Asia Aviation

The short-haul market, AAV’s niche, is seeing rapid growth, particularly from China, AAV’s major market. Though Chinese arrivals (~20% of revenue) surged 67% YoY in October and average jet fuel prices (~40% of cost) have come down 13% QTD, AAV’s share price has declined by 11% QTD. We see a good future for AAV with a jump in earnings in 4Q14 after losses during 2Q-3Q14 and have raised our core earnings forecast by 15% for 2015 and 6% for 2016. We rate AAV as a BUY with a new end-2015 TP of Bt7/share (from mid-2015 at Bt5/share) based on 23x PE. 

Gaining altitude. Thai tourism is heading back up after the trough created by the country’s turbulent politics, brightened by stability and stimulus measures. October international tourist arrivals were 2.1mn, up 6% YoY, exhibiting the first YoY growth after contracting YoY since February 2014. The highlight was a 67% YoY leap to a record high for arrivals from China, at 18% supplying the greatest number of tourists by country. Since ~80% of AAV’s passengers are tourists and ~20% of AAV’s revenue comes from passengers from China, AAV is best positioned to gain from these positives. Currently AAV has 14 routes to major cities in China with an average load factor of 85%.

Earnings jump in 4Q14. The climate is now much better for AAV, and we expect earnings to return to profit after sinking into red ink in 2Q-3Q14, backed by more passengers at higher fares and lower jet fuel cost. AAV reports an 18% YoY rise in passengers carried in October and has boosted daily flights in November to 265 from 202 in 3Q14. It says pressure on fares is easing as Thai tourism gets back into gear and it expects 4Q14 average fare to come in at Bt1,700/passenger, +10% QoQ from the low of Bt1,542 in 3Q14. On the cost side, AAV is basking in the decline in jet fuel price. Thus far this quarter, average Singapore jet fuel price is down 13% from the 3Q14 average. At 44% of its operating costs in 9M14, jet fuel is the major cost component. In response to the lower price, AAV has lowered its hedging position to 10% of jet fuel usage from the usual 30-35%. We expect the plus from lower jet fuel price to show up in late 4Q14.

Forecasts raised, new TP of Bt7/share. We raise our core earnings forecast by 15% for 2015 and 6% for 2016, largely reflecting our reduction in jet fuel price assumption to US$120/bbl from US$125/bbl. The new forecast indicates AAV will bounce back from 2014’s exceptionally low core earnings of Bt46mn to Bt1.4bn in 2015 and Bt1.7bn in 2016, working out to CAGR of 24%. Our end-2015 TP is Bt7/share (up from mid-2015 of Bt5/share) based on 23x PE (+1.0SD historical average of regional airlines).

Good opportunity to BUY. In our view, this is a good time to reload portfolios with AAV, as its share price has been pulled down 11% QTD despite the onset of positives that include the revival of Thai tourism, a strong influx of Chinese tourists and declining jet fuel price. For the longer-term, as Thailand’s leading low-cost carrier, AAV is the best play on the rapid growth of short-haul tourists, particularly from China, as it has the broadest route network covering Thailand’s major destinations and major cities in East Asia with which to capture the enlarged traveling demand.