News   Media news reported that PT Lion Mentari Airlines had entered into a JV (49:51) with Nadi Sdn Bhd (a unit of the National Aerospace & Defense Industries or formerly known as Aerospace Industries Malaysia Sdn Bhd) to set up a new low-cost carrier in Malaysia called Malindo Airways (Malindo). Malindo plans to offer ticket prices lower than AirAsia. It will start operation from KL to Indonesia in May 2013 and will use KLIA as the base. 

Comments   We are neutral on this news as we do not see Malindo as a threat for AirAsia in the near term. In a longer term, for AirAsia to take a beating, it will depend on the sustainability of Malindo to offer such lower ticket prices than AirAsia, which eventually will affect Malindo's profit margin. On top of that, AirAsia's extensive marketing platform (website), high utilisation (load factor), strong brand and ancillary income contribution will be the other sets of barrier for Malindo to fight against.

 We understand that Malindo has ordered 230 737 aircrafts with the delivery to span over the next 10 years. With the uncertainties in the global economic front, we are less optimistic on the financing of the aircrafts despite its strong relationship with the supplier i.e. Boeing or Airbus.     

 The immediate impact to AirAsia will be the contraction of its profit margin due to a potential price war. We are unable to gauge the impact at this juncture, but we opine that AirAsia will be able to make up for any pricing cuts with its ancillary income and wide connectivity within the AirAsia group.

 To recap, Lion Airlines holds almost 40% of the Indonesian domestic market. Based on our visit to Indonesia, we gather that Lion Airlines is also known for its price-throwing exercise and cancelling flights due to low loads close to the departure time, which is jeopardising its profitability.  

Outlook  AirAsia will be able to leverage on Batavia's existing domestic customer to penetrate the local market faster while Indonesia AirAsia ('IAA') will feed Batavia with its international passengers. 

Forecast  No changes in our forecasts for FY12E and FY13E.

Rating Maintain OUTPERFORM

 We are maintaining our OUTPERFORM recommendation for AirAsia. As the share price corrected (-10%) since its 2Q12 results, we see this as an opportunity for investors to accumulate.

Valuation   No changes in our Target Price of RM4.06, which is based on 13x PER of FY13 earnings.

Risks  A spike in fuel price above USD130/barrel.