Analysis: Battle for Hong Kong Airlines pulls complex HNA holdings into daylight

CWT International

29/04/2019 24:00

(Repeats story from April 26; no changes to text)
    By Jennifer Hughes and Julie  Zhu
    HONG KONG, April 26 (Reuters) - Shareholders summoned by
Hong Kong Airlines this month for a meeting were greeted with
some shocking news: the airline needed at least HK$2 billion in
fresh funds or it would lose its operating license.
    The carrier had lost HK$3 billion ($382.54 million) in 2018,
they were told, and an infusion was crucial, according to people
present. 
    Dialled in, but silent for the hour-long meeting on April 1,
were executives for Hainan-based HNA Group,  HNAIRC.UL , which
holds 29 percent of the airline's shares.
    Investors were blunt about HNA's role in the company's
troubles, according to people at the meeting - including
accusations that it was siphoning off cash, which the
conglomerate denies. 
    "There's no point raising fresh capital if we cannot solve
the problem of (a) major shareholder pumping out HKA's assets,"
said Zhong Guosong, who holds 27 percent of the shares and is
vying for chairmanship of the company.
    Another shareholder echoed his views: "This is Hong Kong,
not Hainan."
    In the last week, drama from the call has spilled into the
open as HNA and a rival group battled for control of Hong Kong
Airlines' chairmanship. The airline declined to comment on
shareholders' activities and said its operations "remain
normal."
    The infighting illustrates the convoluted nature of HNA's
holdings around the world, which range from real estate to banks
and are often divided among opaque, related entities.     
    On paper, HNA gave up control of Hong Kong Airlines two
years ago just as it began selling off assets collected in a $50
billion worldwide acquisition spree.
    But the carrier has close ties with several HNA affiliates.
    "HNA's shareholding structure and how they structure
investments has always been very complicated, and the HKA case
isn't any different," said David Yu, adjunct professor of
finance at New York University, Shanghai. "The issue now is that
there is some distress at the parent group, and this is
obviously having implications on the underlying companies,
including HKA."
    
    HNA TANGLE
    Since Beijing in 2017 began cracking down on Chinese
conglomerates' rapid debt-fuelled global expansions, HNA has
sold about $26 billion in assets, according to Dealogic data and
Reuters calculations. 
    Disposals include control of the Radisson hotel group; a
quarter stake in Hilton Hotels; prime property in New York,
Sydney, Shanghai, San Francisco and Hong Kong; regional Chinese
airlines; a stake in aircraft lessor Avolon; and half of its
stake in Deutsche Bank  DBKGn.DE .     
    But the prices HNA has sought and the complex structures,
loans and other business links that bind its holdings have made
unwinding its investments difficult. 
    HNA's wider Hong Kong interests are a case in point. This
week, HNA-controlled CWT International  0521.HK  said lenders
had seized assets, including U.S. property and its
Singapore-based commodity trading and logistics unit, because it
failed to repay a HK$1.4 billion ($178 million) loan. 
    HNA said that it was monitoring the situation, but that it
was a matter for CWT and its creditors. Yet HNA units own 51
percent of CWT's shares, and each of CWT's executive directors
has ties to other HNA businesses. CWT's co-chairman, Mung Kin
Keung, is a shareholder in Hong Kong Airlines. 
    HNA's involvement with the airline is just as complicated.
The conglomerate took control of CR Airways in 2006 and renamed
it Hong Kong Airlines. In July 2017 it cut its stake, according
to filings, by selling 34 percent to Chinese private equity
group Frontier Investment Partners.
    According to Hong Kong Airlines' 2017 accounts, seen by
Reuters, the airline held shares in four unlisted HNA
affiliates, worth $367 million at the end of 2017, and had
loaned $300 million to two other HNA firms.
    That year, the airline's trade receivables - money owed to
it but not collected - jumped 50 percent even as revenue rose
only 11 percent. Of those payments due, the amount HNA companies
owed the airline more than doubled to HK$1.3 billion, or 73
percent of receivables.
    Zhong is closely linked with HNA as well, having been a
director of the airline for almost four years until August 2018.
Since 2017, he has also been chairman of Hong Kong Express, Hong
Kong Airlines' low-cost sister, which HNA recently agreed to
sell to Cathay Pacific for HK$4.93 billion  urn:newsml:reuters.com:*:nL3N21E051.
    Cathay's announcement of the deal contained a warning that
an HK Express shareholder planned to contest it. That
shareholder is Zhong, according to two sources with direct
knowledge of the issue. They declined to be identified because
they were not authorised to speak to the media.
    In a further sign that the relationship between Zhong and
HNA had soured, court papers show that HNA in December sued the
company through which Zhong holds his 27 percent stake in the
airline, seeking repayment of a HK$854 million debt from 2010.
    A representative for Zhong did not provide comment.
    
    CONTROL DISPUTES 
    Since the April 1 meeting, Frontier has aligned itself with
Zhong, working to appoint him chairman of the airline as part of
efforts to seize control and investigate its financial ties with
HNA.
    Late last week they won an injunction that blocked directors
and executives from removing or destroying the airline's
documents. 
    That followed a week in which both Zhong and airline
executive Hou Wei - still listed on its website as chairman -
claimed control and fought over who had access to the company's
headquarters.  
    Adding to the confusion, a group called Grand City
Investment Capital Limited this week said it owned the Frontier
stake after a transfer dated April 11. 
    A spokesman for Grand City declined to discuss his company's
ownership. Frontier disputes Grand City's claim to the stake.
    Frontier and Zhong have also accused HNA of "embezzlement of
HKA assets and serious financial misappropriation by HNA Group
parties" - accusations that HNA has denied.  urn:newsml:reuters.com:*:nL5N22104X 
    They and other shareholders are still demanding access to
the airline's 2018 accounts and details of how it lost so much
money before they address its HK$2 billion capital shortfall. 
    Amid the court orders and competing statements uncertainty
remains over who is in charge - although both sides have gone to
lengths to ensure the airline keeps operating normally. 
    "There are so many moving parts that corporate control is
under dispute because the changes are happening too rapidly for
the company to organise coherently," said Andrew Collier,
managing director of Orient Capital Research, which focuses on
China. He described HNA as "a poster child for overexpansion of
China's worst conglomerates."
    He added: "Because there is always a lack of transparency at
HNA, this makes it twice as hard to figure out what the nature
of the dispute is."         
       
    
($1 = 7.8424 Hong Kong dollars)

 (Reporting by Jennifer Hughes, Julie Zhu, Kane Wu and Alun
John; Additional reporting by Shellin Li and Jamie Freed;
Editing by Gerry Doyle)
 ((jennifer.hughes@thomsonreuters.com; +852 2912 6667;))