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Asia Aviation

Great weather for flying BUY

Asia Aviation Plc (AAV)

Key takeaways from NDR in Singapore. We arranged a non-deal roadshow with

AAV, led by Khun Tassapon Bijleveld (CEO), in Singapore this week. Investors appeared

positive towards company-specific factors, i.e. the move to Don Muang and the fleet

expansion, industry-specific factors such as the LT growth potential for low cost

carriers (LCC), as well as its strong financial status (net cash of Bt5.2bn at the end of

June 2012). Other key questions focused on fuel hedging strategies and competition.

Good days for 4Q12 and 2013. Days ahead look good, backed by continued delivery

of new planes (two in 4Q12 and six in 2013), more profit from routes begun early this

year, recovery of ancillary revenue after adjusting baggage fees from June 2012 and

new products (red carpet service, lounge) and savings from moving to Don Mueang.

Fleet and route network strategies. AAV now has 25 planes, but will end the year

with 27 in its fleet and plans to add five to six each year to bring the total to 48 at the

end of 2016F. In 2H12, it aims to open new routes - BKK-Mandalay/Wuhan and Xi'an -

and increase the flight frequencies for BKK-Yangon/Ho Chi Minh City/Surat Thani/Hat

Yai/Krabi/Trang and Chiangmai. Longer term, AAV believes it will be able to bump up

the number of daily flights to primary destinations (i.e. in the domestic market) as well

as add new routes (i.e. in Southern China and Indochina).

Strong market demand. AAV sees market demand as strong. Backing this view is

Thailand's strength as a tourism destination (4th highest tourist arrivals in the region),

the steady upward trend in tourist arrivals regardless of past events such as the floods,

political unrest and the outbreak of disease. It also sees opportunities to grow since

Thailand's LCC penetration (41percent for domestic and 14percent for international markets) is still

low and there is an ample untapped market in China where there are either no or few

competitors. It also anticipates high travel demand across the region from AEC.

The move to Don Muang a positive. All Thai Air Asia's domestic and international

flights moved to Don Mueang on 1 Oct 2012. Passengers are finding this move provides

them greater convenience in terms of more check-in counters, shorter distance to

gates, and faster baggage retrieval. The company will gain on ST cost savings from the

10-30% reduction in airport charges for Oct 2012-Sep 2015 and 1-2% lower jet fuel costs

from the shorter runways and shorter queues for takeoffs and landings. Expenses from

the move to Don Muang were comparatively small, with 75% capitalized and the rest

booked as expenses in 4Q12. Longer term, the large capacity available at Don Muang

will support its aggressive fleet expansion.

Fuel hedging strategy. AAV has hedged up to 28% of jet fuel cost in 4Q12 with a

policy to hedge 30-40% of jet fuel usage to match forward bookings. If fuel continues

to rise, it may consider adjusting ancillary revenue and fuel surcharge.

Competition. AAV views competition in the Thai market is not yet a concern thus far.

Its key success factors are international branding (strong load factor) and better cost

control that gives it a better margin despite pricing 15-20% below its competitors.

Maintain BUY. We maintain BUY with a new mid-13 PT of Bt5.1 (from Bt4.3), based

on 16x PE vs. 2-year EPS growth of 23% (+0.5SD on 7-year PE on Air Asia Berhad vs.

average EPS growth of 20%). We like AAV for: 1) robust traffic and the high season in

the ST; 2) continued fleet expansion; 3) cost reduction from the move to Don Mueang.

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