AirAsia has signed a memorandum of understanding (MoU) with Everbright and Henan Government Working Group to establish a low-cost carrier (LCC) in China. The MoU outlines how the parties will incorporate a joint venture (JV) to be known as AirAsia (China) fo

AirAsia has signed a memorandum of understanding (MoU) with Everbright and Henan Government Working Group to establish a low-cost carrier (LCC) in China. The MoU outlines how the parties will incorporate a joint venture (JV) to be known as AirAsia (China) for the purpose of operating a low-cost aviation business based in Zhengzhou, the capital of Henan province in central China. Additionally, AirAsia (China) will invest in aviation infrastructure, including a dedicated LC terminal at Zhengzhou airport and an aviation academy to train pilots, crew and engineers, as well as maintenance, repair and overhaul (MRO) facilities to service aircraft.

We understand that Zhengzhou was chosen as the base for AirAsia’s entrance into China due to its strategic location and importance as a logistics hub. As China’s gateway to Europe, Zhengzhou is located at the centre of a vast rail, highway and air transport network that makes up the base of China’s development plans for its central and western regions. 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. We make no changes to our FY17-19F earnings forecasts. Maintain BUY, with an unchanged fair value of RM3.63 per share, based on 10x CY18 P/E, on par with its regional peers.