Wednesday, April 23, 2008

(8) Air Asia : 一个朋友的提问

很开心,因为,终于有志同道合的朋友提问关于股票. 我花了一个早上的时间,仔细的分析了 Air Asia. 虽然, 他只是问如何从年报计算 ROE. 我还是长篇大论的分析了整家公司给他. 希望, 不会被他嫌弃. 哈! 既然分析了, 那就无妨把我的心血给贴上来, 做个记录也好

Here are some good points:
Revenue growth by 49.7% - Excellent!
Cost of sale – Well controlled.
Gross Profit – Up by >80%, excellent!
Other operating Income – Up significantly, excellent! BUT, be careful, it did not stated clearly what is income, from where? So, I doubt the management trying to hide something which does not want to let investor know.
Admin Expenses – reduce significantly, excellent! (Note: Admin expenses including staffing cost. So, when u study this, you need to confirm if the company retrench people in order to reduce the expenses. In this case, Air Asia did a good job, bcox they did it by reducing general expenses, not staffing cost. Look at it’s Note 6 explanation as below.)

Now, come to analyze if Air Asia really doing well.
From it’s Income Statements:
Other operating expenses – increase from 73 to 177. Also, it did not clarify what is this. Same like the point 4 above. So, if the company trying to do “something”, how can you check on it?
Profit Before Tax & Profit After Tax. Be extra careful on this. You need to find out why Air Asia’s PAT is higher than PBT? Normally, PAT should lower after tax deduction. But Air Asia is opposite. Hehe… see the hints… That is because of “Deferred Taxation” which amounting to 225M. What is this? Look at Note 28…

So, what does it means? Air Asia can either enjoy this incentive until 30 June 2009, or after it has fully utilized the total incentive been allocated. So, how much is the incentive, sorry.. I dun know where to find it. BUT, if you read it carefully, it said that “60% on qualifying expenditure incurred”. Think about it’s biz. Air Asia most valuable asset is aircraft. Aircraft expenses is super high, either buying a new one or maintenance cost. So, I guess, the incentive will be fully utilized very soon. Then, what will happened? Hehe… of course, you will not able to see such huge “Deferred Taxation” any more. And this will hit it’s bottom line of NET PROFIT. Secondly, bcox of tax incentive, if you look at it’s reported tax, ONLY 5,118 vs PBT of 278,049. Normal company tax is 26%. Air Asia only paying 1.8% because of it’s tax incentive status! As stated in it’s report, you know this incentive is not going to be last long. So, you can easily imagine what will happened to it’s net earning after considering no “Deferred Taxation” and need to pay 26% income tax! Got it?? So, dun trust on it’s reported EPS! Do your own judgment!

Now, look at it’s Balance Sheet:
In Non-Current Assets, under Property, Plant and Equipment, you can see it has been increase tremendously. I believed this is their investment in buying new aircraft. So, you can easily imagine, to maintain or growth it’s biz, air line companies needs to pump very huge CAPEX. Do you like this biz model?
In Current Assets, everything looks fine. Especially in “Deposits, cash and bank balances”, it increased from 425,641 to 595,243. Looks excellent, right? This $$ is belongs to shareholder le.. if you run a biz, of course you want to see you bank balance increase ma.. correct not? Everything else is secondary. When biz earned $$, only bank balances will increase ma… But, but… be careful, you can not judge this way. You need to find out where is this $$$ from? Then you have study it’s Cash Flow statements. Will explain to you later, when we go to Cash Flow. Remember this, very important point!

Look at it’s Non-Current Liabilities. (This means long term loans). “Borrowings” increase from 787,276 to 2,303,488. Haha… see… Now you got some ideas why it’s piggy bank cash increase? Dun border about that 1st. Let’s do some exercise. Remember, when you invest in it’s share, means you are the shareholder of the company, you are also the TAUKE like Tony, just that you are small TAUKE, he is bigger one la… So, company earning, is your earning; company money is also your money; company’s DEBT is also your debt! Now, look back YOUR company’s “Profit from operations” (I dun use Net Profit, bcox of the Tax Incentive issue). Is ONLY 278,851. ASSUMING this is your net profit (remember, you actually need to pay 26% income tax), how many years for you to pay off the long term debt? 2,303,488 / 278,851 = 8.26 years!!! This has not taking interest that you need to pay to bank of the amount of borrowing yet! So, do you like to join them?

Now, come to Cash Flow Statements:
Look at CASH FLOW FROM OPERATING ACTIVITIES, under Depreciation. This is the depreciation for fixed assets. In this case, majority should come from aircraft. Increased from 71,066 to 175,366. With the new purchased of aircraft, I believed Air Asia next year’s will be even higher.

Look at CASH FLOW FROM INVESTING ACTIVITIES, under Property, plant and equipment – Additions. This usually indicate a company’s investment in new machine OR machine maintenance COST. Be careful, an ideal biz is with very minimum CAPEX on this item. Air Asia assets is aircraft. How much do you think for aircraft maintenance? Hehe.. got it? Dun ask me, I also dun know. I only know is very very very expensive. Look at the number, increased by double! And, this eventually give a big impact on “Net cash used in investing activities” – total of 1,942,712!!! The “Net Cash from operating activities” only 595,120. So, how Air Asia can support such huge CAPEX? The answer is in CASH FLOW FROM FINANCING ACTIVITIES!

Look at CASH FLOW FROM FINANCING ACTIVITIES, under “Proceeds from borrowings” – total of 1,803,306! So, now you should understand why Air Asia bank balances can increase. It’s purely from borrowing – means long term DEBT! When you borrow money, you need to pay back with INTEREST, right? Now, look at “Repayment of borrowings”, increased from 118,296 to 301,357! With the drawdown of new borrowing – 1,803,306, you can easily predict that next year Air Asia got to make much more repayment! The “Profit from operations” only 278,851, need to use to support CAPEX, bank interest and repayment, mana cukup…. So, if not enough, what will Air Asia do again? Keep on increase borrowing loh…
When this happened, don’t forget that Air Asia will have to pay higher and higher bank interest!! How high is it? Look at it’s 2008 Q1 quarterly report, you will get the answer.
In Note 9, you can find 2007 full year bank interest. As you can see, 2007 compared to 2006, already increased from 21,342 to 104,016!!!
And, what happened to Q1, 2008, look at it:
Only in Q1, the interest cost is already 40,493! So, if full year, how much? = 40,493 x 4 = 161,972!!! Another 60% cost increase, JUST on bank interest. Not finish yet… look at Q1, 2008 depreciation:
Look at the trend, 2006 – 71,066, 2007 – 175,366, Q1 08 – 63,776 or (63,776 x 4 = 255,104 full year 2008)!!! Do you like this? Secondly, look at maintenance cost or CAPEX in Q1-08,
Another huge increase! Which translate into full year of (776,717 x 4 = 3,106,868). Again, 3 years trend: 1,261,993 (2006) > 2,959,817 (2007) > 3,106,868 (2008). So, with such huge CAPEX, do you think what Air Asia will have to do? Yeah… borrow more $$$. Now look at it’s borrowing in Q1-08. From it’s Q1-08 income statements, it’s long term loan shows:
Another increased!! Now, look at it’s Q1-08 Cash Flow from Financing Activities:

Just in Q1-08, Air Asia raised another term loan of 655,867!!! Bila baru boleh habis bayar DEBT???
So, do you still interested to know what is Air Asia’s ROE??? Haha… I bet you will run away….
Anyway, ROE = Net Profit / Shareholder’s Equity
Based on Air Asia’s FY2007 report,
Net Profit is = 498,057
Shareholder’s Equity = 1,661,842
So, ROE will be = 29.97.
Wau, incredible! But, but… remember, the Net Profit is with tax incentive of 225,126 and much much lower Tax Rate of 1.8% compared to norm of 26%.
And, most importantly, in high DEBT company like Air Asia, you should not rate is GOOD even with high ROE. Because, you have not consider it’s long term loan of 2,303,676. You have to access this type of company from many other aspects. And, if you would like to understand it’s “REAL” return, a more conservative way is to judge it based on Return on Total Assets, which will take the debt into consideration as well. This is much safer way to understand if this biz is worth to invest.
Overall, high CAPEX industry normally is not worth for investment. Like air line industry, car manufacturer and etc. Because it needs huge capital to support such business. If Air Asia want to growth, it has to introduce more route to worldwide. By doing so, it MUST buy more airplanes. Indirectly, CAPEX go up, maintenance cost go up. And as you know, aircraft just like our car, the value will depreciate like hell. Unlike property company, they are holding vacant land. Land will appreciate over time. Just ask yourself, if you are the boss, would you prefer your assets’ value keep on increasing or decrease?
No doubt Air Asia is very successful in getting public using their airline and the number of passenger keep increasing. But, think of it different way. Why people choose Air Asia? Purely because of cheaper air ticket, NOTHING else! So, meaning to say, Air Asia is operating in PRICE war business. How far can it sustained? Furthermore, the oil price is so high, how much can it pass on to consumer? Think this way. If tomorrow Air Asia increase higher price, people can deferred their mood of traveling, until the package become more attractive, right? Because traveling is not a MUST expenses, it is purely on people’s NEEDS or DESIRE.
Look at milk powder, like Nestle, Dutch Lady and etc. When the raw material increase, they also announced price increase. Do they worry about losing customer based? They don’t. Because, parents still need to buy milk to feed their babies. That is a MUST. When rubber price increase, what happened to car tyres manufacturer? They just pass down to consumer! Because you can put yourself to safety risk if your car tyres already botak.