Highlights/ Comments

• We had dialed in for AirAsia Analyst briefing conference call for the recent price movement of AirAsia Bhd due to a foreign house report on AirAsia. We maintain our positive views on this stock as we believe AirAsia fundamentals are still intact and management has addressed investors’ concern about the issues of contention.

• The main concern was whether AirAsia will be able to retrieve back outstanding amount due from its associates (amounting up to RM2.7bn; consist of lease payments and some working capital).

• Management are expected to retrieve back at least RM1bn by 2017 from its associates through 3 steps which are: o Raising share capital to approximately USD100m; o Pre-IPO – Raising a minimum of USD100m each from new investor through Convertible bond issuance from IAA and PAA respectively and; o IPO for IAA and PAA in 2017.

• We understand AirAsia are relentless in their effort to secure investors to invest in their Pre-IPO exercise (subscribe to the Convertible bond issuance) and we believe they will be able to get it done as: 1) based on AirAsia forward bookings data, IAA and PAA are expected to perform better in 2H15, and we forecasted IAA to be profitable in FY16; and 2) the imminent ASEAN Open Sky Policy which will enable airlines to be less regulated in getting routes would make IAA and PAA more alluring.

• Going forward, IAA will meet lease payment and brand license fees due to AirAsia (PAA has not miss these payments) and the amount due from AirAsia’s associates would not rise anymore.

• We understand that worst case scenario; AirAsia might not be able to get investors for the Pre-IPO exercise which might postpone the IPO of IAA and PAA. Nonetheless, we believe that management is looking into this matters and should be given time to eradicate this issue.

• We believe the sell down is overdone, and we remain positive with AirAsia performance this year, given a rationalized market from MAS restructuring and route rationalization.

Risks

• World crisis (ie. war, terrorism and epidemic outbreak); surge in jet fuel price; US$ appreciation; weak air travel demand; and high speed train infrastructure between Singapore and Pulau Pinang.

Forecasts

• Unchanged

Rating

• Buy

Positives

• 1) Sustaining lowest cost LCC operator in Asia with largest network and strong brand name; 2) Low jet fuel price; 3) Increasing ancillary income; and 4) Routes rationalization of major competitor MAS.

Negatives

• 1) Higher cost of living faced by consumers (from GST implementation); and 2) Regional air-demand slowdown and political issues.

Valuation

• Maintained to BUY with TP of RM3.11 based on unchanged 10% discount to SOP.

Source: Hong Leong Investment Bank Research - 18 Jun 2015