HNA Group draws back after aggressive expansion#Caixin Weekly#-Sino-US

Path: Sino-US >> Cover Story>> 2018 >>
HNA Group draws back after aggressive expansion

Wang Jian, a founder and former chairman of HNA Group, died at 57 during a fall during a business trip to France on July 3, and his death has drawn public attention to the Chinese private conglomerate’s expansion in recent years.

Wang acted as the helmsman in the company’s expansion both at home and abroad, but earlier this year, HNA Group has been reportedly having cash-flow problems due to the rapid overseas acquisitions.

Chen Feng, another founder of the company based in South China’s Hainan province, said recently that the company was in a learning process, and it was inevitable that it encountered some temporary setbacks during a stage of rapid growth.

In the 32nd issue of 2018, Caixin Weekly, a national financial and business weekly, ran a cover story on the development history of HNA Group, the process of its expansion and recent contraction.

Below is an excerpt of the article.

Since the establishment of Hainan Airlines in 1993, HNA Group has grown from a local transport company to a multinational involved in aggressive acquisition of global assets, with its business spanning across industries including real estate, tourism and financial services.

As an ambition to grow into a conglomerate, HNA had a strong intent to acquire domestic companies from the first decade of the 21st century, such as Meilan Airport and Grand China Air.

But a series of overseas acquisitions, especially some high-profile acquisitions around 2015 brought HNA into the limelight. The deals included the purchase of 25 percent of hotel giant Hilton Worldwide Holdings Inc with $6.5 billion and the takeover of 10 percent stake in Deutsche Bank.

Outsiders started wondering about HNA’s ties with the Chinese government in the spending spree while speculation about its source of funds and ownership structure surfaced. HNA made clear in 20017 that its major shareholders are company founders and two charitable funds.

Wang Jian, who aimed to build HNA into one of the world’s top 100 companies by revenue, piloted the company’s expansion, company sources said. HNA was ranked 170th on the Fortune Global 500 list in 2017.

According to publically available data, HNA spent $80 billion on overseas assets, much of it borrowed. Its financial statements showed that its total assets reached 1.23 trillion yuan and its debt was 740 billion yuan by 2017.

Hints on a brake already appeared in the second quarter of 2017 when the government tightened scrutiny of Chinese companies’ debt-fueled foreign investments.

HNA started to sell off assets to meet a liquidity shortage in the second half of 2017. It has regained 120 billion yuan in a string of asset sales mainly in real estate and financial services so far this year.

Shortly before his death, Wang had told Caixin that HNA expected to sell off about 300 billion yuan of assets this year. His death might mark the end of HNA’s rapid overseas expansion.

On July 8, Mao Shaofeng, a deputy governor of Hainan province, visited HNA and told company executives at a meeting that HNA started from aviation and a focus on aviation will help the company become an excellent global competitor.

Chen Feng, 65, sole chairman of HNA now, has now reshuffled the management in a strategic shift. HNA said in an August 1 statement that it will continue to withdraw from the financial sector but refocus on its core aviation.

Zero to trillion

At a meeting in Paris in June 2017, Wang Jian said that several founders built up the company through joint-stock system, a response to the speculation that the company has ties with the government.

But from its start, HNA did have the gene of a state-owned company. It was the provincial government which decided to invest 10 million yuan to set up a local airline company in September 1989, following the establishment of Hainan in 1988.

The airline was registered in October 1989, but it lacked planes and personnel, as well as operating license from the civil aviation administration. Wang said that several teams had failed to get the company to get started.

In 1990, Wang, Chen and Li Jing from a same office quit their jobs at the civil aviation administration, together with several other co-workers from the administration, and joined the new airline.

However, financial difficulties created obstacles for the airline’s development in 1991, and senior provincial officials decided to merge it into China Southern Airlines then. Wang and Chen, then vice presidents, lost their jobs in the turmoil.

A turning point emerged in 1992, as Hainan government wanted to restructure the airline into a joint-stock company. Wang and Chen returned with their plan and the startup raised 250 million yuan from 122 shareholders. The former state assets accounted for 5.3 percent.

In the beginning of 1993, the joint-stock airline got registered. That year is considered the starting year in HNA’s history.

In September 1995, Hainan Airlines raised $25 million through selling 100 million shares to American Aviation LDC, backed by the billionaire investor George Soros. It became a foreign-funded venture after the deal.

From 1997, the company has gone through several rounds of fundraising and restructuring, and became a listed company on the domestic stock market. The state shareholders gradually withdrew. Soros quit from the company in 2011.

HNA started the acquisition of regional carriers and airports across the country in 2000. The acquisition of China Xinhua Airlines in 2001 helped HNA to get a base and flight routes, after which it wasn’t just a local company.

By 2006, Hainan Airlines had become China’s fourth-largest airline company.

While the global financial crisis has left low-priced assets abroad, and under the country’s going global policy and support from banks, HNA stepped onto the global stage in 2010.

HNA spent $100 million on acquiring the Australian aircraft leasing business of Allco in 2010, and $30 million on getting 60 percent stake in Turkey aircraft maintenance company myTECHNIC.

The deal of $1.05 billion to acquire the world’s fifth-largest container leasing company GE Seaco became the largest in 2011.

According to an audit report, HNA had 1.23 trillion yuan of assets by the end of 2017, which is due to the aggressive acquisitions. Most of the acquisitions were financed using newly acquired assets as collateral.

Growing trouble

From 2015 to the first half of 2017, HNA appeared on the global stage as a big buyer, such as the 3.4 billion euros deal to get 10 percent stake in Deutsche Bank, but by the end of 2017, its cash-flow fell to a dangerous level.

When HNA was ranked 170th on the Fortune Global 500 list based on its 2016 revenue of $53 billion in July 2017, Wang told employees that HNA was at a crucial moment of growth and should speed up its pace to get into the top 100.

However, in June 2017, China’s banking regulator asked banks to examine their businesses with some companies having heavy investment overseas, including Dalian Wanda, HNA and Fosun International Ltd.

Wang denied that the expansion had impacted his company’s liquidity, and instead, he said it was the country’s top economic planner’s tightened outbound investment policy which caused the crisis.

“The source of funds for overseas investment was suddenly cut off, and we have hundreds of planes on order to pay,” Wang said.

No matter what caused the tight cash-flow, by the end of 2017, HNA had suffered deteriorated financing situations. On Nov 2, 2017, one HNA’s subsidiary had to issue $300 million bonds in 364 days with an 8.875 percent interest rate, the highest that a Chinese company of its kind has offered.

At the end of November, S&P Global lowered HNA’s credit rating to B from B+. “We will closely monitor HNA’s access in capital markets and funding costs to determine whether additional actions are necessary,” S&P said.

Since the beginning of this year, HNA has made massive sell-offs to get its cash-flow healthy. The sales included its stakes in Hilton, Deutsche Bank, properties and financial assets at home and abroad.

HNA’s statement on July 30 showed that by the end of June, it and its subsidies have sold a total of 60 billion yuan in assets in the first half of this year, an amount exceeding 10 percent of HNA’s net assets on its consolidated statements in 2017.

HNA has also streamlined its pillar business lines from seven to four, including civil aviation, logistics, financial and tech sectors.

Wang once reflected that the company became too aggressive and high-profile, not holding true to its mission while facing the big growth prospect.

Wang’s memorial service was held on July 13, and HNA announced that his stake in the company that could be worth 70 billion yuan will be donated to Hainan-based Cihang Charity Foundation according to his will.

Before the donation, Wang and Chen were biggest individual shareholders of HNA, each holding 14.98 percent stake.

The Hainan foundation and the US-registered Hainan Cihang Charity Foundation are the two largest shareholders of HNA, respectively holding 22.75 percent and 29.5 percent. Most of their shares came from donations of HNA employees.

Related Stories
Share this page
Touched Sympathetic Bored Angry Amused Sad Happy No comment

Latest US-China trade talks end not with a bang but a whimper, if heard at allOfficials held accountable for substandard vaccine scandalSkyrocketing housing rents in major Chinese cities concern migrant workersChina should not encourage couples to have more children, says Chinese scholarChina slaps back at latest United States tariffs in trade war escalationWhat caused the downfall of Chinese credit rating agency Dagong?‘Thanks Mr Trump’: state media mocks US president for helping make China great againChina’s ‘industry policy’ unexpectedly helps unruly property firms to raise rentsUS should focus on China’s cybersecurity law, not its tech programme, says organisation representing, Apple, Google and moreChildbirth fund proposal makes splash as China encourages citizens to have more children
< Prev Next >