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HNA Group’s wings clipped by 2020 black swans

(ATF) Financiers are asking whether China’s second largest private enterprise is going to “fall down”? HNA Group, the Hainan-based airlines-to-real estate conglomerate, burned through 560 billion yuan in just two years, and has debt of 750bn yuan.

The coronavirus pandemic and a slowdown in global trade has made 2020 a “black swan” year for HNA and other private firms, many of which have declared bankruptcy. The controlling shareholder of numerous airlines, including Hainan Airlines, Grand China Air and Lucky Air, it’s suffering especially as a result of the pandemic-fuelled decline in the air travel industry.

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Xinya Finance estimates the global aviation industry has seen more than 400,000 lay offs. While officials have hailed the rebound of China’s aviation industry after two months of virus-mitigation lockdowns decimated the economy earlier this year, carriers still lost 40 billion yuan in the first quarter alone.

By February, the total volume of transportation plummeted by 73.9%, and the total number of passengers carried by airlines was only 8.34 million. Compared with the total passenger traffic during the Spring Festival last year, its scale has dropped by 85.5%, causing a loss of more than 20 billion yuan. This is the highest recorded loss in a single month for the first time since China’s aviation industry stabilised.

HNA is one of the best-known civil aviation companies in China. It’s not only number-one in the domestic aviation industry but also the second-largest private enterprise in China, according to Xinya Finance. 

At its peak, HNA Group pulled in annual revenue of 618.2bn yuan, ranking second in China’s top-500 private enterprises, second only to Huawei.

Nevertheless, HNA is in danger of collapse.

The main problem is that there is a huge gap between revenue and profit. Net earnings for the entire group was only 1.1bn yuan in the first half, with its margins narrower than medium-sized enterprises in China. 

This year’s disaster was only the fuse that blew up a debt crisis that had already begun to simmer.

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According to Xinya Finance, HNA was shouldering 750bn yuan of debt before the epidemic, and even employees’ salaries were not being paid. At the beginning of this year, chairman Chen Feng personally wrote a thousand-word letter to employees, expressing his apologies for the shortage of funds and the delayed payments.

The reason why HNA Group got into such a predicament is mainly due to its wild expansion. In two years it spent 560bn yuan in an acquisition spree that extended its tentacles into seven associated industrial sectors, including hotels, tourism and logistics.

According to Xinya Finance the “crazy” cost of expansion increased the firm’s market value to one trillion yuan, but shortly afterwards China issued a new regulation “restricting blind investment by private enterprises”. This regulation “dumbfounded” HNA Group.

At that time, it was on the risk list due to its involvement in overseas mergers and acquisitions. In desperation, HNA switched from the previous “buy, buy, and buy” model to one of “sell, sell, and sell”.

HNA’s expanded through high-priced acquisitions, which it eventually sold cheap. At that time, there were more than 300 companies under its name and assets of more than 300bn yuan were sold by HNA. Top of the list was Pactera, which was bought for 4.7bn yuan and eventually sold for 500 million yuan.

Affected by “public health issues” this year, HNA started another round of internal self-rescue operations, selling 21 aircraft engaged in the leasing business for 5.1bn yuan. This still couldn’t stanch the haemorrhage of cash.

From having a market value of nearly 1tn yuan, it’s now in serious trouble.

One silver lining was the announcement Tuesday by the Civil Aviation Administration of its decision to relax its domestic flights access policy.

There are two main measures. The maximum quantity of weekly approved flights has been increased. On the basis of “meeting aviation safety, accessibility and operational quality requirements,” airlines can arrange flight routes flexibly and independently. Also restrictions on access to the three major airports of the North, Shanghai, and Guangzhou branch routes have been relaxed.

That should enable the 32 airports with passenger throughput of between one million and two million passengers to increase the number of access points.

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Chris Gill

With over 30 years reporting on China, Gill offers a daily digest of what is happening in the PRC.

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