GMT Research on AirAsia – “The Da Vinci Code” Alike Analysis

First of all, I would like to thank a friend who shares the famous GMT Research report on AirAsia with me.

Last night (19 Jun 2015), GMT Research released a video: AIRASIA: New Dog, Old Tricks

Due to copyright, I won’t be able to share the report here.

SmileSmileSmileI am writing this post while playing game with my son SmileSmileSmile

At the first glance, the report made me very nervous; but after few times of reading, “The Da Vinci Code” popped up in my mind. Writing style of that report is like “The Da Vinci Code” by Dan Brown, where the writer of the report managed to connect the dots by relating couple of known issues in AirAsia and some assumptions. I fully respect capability of the writer. Salute!

The report highlights the following issues (which are not new):

  1. Gaming the Associates – AirAsia boosted their profits by 39% over the past 5 years through related party transactions with associates (operating leases with related parties). This model is no longer sustainable. Now, these associates have not only stopped paying  their bills, but require AirAsia’s financial support. This is related to Asia Aviation Capital.
    The report uses “Pyramid Scheme” to describe this model. This is really frightening. GMT claims that the current group structure is designed to facilitate a pyramid scheme to the benefit of AirAsia. Having avoided consolidation, intercompany transactions do not need to be eliminated, creating  the potential for dubious profit generation.
    My opinion:
  1. Going concern status of its Indonesian and Philippines associate and potential impairment of inter-co loans. The company’s FY14 audited accounts states a RM1.2B financial assets that are past due but was not impaired. In its FY14 FS audited by PricewaterhouseCoopers, financial assets that are past due but not impaired amount to RM1.2bn (RM0.45/sh). No impairment was made as management is of the view that these amounts are recoverable.
  2. Although I have been aware of large related party transactions with associates, this report enlighten me about the effect of “Pyramid Scheme”.
  3. I am not sure whether AirAsia purposely design the group structure in this way. It could be due to agreement with the local partner, or local statutory law. Apparently, Thailand, Indonesia, and India disallow foreign shareholding in a company more than 49%; as for Philippines, the limit is 40%. Why didn’t GMT mention this in the report?
    1. 22 Jun 2015 – Its audit committee chairman said the group did not consolidate associates’ financials as it would be a breach of aviation regulations in countries where the budget airline has a presence. Any change in our present relationship with the asssociate companies, be it in equity shareholdings or shareholders agreement, that gives AAB (AirAsia) legal control will result in loss of the associates’ airline operating licenses
  4. During AirAsia AGM 2015, Tony told us that he would like to maintain the current shareholding in the associates. This means AirAsia would like to continue this model.
  5. This model is not illegal, but I agree with the report that the associates must make money and capable to pay back AirAsia.
  6. In my opinion, AirAsia will be able to overcome this problem (if given time) by raising funds from market and improving performance of AirAsia Indonesia and AirAsia Philippines.
    • While lower fuel price are tailwinds for IAA and PAA, cash from operations are insufficient to reduce interco loans in FY15. Cash from a potential pre-IPO exercise for IAA and sale of aircraft for PAA as highlighted by AirAsia are crucial for the two companies in FY15 to raise cash.
    • 15 Jun 2015 – AirAsia eyes up to $300 mln bond issuance, jet sales to raise funds
  7. In long term, I hope AirAsia can consolidate these associates into the group, if this allowed by the local partner or local statutory law.
  • Zero Operating Cash Flow – Without the support from its associates, GMT claims that AirAsia’s cash flow had fallen to zero by last year
    My opinion:

    1. The report does not show how they do the calculation.
    2. I am sceptical with this allegation.

In summary,

  1. This report is a well written, but style of writing is less professional, and like “The Da Vinci Code”. Fortunately, our local analysts do not use this kind of writing style.
  2. This report made some assumptions that I don’t know how to verify them. This makes me sceptical.
  3. I strongly believe that based on the style of writing, GMT has its own agenda, even if GMT repeats that they are not short seller.
    1. There is one Chinese proverb: “此地无银三百两”. In English: “A guilty person gives himself away by conspicuously protesting his innocence”
  4. Put aside the sceptical, I learnt some new knowledge from this report too.

Enough talk about the report. I would like to close this post by sharing my opinion as a shareholder.

  1. In the past 5 years, AirAsia has been expanding aggressively, and too fast. In my career, I am (and have been) working in fast growing company. General problems of fast growing companies are communication issues, rapid change in company structure, rapid change in SOP, take leverage to grow the company, etc… We can see these problems in AirAsia, from the Flight 8501 incident, some hiccups here and there in their services. I hope that AirAsia can slow down the expansion, but focus on operational excellence.
  2. I hope AirAsia can consolidate these associates into the group, if this allowed by the local partner or local statutory law. This will be an important topic in the next AGM.
  3. AirAsia has been going through many crisis, and I believe that they will go through this round too. Going slow by focusing on operational excellence will reduce the risks of making similar errors in the future.
  4. I will continue to hold and accumulate AirAsia. Most of the stocks in my portfolio are low-risk stock. Since I have reasonably strong holding power, I don’t mind to hold 1 or 2 fast growing/turnaround counters with some risks.

By the way, I enjoyed reading “The Da Vinci Code”. Although I am skeptical with the conspiracy theory in the book, Dan Brown is a brilliant writer. He managed to create different perspective by using some historical facts and his imagination. One day, I will visit the places mentioned in the book.


9 thoughts on “GMT Research on AirAsia – “The Da Vinci Code” Alike Analysis

  1. But in India, even as a joint venturer (less than 51% holding), Indian GAAP permits line by line consolidation. Unsure why Malaysian accounting does not permit this since Indian GAAP is also aligned to IFRS. ALso, is it possible for me to get a copy of the report from you please?


    • The non-consolidation of its associates’ account is in compliance with the requirements of MFRS 10 and the regulatory requirements of operating countries.


  2. by capacity control and the advantage of low fuel price, i believe the hiccup on the share price is over react.ed. their management go through many challenge so far, i believe this will be over soon, by proven signed of positive cash flow next few years.

    Liked by 1 person

  3. Gillem Tulloch has hailed as bearer (=aggravator) of bad news in the investment community. He used to be a Telco Head of Research in Nomura when he was sacked for publishing a very negative report on a South Korean telco, a Nomura’s client. Since then he went on to join CLSA, setup Forensic Asia and now GMT Research…

    ” Tulloch left Nomura in 2002 after he issued a negative report on a South Korean company, which prompted an apology from Nomura at the time, according to media reports.”

    He seems to hv a personal vendetta against corporate asia. Shud shed some light on his article on Airasia, not discounting the possibility he published the report for a shortseller client

    Liked by 1 person

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