Insight: China's HNA, shedding debt overseas, is still Hainan's hometown champion

Hainan Meilan International Airport Co

16/03/2018 02:31

By Matthew Miller
    HAIKOU, China March 16 (Reuters) - Hundreds of workers pour
concrete as tower cranes swing overhead at the building site
where a giant skyscraper is set to soar above the palm-fringed
streets of this tropical Chinese city.
    The building is the first of two towers that will serve as
the gateway to a 200-hectare new central business district in
downtown Haikou, capital of the island-province of Hainan in
southern China.
    The project is being constructed by HNA Group  HNAIRC.UL ,
the widely scrutinized and highly leveraged
aviation-to-financial services conglomerate that got its start
in Hainan 25 years ago as a regional airline with just two
aircraft.
    But HNA is now looking to shed at least some of its
sprawling interests in the huge 100 billion yuan ($15.84
billion) business district, as it has done with many of the
interests the company has amassed in a $50 billion global
spending spree. 
    HNA is currently in talks with potential "strategic
partners" for parts of the development, which a range of
investors also have stakes in, according to sources familiar
with the situation, even as it prepares to re-organize its
operations and shrink its workforce.
    The search for investors in HNA's hometown underlines the
difficulties the company is facing as it struggles under the
weight of the debt it racked up during its rapid expansion.
    HNA told major bank creditors in January that it faced a
potential cash shortfall of at least 15 billion yuan in the
first quarter.  urn:newsml:reuters.com:*:nL4N1PP266
    In the last two months, HNA has sold more than $6 billion in
prime real estate in Australia, New York and Hong Kong, while
selling shares in Deutsche Bank  DBKGn.DE , Park Hotels &
Resorts  PK.N , and Hilton Grand Vacations Inc  HGV.N .
    On Monday, HNA Infrastructure Investment Group  600515.SS ,
one of the key developers of the Haikou business district, said
it would sell a Hainan-based property company and logistics unit
to Sunac China  1918.HK , a real estate developer, for 1.9
billion yuan.  urn:newsml:reuters.com:*:nL3N1QU3GN
    When asked for comment on the stake sales, the company said
in a statement that "HNA is always looking for trusted
partners".
    The master plan for the Haikou business district includes 23
office buildings, residential compounds, and a massive luxury
shopping mall. The first of the Haikou Twin Towers, 94-floors
high, is scheduled to open in 2020, and will include a St. Regis
Hotel.
    Anchored in the center of the district is the Hainan
provincial government, with HNA's headquarters, a Buddha-shaped
tower, sitting just down the road.
    
    A COMPANY ISLAND
    Hainan is in many ways an HNA company island. HNA Group
operates 92 enterprises across the province, employing 30,000
workers, with total assets of nearly $50 billion. It is Hainan's
biggest money maker, with total revenues outstripping the
combined sales of the province's next nine largest companies
combined.
    HNA is also critical to local government efforts to
establish Hainan as a regional and global tourist destination.
    The group operates the island's three commercial airports
and its flagship Hainan Airlines operates 17 international and
regional routes from the province and transports about 45
percent of all visitors arriving by air here. 
    The company is currently investing 15.3 billion yuan for a
second runway and terminal for Haikou's international airport,
part of an expansion to accommodate 35 million visits by 2025.
    The branded tailfin of Hainan Airlines, which travels to 110
cities worldwide, has elevated the province's name around the
world, said Edward Tse, chief executive of Gao Feng Advisory
Company, who previously advised Chinese companies at Booz &
Company and Boston Consulting Group.
    "HNA is a business card for Hainan province," Tse said.
    Hainan's governor, Shen Xiaoming, who visited HNA's Haikou
headquarters in November just as the severity of the company's
financial struggles emerged, underscored the importance of the
group to the province's development.
    "HNA took root in Hainan, understands Hainan, implemented a
new development concept in Hainan, and built a modern economic
system in Hainan," Shen said. "If HNA is good, then Hainan is
good; when Hainan is good, then HNA is better."
    
    GOVERNMENT CLEAN-UP
    HNA and other non-state conglomerates in China have
meanwhile been under intensifying pressure from Beijing to clean
up operations and deleverage their businesses.
    In recent weeks, Chinese regulators have taken control of
Anbang Insurance Group urn:newsml:reuters.com:*:nL4N1QD1C7. The government is also
investigating the chairman of CEFC, which has agreed to take a
$10 billion stake in the Russian oil major Rosneft.
    HNA executives have recently elevated their patriotic
rhetoric and have tethered company goals closely to those of
Beijing.
    HNA Capital, for instance, announced on Feb 27 that it was
helping to raise 20 billion yuan to help fund projects along
China's new Silk Road trade initiative.  urn:newsml:reuters.com:*:nL8N1QH27E
    HNA's cause is the "cause of the party, the cause of the
people and the cause of all mankind", Chen Feng told HNA's
Communist Party members on Feb 7, according to a company report.
    HNA's co-chairman, Wang Jian, voiced a darker message,
telling employees that the company's difficulties were the
result of a "major conspiracy" against the party and President
Xi Jinping by foreign and domestic "reactionary forces",
according to an internally-distributed email.
    China's leading industrial conglomerates and technology
companies all have Communist Party committees, and such rhetoric
is not unusual now, said Tse of Gao Feng Advisory.
    
    OFFICIAL SUPPORT
    At the same time, HNA is engaged in a wrenching
reorganization of both its domestic and overseas businesses.
    Other foreign assets involved in the group-wide debt
reduction program include a 29.5 percent shareholding in the
Spanish hospitality firm NH Hotel Group  NHH.MC   that is up for
sale, and the Swiss airline services firms Gategroup and
Swissport, which are being prepared for listings.  urn:newsml:reuters.com:*:nL8N1OK1FC
 urn:newsml:reuters.com:*:nZ8N1P401F[ nZ8N1NU023]
    At home, HNA is undertaking a massive reorganization of its
businesses, which include aviation, tourism, healthcare,
technology and financial services assets. 
    Still, repayment of group borrowing, which surged by more
than one-third over the first 11 months of last year to 637.5
billion yuan, has been exacerbated by liquidity issues,
including the inability to pay a 3 billion yuan aviation fuel
bill owed to China National Aviation Fuel Group Ltd by its
airlines.  urn:newsml:reuters.com:*:nL4N1QI3LR
    However, the company appears to be getting crucial official
support to help it survive, even if it's unlikely to receive a
direct government lifeline.
    Hainan's vice governor, Mao Chaofeng, told Reuters in
Beijing last week that the province wouldn't need to intervene,
given the quality of HNA's assets.  urn:newsml:reuters.com:*:nB9N1QC02M The State
Council Information Office, which acts as the public relations
arm of the Chinese government, declined to comment.
    HNA has since the end of the year received credit from
leading state banks, including Citic Bank, which in February
extended the group a 20 billion yuan facility.  urn:newsml:reuters.com:*:nL4N1PZ4E4
    Also in February, HNA Infrastructure announced it had
obtained a 7.8 billion yuan loan issued by China Development
Bank, and the Hainan branches of Industrial and Commercial Bank
of China and Agricultural Bank of China, to help complete its
work on Haikou's international airport.  urn:newsml:reuters.com:*:nFWN1PR0VT
    HNA also has been leaning on the more than 100 strategic
relationships it has with provincial, municipal and local
governments across the country, while pursuing fresh regional
cooperation deals. 
    For example, in the northern municipality of Tianjin, where
it employs nearly 10,000 workers and operates a regional airline
and cargo facilities, HNA is working with the government to
create an international shipping center. 
    These deals have helped HNA gain crucial credit support from
regional banks.
    They also underline the extent to which the survival of the
sprawling behemoth is important to regional governments, and
Beijing.
    For China, the stakes are high, said William Kirby, a
professor at Harvard Business School who has authored a case
study on HNA.
    "It's reputationally important for China to get this right,"
Kirby said. "At the end of the day, HNA needs to be deemed a
successful Chinese and international company."
($1 = 6.3150 Chinese yuan renminbi)

 (Reporting By Matthew Miller; Editing by Philip McClellan)
 ((matthew.miller1@thomsonreuters.com;))