in ASEAN

1.34

0.61

0.36

0.12 0.10 0.09 0.05 0.03

3.82

-

0.25

0.50

0.75

1.00

1.25

1.50

Singapore Brunei Malay sia Thailand Philipines Indonesia Cambodia Vietnam Laos

Source: The S-A-P Group

There is a significant room for growth in AirAsia’s new joint venture in the Philippines. For instance, only 12% of Filipinos take a round trip flight each year—this is one-third of Thailand and almost one-fifth of the Malaysian average.

Figure 35: Flights per capita vs. GDP per capita

Singapore

New Zealand

Australia

Brunei

Malaysia

Japan

ThailandPhilipines

(5,000)

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

- 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

Round trips per capita

GDP per capita (US$)

Source: The S-A-P Group

With hubs across ASEAN, AirAsia is able to tap into growing income levels of a market with almost 600 mn people. Thus, the long-term growth prospects for AirAsia as a group are tremendous. We believe it is this long-term growth potential that ensures CEO Tony Fernandes and Deputy CEO Kamarudin Meranun to remain committed to AirAsia.

Big in Japan Between the two new overseas ventures, we believe that AirAsia Japan (AAJ) has greater growth potential. To recap, in July 2010, AirAsia announced that it is forming a budget carrier with All Nippon Airways (ANA). AirAsia will own 40% of the joint venture, but will only have 33% of voting rights (in compliance with Japanese aviation laws). Under the

Only 12% of Filipinos take a round trip flight each year

Less than 5% of Vietnamese fly each year

AirAsia is able to tap into growing income levels of a market with almost 600 mn people

AirAsia Japan (AAJ) is a JV with All Nippon Airways (ANA)

12 October 2011

AirAsia


deal, AirAsia will provide the technical and commercial expertise on LCCs. Meanwhile ANA will transfer slots to AAJ, and assist in securing additional route rights.

In our view, AirAsia Japan is potentially a long-term positive development, as it allows AirAsia to tap into the lucrative Japanese domestic air travel market, where the LCC segment is underserved. LCC penetration rates, as shown below, are still low in Japan where LCCs account for only 9% of domestic capacity. This pales in comparison with the Asia Pacific average of 19%, and the global average of 24%.

Figure 36: Key domestic LCC penetration by capacity Jan-Jul-2011

56.5

38.5

24.2

18.9

9.1

- 10 20 30 40 50 60

Malay sia

Thailand

Worldw ide

Asia Pacific

Japan

(%)

Source: CAPA

The airline, which will have its first hub in Terminal 2 of Tokyo Narita Airport, is targeted to start operations in August 2012. Using Airbus A320s from Narita, not only can AAJ cover North Asian markets of China, Taiwan and Korea, it can also reach Northern Philippines and parts of Russia. Note that AAJ’s location in Tokyo Narita Terminal 2 allows it to tap into ANA's network which uses Tokyo Narita's Terminal 1 as its major hub.

Figure 37: AAJ’s operating radius Figure 38: Key destinations within AAJ’s reach


Starting with three to four aircraft in its first year of operations, AAJ aims to have about 30 planes in 2016. ANA’s CEO Shinichiro Ito expects AAJ’s annual sales to exceed ¥100 bn (RM3.3 bn) in the next five to six years. Assuming a 20% pre-tax margin, AAJ’s profit contribution could be equal to 37-34% of our FY11-13 PBT forecast for AirAsia.

LCCs account for only 9% of Japan’s domestic capacity

AAJ can tap into partner ANA’s traffic

AAJ aims to have about 30 planes in 2016

12 October 2011

AirAsia


Peach Aviation

ANA has a stake in another budget airline, Peach Aviation Ltd (unlisted), which was established with Hong Kong private equity firm First Eastern Investment Group. Scheduled to start operations in March 2012, Peach takes to the skies from its base in Osaka’s Kansai International Airport. Under the terms of the AirAsia-ANA agreement, a non-competition provision prohibits Peach Aviation from locating its base out of Tokyo Narita Airport. Note that, Kansai Airport is located almost 500 km away from Tokyo Narita.

Partial open skies in North Asia The North Asian region enjoys partial open skies between South Korea, Japan and China, where three, eight and 22 airports, respectively, are open for unlimited frequencies. Furthermore, there is an obvious room to grow for budget airlines such as AirAsia as the market is grossly underserved. As shown in the chart below, LCCs account for less than 7% of domestic capacity in North Asia.

Figure 39: Key domestic LCC penetration in North Asia (Jan-Jul-2011)

29.6

24.2

18.9

9.1

6.8

6

0

- 5 10 15 20 25 30 35

South Korea

Worldw ide

Asia Pacific

Japan

North Asia

China

Taiw an

(%)

Source: CAPA

Partial open skies policy improves connectivity, which positions Japan and South Korea to tap into the growth of outbound tourism from China. According to the World Tourism Organisation (UNWTO), China is now one of the top spenders on international tourism. In 2010, China spent US$55 bn on international travel, making it the world’s third-largest spender after Germany and the US. Reflecting the growth in Chinese economy and its burgeoning middle classes, the growth in outbound Chinese tourist spend has been the fastest in the world ‘multiplying expenditure four times since 2000.’ Since its seventh rank in 2005, China’s has overtaken Italy, Japan, France and the UK.

ANA’s other LCC, Peach Aviation, cannot operate from the Narita airport

Partial open skies between South Korea, Japan and China

AAJ can tap into the growth of outbound tourism from China

12 October 2011

AirAsia


Figure 40: 2010 International tourism expenditure 2010 spend 2009 spend Change Share

Rank Country (US$ bn) (US$ bn) (%) (%)

1 Germany 77.7 81.2 -4.3 8.5

2 United States 75.7 74.1 2.2 8.2

3 China 54.9 43.7 25.6 6.0

4 United Kingdom 48.6 50.1 -3.0 5.3

5 France 39.4 38.5 2.3 4.3

6 Canada 29.5 24.2 21.9 3.2

7 Japan 27.9 25.1 11.2 3.0

8 Italy 27.1 27.9 -2.9 2.9

9 Russia 26.5 20.9 26.8 2.9

10 Australia 22.5 17.6 27.8 2.5

Source: UNWTO

AirAsia is looking to start up another LCC joint venture in North Asia, as highlighted earlier. An LCC joint venture in China would be well placed to ride the wave of outbound Chinese travellers. However, it is most unlikely, in our view, due in part to the regulatory contracts. We believe that a start-up in either Taiwan or (in our view, more likely) Korea could be a more realistic option for AirAsia. In our view, a start-up in Korea would still allow AirAsia to tap into the China tourism market.

AirAsia could operate as a ‘virtual hub’ in China, akin to Singapore where it mounts flights from various hubs across ASEAN. This could be replicated in China, where AirAsia mounts flights from across hubs in Japan and Korea to key cities in China.

Figure 41: AirAsia’s virtual hub in Singapore Figure 42: AirAsia’s virtual hub in China?

Source: Company data Source: Company data, Credit Suisse estimates

China is now one of the top spenders on international tourism

AirAsia wants another JV in North Asia

A virtual hub in China via Japan and Korea?

12 October 2011

AirAsia


Attractive valuations AirAsia looks inexpensive in the range of 8x-10x P/E between FY11 and FY13, but this falls to 7-8x P/E if one annualises the unrecognised portion of income from its associates. Note that between FY06 and FY09, which covered the last financial crisis, European LCC leaders, Ryan Air and EasyJet, traded at a median forward P/E of 16x and 17x, respectively. We thus reiterate our OUTPERFORM rating on AirAsia, with a sum-of-the-parts-based target price of RM4.55 (40% potential upside).

How did Ryan & Easy fare during the last crisis? During the previous financial crisis, European budget airlines Ryan Air and EasyJet traded, as shown below, traded at a median forward P/E of 16.3x and 17.2x, respectively.

Figure 43: RyanAir P/E band: 2006-09 Figure 44: EasyJet P/E band: 2006-09

0

5

10

15

20

25

30

35

40

45

Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09

Hist median = 16.3x

(x )

0

5

10

15

20

25

30

35

Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09

Hist median = 17.2x

(x )


Attractive valuations At 10x FY11E and FY12E P/E, AirAsia looks inexpensive compared with the ‘crisis period’ valuation multiples of Ryan Air and EasyJet. As shown below, the stock is trading in the middle of the pack. However, these multiples are not reflective of the value of its overseas joint ventures, as the company does not equity account the profit contributions from its Thai and Indonesian units.

Maintain OUTPERFORM

Between 2006 and 2009, Ryan Air traded at a median forward P/E of 16x-17x …

… thus, at 10x FY11E and FY12E P/E, AirAsia looks inexpensive

12 October 2011

AirAsia


Figure 45: CY11E LCC sector P/E Figure 46: CY12E LCC sector P/E

(14.5)

(3.8)

7.6 8.19.7 10.3 10.4 11.1

15.8

20.4 39.5

-20

-15

-10

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6.8 6.9 7.08.7 9.1 9.5 9.9

11.7

18.527.4 48.0

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AirAsia’s unrecognised share of net profits from the Thai and Indonesian units in 1H11 stood at RM70 mn. If this unrecognised portion is annualised and added to AirAsia’s profit forecast, the adjusted P/E falls to 8x in FY11E and FY12E. This represents a 14-17% discount to the LCC sector median P/E in FY11E and FY12E.

Figure 47: CY12E comparative P/E including AirAsia’s

associates

Figure 48: CY12E comparative P/E including AirAsia’s

associates

(14.5)

(3.8)

7.6 8.1 8.3 9.7 10.3 10.4 11.1

15.820.4 39.5

-20

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Air A

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12 October 2011

AirAsia


Maintain OUTPERFORM We reiterate our OUTPERFORM rating on AirAsia and maintain RM4.55 target price (40% potential upside). We value the Malaysian operations on a P/E of 15x, Our RM4.55 target price is based on the sum of parts between the Malaysian earnings at 15x P/E, which is in line with the market P/E, and its associates at 3.5x EV/EBITDAR.

Figure 49: AirAsia’s target price RM

AirAsia’s FY11 EPS (excluding gains) 0.28

P/E multiple (x) 15

Equity value of Malaysian operations 4.17

Equity value of stake in its associates 0.38

Target price 4.55


In Figure 51 below, we have illustrated AirAsia’s potential equity value based on differing P/E for the Malaysian operations.

Figure 50: AirAsia’s valuation matrix FY11 EPS Value of Malaysia Value of Equity

P/E multiple (x) exc-gains (RM) operations (RM) associates (RM) value (RM)

10.0 x 0.28 2.78 0.38 3.16

11.0 x 0.28 3.06 0.38 3.44

12.0 x 0.28 3.34 0.38 3.72

12.5 x 0.28 3.48 0.38 3.86

13.0 x 0.28 3.61 0.38 3.99

14.0 x 0.28 3.89 0.38 4.27

15.0 x 0.28 4.17 0.38 4.55


Maintain OUTPERFORM rating

RM4.55 target price implies 40% potential upside

12 October 2011

AirAsia


Appendix: Fleet valuations Based on current market prices, AirAsia’s fleet of 100 aircraft is worth RM9.6 bn. Net of debt, this is worth RM1.33 per share.

Figure 51: AirAsia’s fleet valuations US$ No Av price (US$ mn)

Airbus A-320-200 2985.6 94 31.8 Boeing B737-300 15.5 6 2.6

Mkt value of aircraft (US$ mn) 3001.0 Exchange rate (RM/US$) 3.20

Mkt value of aircraft (RM mn) 9603.2 Total net debt at end FY11 (RM mn) (5,919.7)

Net mkt value of fleet (RM mn) 3,683.5

Total no of shares (mn) 2,770.3 Net value per share (RM) 1.33

Source: ASCEND, Company data, Credit Suisse estimates

Figure 52: Breakdown of AirAsia’s fleet valuations Market value Market value Market value Manufacturer (US$ mn) Manufacturer (US$ mn) Manufacturer (US$ mn)

1 Airbus A320 24.5 34 Airbus A320 28.8 67 Airbus A320 33.6 2 Airbus A320 24.5 35 Airbus A320 28.8 68 Airbus A320 33.6 3 Airbus A320 26.6 36 Airbus A320 31.1 69 Airbus A320 33.6 4 Airbus A320 26.6 37 Airbus A320 31.1 70 Airbus A320 33.6 5 Airbus A320 26.6 38 Airbus A320 31.1 71 Airbus A320 36.3 6 Airbus A320 26.6 39 Airbus A320 31.1 72 Airbus A320 36.3 7 Airbus A320 26.6 40 Airbus A320 31.1 73 Airbus A320 36.3 8 Airbus A320 26.6 41 Airbus A320 31.1 74 Airbus A320 36.3 9 Airbus A320 26.6 42 Airbus A320 31.1 75 Airbus A320 36.3 10 Airbus A320 26. 6 43 Airbus A320 31.1 76 Airbus A320 36.3 11 Airbus A320 26.6 44 Airbus A320 31.1 77 Airbus A320 36.3 12 Airbus A320 26.6 45 Airbus A320 31.1 78 Airbus A320 36.3 13 Airbus A320 26.6 46 Airbus A320 31.1 79 Airbus A320 36.3 14 Airbus A320 26.6 47 Airbus A320 31.1 80 Airbus A320 36.3 15 Airbus A320 26.6 48 Airbus A320 31.1 81 Airbus A320 36.3 16 Airbus A320 26.6 49 Airbus A320 31.1 82 Airbus A320 36.3 17 Airbus A320 28.8 50 Airbus A320 31.1 83 Airbus A320 36.3 18 Airbus A320 28.8 51 Airbus A320 31.1 84 Airbus A320 36.3 19 Airbus A320 28.8 52 Airbus A320 31.1 85 Airbus A320 36.3 20 Airbus A320 28.8 53 Airbus A320 31.1 86 Airbus A320 36.3 21 Airbus A320 28.8 54 Airbus A320 31.1 87 Airbus A320 39.3 22 Airbus A320 28.8 55 Airbus A320 31.1 88 Airbus A320 39.3 23 Airbus A320 28.8 56 Airbus A320 31.1 89 Airbus A320 39.3 24 Airbus A320 28.8 57 Airbus A320 33.6 90 Airbus A320 39.3 25 Airbus A320 28.8 58 Airbus A320 33.6 91 Airbus A320 39.3 26 Airbus A320 28.8 59 Airbus A320 33.6 92 Airbus A320 39.3 27 Airbus A320 28.8 60 Airbus A320 33.6 93 Airbus A320 39.3 28 Airbus A320 28.8 61 Airbus A320 33.6 94 Airbus A320 39.3 29 Airbus A320 28.8 62 Airbus A320 33.6 95 Boeing 737 (CFMI) 2.5 30 Airbus A320 28.8 63 Airbus A320 33.6 96 Boeing 737 (CFMI) 2.5 31 Airbus A320 28.8 64 Airbus A320 33.6 97 Boeing 737 (CFMI) 2.5 32 Airbus A320 28.8 65 Airbus A320 33.6 98 Boeing 737 (CFMI) 2.6 33 Airbus A320 28.8 66 Airbus A320 33.6 99 Boeing 737 (CFMI) 2.6 100 Boeing 737 (CFMI) 2.8

Total (US$) 909.4 Total (US$) 1,046.6 Total (US$) 1,045.1

Source: ASCEND.

AirAsia’s fleet is worth RM1.33/share

12 October 2011

AirAsia


Appendix: Aircraft orders AirAsia has ordered 200 Airbus A320-NEOs, with an option to purchase a further 100 aircraft. Reportedly worth US$17 bn, this works out to an estimated list price of US$85 mn per aircraft. This deal makes AirAsia the largest single buyer of the A320-NEO, which 15% fuel cost savings over AirAsia’s current A320-200s, an additional 2 MT payload (or 950 km more range). First delivery of the A320-NEO is expected to start from 2016, even as AirAsia’s current order of A320-200s concludes in 2016.

Figure 53: Aircraft delivery schedule: 2016-26 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

A320-200s 15 0 0 0 0 0 0 0 0 0 0

A320-NEO 4 14 18 19 20 21 23 24 24 24 9

Total 19 14 18 19 20 21 23 24 24 24 9


Why is AirAsia doing this?

AirAsia is planning for its long-term growth, including the new joint ventures in the Philippines and Japan, by locking in its long-term aircraft requirements. By ordering such large quantities at such an early stage of the aircraft development, we expect AirAsia to enjoy significant discounts over the list price of the aircraft. Under its previous aircraft order of the A320-200s (also a large and early order), we estimate that AirAsia enjoyed a discount of over 40% on the list price of the aircraft.

Furthermore, by 2016, AirAsia will have 16 aircraft that are 10 years old and over. A further 19 aircraft will hit the 10-year mark in 2017. We expect AirAsia to maintain a young fleet to enjoy lower maintenance costs and maintain its premium pricing power among the LCCs (which operate older aircraft). We also expect the company to dispose of older aircraft, and thus crystallise gains from the large discounts enjoyed from its A320-200 order. Therefore, in our view, this order will be part of its fleet renewal programme.

Note that by end-2026, AirAsia would be operating in at least six countries: Malaysia, Thailand, Indonesia, the Philippines, Japan and possibly another JV in North Asia. AirAsia Malaysia operates a fleet of 60 aircraft. If in 15 years, AirAsia’s three new joint ventures can grow to the size of the Malaysian operations today, it means they will require 180 aircraft thereby absorbing 90% of the A320-NEO orders.

Figure 54: AirAsia’s potential aircraft requirements abroad

Malay sia

60

North Asia

60

Philippines

60

Japan

60

A320-NEO

200

0

50

100

150

200

2011 By 2026 A320-NEO


AirAsia has ordered 200 Airbus A320-NEOs

First delivery of the NEO is expected in 2016

AirAsia to enjoy significant ‘early bird’ discounts

Order part of fleet renewal; by 2017, 25 aircraft would be over 10 years old

AirAsia’s three new JVs could take on 90% of the A320-NEOs

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AirAsia


Key financial data Figure 55: AirAsia’s P&L P&L (RM mn) FY09A 2010A 2011E 2012E 2013E

Revenue 3,178.9 3,992.7 4,964.3 5,561.9 6,184.7

EBITDAR 1,431.7 1,735.3 1,970.4 2,163.7 2,454.4

EBITDA 1,324.4 1,669.6 1,908.6 2,101.9 2,392.6

EBIT 876.8 1,148.7 1,271.3 1,405.5 1,612.8

Forex impact 91.1 288.1 117.0 0.0 0.0

Interest income 6.3 66.0 50.1 64.8 79.9

Interest cost (374.3) (377.9) (406.9) (439.4) (479.3)

Exceptional items 22.5 (25.6) (66.1) 0.0 0.0

Profit before tax 622.3 1,099.3 965.4 1,030.8 1,213.5

Income tax (11.2) (2.6) (19.3) (20.6) (24.3)

Deferred taxation (104.8) (28.8) (125.0) (150.0) (104.6)

Net profit 506.3 1,067.9 821.1 860.2 1,084.6

Net profit ex-gains & def tax 497.6 834.2 895.3 1,010.2 1,189.2


Figure 56: Cash flow statement (RM mn) FY09A 2010A 2011E 2012E 2013E

Operating profit 622.3 1,099.3 965.4 1,030.8 1,213.5

Depreciation 424.6 520.9 637.3 696.5 779.8

Change in working capital (262.6) 218.1 175.3 66.8 38.7

Taxes paid (3.8) (2.6) (19.3) (20.6) (24.3)

Others (44.2) (212.3) 0.0 (0.0) (0.0)

Cash flow from operations 736.3 1,623.4 1,758.6 1,773.5 2,007.7

Cash flow in investing activities

CAPEX (1,923.8) (1,903.5) (1,239.3) (1,476.7) (1,714.8)

Others 262.0 27.6 0.0 0.0 0.0

(1,661.8) (1,875.9) (1,239.3) (1,476.7) (1,714.8)

Cash flow from financing

Net proceeds from loans 1,008.9 990.3 561.3 738.3 857.4

Others 514.3 15.9 (83.1) (83.1) (83.1)

1,523.1 1,006.2 478.2 655.2 774.3

Net change in cash 597.7 753.7 997.6 952.1 1,067.2


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Figure 57: Balance sheet (RM mn) FY09A 2010A 2011E 2012E 2013E

Non current assets 9,177.4 10,350.6 10,827.6 11,457.8 12,288.2

Cash 746.3 1,501.0 2,498.5 3,450.6 4,517.8

Others 1,471.3 1,083.5 1,526.9 1,654.5 1,786.8

Current assets 2,217.6 2,584.4 4,025.4 5,105.2 6,304.6

Short-term loans 540.2 554.0 495.7 495.7 495.7

Other liabilities 1,166.1 996.4 1,615.1 1,809.6 1,980.5

Current liabilities 1,706.3 1,550.3 2,110.7 2,305.2 2,476.2

Long-term loans 7,067.7 7,302.9 7,922.5 8,660.8 9,518.2

Others 0.0 456.3 456.3 456.3 456.3

Non current liabilities 7,067.7 7,759.2 8,378.8 9,117.2 9,974.6

Net assets 2,621.0 3,625.4 4,363.4 5,140.5 6,142.1

Share capital 275.8 277.3 277.3 277.3 277.3

Reserves 2,345.2 3,348.1 4,086.1 4,863.2 5,864.7

Shareholders' equity 2,621.0 3,625.4 4,363.4 5,140.5 6,142.1


Figure 58: Key assumptions, financial ratios and margins FY09A FY10A FY11E FY12E FY13E

Key assumptions

Pax traffic growth (%) 20.7 12.6 15.1 6.8 7.3

ASK growth (%) 17.4 10.9 12.3 6.8 7.3

Load factor (%) 75.0 77.9 80.0 80.0 80.0

Rev / ASK growth (%) -5.1 13.3 10.7 4.9 3.7

Avg fare growth (%) -17.4 5.3 6.2 4.3 1.3

Avg ancillary growth (%) 46.5 39.2 29.5 12.5 10.0

Avg fuel cost 68 92 114 120 120

Group fleet size 80 94 102 114 128

Average fuel price (US$/bbl) 68 92 114 120 120

Financial ratios

P/E (x) 16.7 7.9 10.3 9.9 7.8

P/B (x) 3.2 2.3 1.9 1.6 1.4

ROE (%) 24.0 34.2 20.6 18.1 19.2

ROA (%) 4.4 8.3 5.5 5.2 5.8

Margins (%)

EBIT 27.6 28.8 25.6 25.3 26.1

EBITDA 41.7 41.8 38.4 37.8 38.7

EBITDAR 45.0 43.5 39.7 38.9 39.7

Pre-tax 19.6 27.5 19.4 18.5 19.6


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AirAsia


Companies Mentioned (Price as of 11 Oct 11) Air Arabia (AIRA.DU, Dhs0.61, NEUTRAL, TP Dhs1.02) Air Canada (ACa.TO, C$1.36) Air France-KLM (AIRF.PA, Eu5.37, UNDERPERFORM [V], TP Eu4.30) AirAsia (AIRA.KL, RM3.24, OUTPERFORM, TP RM4.55) All Nippon Airways Co Ltd (9202, ¥243, NEUTRAL, TP ¥280, MARKET WEIGHT) CAE Inc. (CAE.TO, C$9.54, OUTPERFORM, TP C$13.00) Cathay Pacific (0293.HK, HK$13.34, OUTPERFORM, TP HK$19.50) Deutsche Lufthansa (LHAG.DE, Eu9.80, OUTPERFORM, TP Eu9.75) EADS (EAD.PA, Eu22.41) easyJet (EZJ.L, 364 p, OUTPERFORM, TP 412.00 p) Expedia Inc. (EXPE, $28.23, NEUTRAL, TP $37.00) Gol (GOLL4, R$12.46, NEUTRAL, TP R$16.00) International Airlines Group (ICAG.L, 162 p, NEUTRAL, TP 164.00 p) LAN Airlines (LFL, $21.88, NEUTRAL, TP $32.00) Malaysia Airlines (MASM.KL, RM1.40, OUTPERFORM, TP RM1.95) Malaysia Airports (MAHB.KL, RM5.40, OUTPERFORM, TP RM7.20) Orix (8591, ¥6,370, OUTPERFORM, TP ¥8,300, OVERWEIGHT) Philippine Long Distance Telephone (TEL.PS, P2,210.00, OUTPERFORM, TP P2,800.00) Qantas Airways (QAN.AX, A$1.55, OUTPERFORM, TP A$3.00) Ryanair (RYA.I, Eu3.20, OUTPERFORM, TP Eu3.95) Singapore Airlines (SIAL.SI, S$11.31, NEUTRAL, TP S$12.00) TAM Linhas Aereas (TAMM4, R$29.49, OUTPERFORM [V], TP R$45.00) Thai Airways International (THAI.BK, Bt21.30, OUTPERFORM [V], TP Bt39.10) Tiger Airways (TAHL.SI, S$0.67, UNDERPERFORM, TP S$0.73) Virgin Blue Holdings (VBA.AX, A$0.32, OUTPERFORM [V], TP A$0.42)

Disclosure Appendix

Important Global Disclosures I, Annuar Aziz, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for AIRA.KL AIRA.KL Closing

Price Target

Price

Initiation/ Date (RM) (RM) Rating Assumption 01-Dec-08 .975 1.3 16-Mar-09 .95 1.4 02-Jun-09 1.31 1.9 13-Aug-09 1.46 1.85 31-Aug-09 1.37 R 25-Sep-09 1.39 1.8 O 05-Nov-09 1.32 1.7 13-Jul-10 1.4 1.6 23-Jul-10 1.4 1.8 19-Aug-10 1.73 2.05 15-Oct-10 2.36 2.7 12-Nov-10 2.33 3.9 26-Nov-10 2.61 4.3 09-May-11 3.1 4.8 24-Aug-11 3.45 4.55

1 1

2 2 2 2 22

2

3

44

55

OR

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

12-Oct-

08

12-Dec-0

8

12-Fe

b-09

12-Apr-

09

12-Ju

n-09

12-Aug

-09

12-O

ct-09

12-D

ec-09

12-F

eb-10

12-Apr-1

0

12-Jun

-10

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-10

12-O

ct-10

12-D

ec-10

12-Feb

-11

12-Apr-1

1

12-Jun

-11

12-Aug-1

1

Closing Price Target Price Initia tion /Assumption Rating

RM

O=Outperform; N=Neutra l; U=Underperfo rm; R=Restricted ; NR=No t Rated; NC=Not Covered

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities.

12 October 2011

AirAsia


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See the Companies Mentioned section for full company names. Price Target: (12 months) for (AIRA.KL) Method: The RM4.55 target price is based on the sum of parts between the Malaysian earnings at 15x P/E, and its associates at 3.5x EV/EBITDAR. This is backed up by the value of RM1.33 its fleet based on current market prices. Risks: The key risks to our target price of RM4.55 for Air Asia are: 1) passenger traffic demand 2) market prices of aircraft 3) AirAsia's net debt levels 4) potential delays in delivery of new planes, and 5) jet fuel prices Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names. The subject company (AIRA.KL) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (AIRA.KL) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (AIRA.KL) within the next 3 months. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

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Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

12 October 2011

AirAsia


For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

Credit Suisse Securities (Europe) Limited acts as broker to EZJ.L.

The following disclosed European company/ies have estimates that comply with IFRS: AIRF.PA, LHAG.DE, EAD.PA, EZJ.L, RYA.I.

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For Thai listed companies mentioned in this report, the independent 2008 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Thai Airways International(Very Good). Taiwanese Disclosures: Reports written by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers.

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12 October 2011 Asia Pacific/Malaysia

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Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. Any Nielsen Media Research material contained in this report represents Nielsen Media Research's estimates and does not represent facts. NMR has neither reviewed nor approved this report and/or any of the statements made herein. 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