KUALA LUMPUR (May 15): AirAsia Bhd signed a memorandum of understanding (MoU) with China Everbright Group and the Henan Government Working Group to jointly explore the planned establishment of a budget airline in China.
AirAsia told Bursa Malaysia today that the MoU enabled AirAsia, Everbright and the Henan Government "to confirm their interest" in forming joint venture (JV) entity AirAsia (China). Henan is a province in central China.
AirAsia said the MoU parties planned to incorporate AirAsia (China) in Henan's capital city Zhengzhou, which is intended to be the headquarters of AirAsia (China).
"The MoU creates no legally binding contractual relationship between the parties and is intended for the parties to confirm their interest in establishing a joint venture for a low cost airline to be known as AirAsia (China) in China either through an acquisition or by obtaining a new airline licence. Under the MoU, it is intended that AirAsia (China) will submit an application for an operating permit in China to Civil Aviation Administration of China (CAAC).
"In addition to the airline, the JV will also look into developing infrastructure. The JV will invest in the development of the following in Zhengzhou: a low cost carrier terminal, an aviation academy for pilots, engineers and crew training as well as a maintenance, repair and overhaul provider (MRO)," AirAsia said.
At Bursa Malaysia, AirAsia's share trade was suspended between 9am and 10am today in conjunction with the announcement. At 10:08am, AirAsia shares rose five sen or 1.44% to RM3.53 for a market value of RM11.63 billion.
The stock saw some two million shares traded.
Analysts say JV positive for AirAsia
AmInvestment Bank Bhd analyst Azman Hussin said the research firm expects the JV to augur well for AirAsia as the company is already the largest foreign budget airline operating in China.
"We believe the MoU for the JV is positive to AirAsia's long-term outlook, with it being the largest foreign LCC (low cost carrier) operating in China. It was the first foreign LCC to enter China in 2005, and AirAsia and AirAsiaX currently fly to 15 destinations in China. Moreover, with the venture into China, AirAsia will complete its presence in all the major territories in the Asia Pacific region, having successfully built its presence in Malaysia, Thailand, Indonesia, the Philippines, India and Japan.
"We expect the JV to result in an increase in the number of destinations and frequency of Asia's operations in China, which should translate into larger revenue and earnings contributions from its operations in the country over the long term. However, we believe the impact is minimal in the short to medium term, as the potential JV is still in the preliminary stage," Azman said.
As such, Azman said AmInvestment maintained its AirAsia earnings forecast and share target price (TP) at RM3.63. He said AmInvestment has an unchanged buy call for AirAsia shares.
MIDF Amanah Investment Bank Bhd analyst Tay Yow Ken said MIDF upped its AirAsia TP to RM4.06 from RM3.45 with an unchanged buy call.
Tay said MIDF raised its AirAsia TP based on a "higher target forward price-to-earnings ratio of 10x FY17 EPS (previously 8.5x), on par with its regional LCC peers".
"No changes to earnings pending further details," he said.