ANALYSIS-Battle for Hong Kong Airlines pulls complex HNA holdings into daylight

Credit: REUTERS/Bobby Yip/File Photo

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, [RIC:RIC: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."


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 .

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.


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.

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)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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