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Hainan Airlines parent is on a $40bn spree but sources of funding raise questions

From a Buddha-shaped building on the tourist island of Hainan, HNA Group has transformed itself into one of China’s most aggressive dealmakers — and drawn new scrutiny of its ownership and financing.

Founded as a provincial airline by economic reformers who drew on World Bank support, the parent of Hainan Airlines has grown into a sprawling, privately held international conglomerate. To fuel its growth, it has skilfully leveraged existing assets to fund the purchase of new ones — a process known in Chinese as “a snake swallowing an elephant”.

But the company’s $40bn deal spree — most recently it became Deutsche Bank’s largest shareholder by building up to a 9.9 per cent stake — has brought it criticism on several fronts. HNA recently became caught in the crossfire of a political storm involving Wang Qishan, China’s anti-corruption tsar and one of its most powerful politicians. Its heavy use of debt has also drawn concern from Standard & Poor’s and some overseas bankers

HNA’s corporate structure is complex. Its $145bn in assets now include New Zealand’s largest financial services firm, a stake in Hilton Hotels and aviation services companies in at least 14 countries. It operates the world’s third-largest aircraft rental fleet. 

Domestically, HNA owns a smorgasbord of property developers, leasing firms, four regional airlines, a respected financial magazine and one of China’s largest peer-to-peer lending platforms, JuBao Internet Technology. It has raised funds through at least 11 P2P platforms, many of which it has invested in, as well as through loans to its roughly 25 listed companies.

Overseas, it has chosen some politically connected partners. The company invested together with Jeb Bush in a fuel shipping business when he was considering a presidential run, and it bought SkyBridge Capital from hedge fund manager Anthony Scaramucci when he was hoping to join the Trump Administration.

Currently HNA is 76 per cent owned by just 13 individuals, all but one of whom are current executives with the group, according to corporate filings. Founder and public face Chen Feng — a Buddhist with a taste for luxury cars — and the chairman of the board, Wang Jian, own about 15 per cent each after many years of complex asset reshuffles that effectively privatised the firm.

But HNA’s “very complex and convoluted shareholding structure” has prevented either man’s inclusion on the annual Hurun list of China’s richest men and women, according to Hurun founder Rupert Hoogewerf. “We have been trying to get Chen Feng on there but we just can’t find any way to show that he’s got enough money.”

HNA’s largest single shareholder is also the most mysterious: Guan Jun, who purchased nearly 29 per cent of the company last year from Hong Kong-based businessman Bharat Bhise. HNA declined to say how much the stake sold for and Mr Bhise did not respond to request for comment. 

Mr Guan serves as co-chairman with Mr Chen’s son in a peer-to-peer financing platform owned by HNA, but he otherwise leaves few traces for a man who wields billions in assets. 

He first bought into HNA subsidiaries seven years ago, through an investment vehicle that operates out of HNA’s Beijing offices. But HNA says Mr Guan is a “private investor” who does not work for the company.

Chinese corporate registries list several other business addresses for Mr Guan. One leads to the “Oriental Aphrodite Beauty Spa”, a street-side salon in a residential neighbourhood in western Beijing. The current owners say he sold the salon about five years ago. Another address led to a locked door in a shabby Beijing office building. His residence, according to Hong Kong corporate filings, is a nondescript apartment in south-west Beijing whose current occupant says she moved in a few months ago. 

Reached by mobile phone, Mr Guan said: “It is inconvenient to answer any of your questions.”

Mr Bhise no longer has a stake in HNA. His firm Bravia Capital co-invested with HNA in several of its largest overseas acquisitions, including the $1bn purchase in 2012 of SeaCo, the world’s fifth-largest marine container firm. 

He is also the man who introduced HNA to its most celebrated foreign investor, George Soros. Mr Soros has since sold most of his $50m stake in HNA’s flagship subsidiary, Hainan Airlines.

That airline is where HNA’s story starts and one reason it has become caught up in factional politics today. For HNA’s corporate heritage draws from reform experiments launched in the late 1980s, when Wang Qishan was a promising young technocrat rising in the shadow of his powerful father-in-law, Communist party elder Yao Yilin

Now Mr Wang is the powerful anti-corruption tsar who has led a wide-ranging purge of China’s military, security forces and ruling Communist Party.

But in the past month, an exiled businessman with ties to the state security apparatus has pushed forward allegations that Mr Wang’s wife’s family improperly benefits from ties to HNA.

Guo Wengui, the former business partner of an imprisoned security official, has claimed on widely viewed Twitter posts over the past month that Yao Qing, a nephew of Mr Wang’s wife, has benefited from a hidden shareholding in HNA.

“The allegations with regard to HNA simply aren’t true. Neither Wang Qishan nor his nephew by marriage, Mr Yao, are shareholders in HNA Group,” a spokesman for HNA Group said. Mr Wang did not respond to request for comment. Mr Yao could not be reached.

What is clear is that Mr Wang has close ties to the men who built the company that has become HNA.

Back in the 1980s, China received soft loans from the World Bank to help fund the country’s economic reforms as it recovered from 30 devastating years of Communist orthodoxy. At that time Mr Wang set up the China Agricultural Development Trust and Investment Co (CADTIC) to channel World Bank loans to the rural sector. Chen Feng, HNA’s founder, worked under him. World Bank assessments of those early loans are gushingly positive. 

Then came the June 1989 crackdown on pro-democracy protests centred on Tiananmen Square. Western nations imposed sanctions and China’s economic reforms suffered under a conservative backlash.

But a core group of CADTIC bureaucrats — including Mr Chen — sought to get around the sanctions. They moved to Hainan, the sub-tropical island that was at the time a blank slate for market reform experiments, and appealed to the World Bank for help. The resulting aid was channelled through the newly founded Xingnan Group, according to You’ll Make It, a memoir by CADTIC veteran Huang Xiaohe.

Xingnan Group provided the start-up capital for Hainan Airlines and recruited many of the men who are now its top executives, including current chairman Wang Jian, according to the memoir. Other senior HNA executives include former Hainan government officials and the former head of state-owned rubber farms that were among the earliest World Bank loan recipients.

CADTIC, meanwhile, fared less well. By 1996, reeling under Rmb5bn in losses, its Rmb12bn in debt was absorbed by China Construction Bank, by then headed by Wang Qishan. Soon after, he cleaned up the $2bn default of the Guangdong International Trust and Investment Co, or Gitic, sealing his reputation as a reliable political firefighter and starting his climb to the top of the party. 

A highly aggressive strategy

HNA Group’s heavy reliance on pricey offshore finance has helped it skirt the strict capital controls China has imposed in the past six months and emerge as the country’s most active dealmaker.

After regulators clamped down on capital outflows last year, many Chinese companies cancelled overseas buyouts or stopped acquisition activity altogether. Not HNA. Hardly a week has gone by without some new announcement. Altogether HNA has announced more than 100 deals worth some $40bn domestically and overseas over the past 30 months. 

“HNA Group’s global operations and healthy balance sheet provide it with the financial flexibility to fund acquisitions in the most efficient manner possible,” the company said, in response to emailed questions.

China’s most acquisitive company has tallied up at least $19bn offshore debt over the past six years. At times it has relied on margin loans and non-recourse financing — the use of securities in a buyout target to back up a loan to the buyer.

That strategy has been described by credit rating agency S&P as highly aggressive and, at times, risky. “We view the group's financial policy as aggressive based on its acquisition strategy and high debt leverage,” S&P said in a recent report. S&P put one of its newly acquired groups, Swissport, on negative credit watch in May

HNA counters that its degree of leverage has declined every year for the past seven years. The ratio of its debt to total assets now stands at 60 per cent, down from 82 per cent seven years ago, a spokesman said.

HNA has faced the same difficulties as other Chinese companies in moving money out of China, said one person who has advised the company on overseas acquisitions. 

The difference is that HNA has other options. Half of its revenue and about 30 per cent of its assets are located overseas. “The trick is that they don’t need to get money offshore. They are already have enough assets offshore,” the person said.

At least $6.7bn of the $19bn in debt the company accrued in recent years involves non-recourse arrangements, data from Thomson Reuters shows.

HNA’s $6.5bn, 25 per cent stake in Hilton Worldwide — completed earlier this year even as other companies struggled to move money out — highlights its use of margin finance. HNA pledged about 66 per cent of its stock in the American hotel group to secure a $3bn offshore margin loan, according to Securities & Exchange Commission filings.

At times, its reliance on overseas debt has been costly. When it bought the airlines luggage servicer Swissport for $2.8bn in 2016, it used shares in Swissport holding companies as security for a debt facility before closing the buyout, a move that technically breached covenants in a credit security agreement. According to S&P, the breach was discovered when HNA attempted to inject €718m of equity into Swissport — funds that were backed by securities in Swissport.

The group also used an expensive hedging tool, known as a collar strategy, to increase its stake in Deutsche Bank to nearly 10 per cent earlier this month. HNA used €2.1bn in financing from UBS to fund the collar transaction. 

Intel CEO Brian Krzanich was interviewed at Code Conference on Thursday, where he talked about his long-term vision for automobiles. He said his prediction that “the car of the future is going to look much more like a server” was a driving factor in their recent acquisition of Mobileye, the Israeli auto startup for which Intel paid more than $15 billion.

Krzanich said that someday “if you get a ransomware or some kind of virus on one portion of the device,” Intel will not only have backups, but they could “refresh your car on the fly.” While he acknowledged that there are some potential privacy concerns, Krzanich believes that connected cars will be “much safer.”

“In order for those cars to drive, they do have to look,” said Krzanich about self-driving cars. “There’s a lot of social good that can come out of this.”

He hoped that automotive technology will someday help with situations like Amber Alerts, where they could locate the whereabouts of missing children. “We’re really trying to understand how data will be adjusted and how can you apply artificial intelligence,” he said.

Shortly after his presentation, Intel released its findings that autonomous driving will result in a $7 trillion boon to the economy by 2050. Their reasoning is that “autonomous driving and smart city technologies will enable the new passenger economy, gradually reconfiguring entire industries and inventing new ones thanks to the time and the cognitive surplus it will unlock.”

These predictions were similar to Marc Andreessen’s, who proclaimed at Code Conference that self-driving cars would result in the creation of suburbs further away from cities, because the commutes will be more tolerable. Building these cities would create a lot of jobs, he surmised.

Activity in the UK’s construction sector beat forecasts for the second month in a row in May, according to a key survey of the sector which suggests growth is picking up after a weak start to the year.

The purchasing managers’ index for the sector – which accounts for around 6 per cent of economic output – came in at 56, compared to the previous month’s 53.1.

Economists had expected the figure to slide to 52.6, but a sharp increase in residential work meant companies were more optimistic than had been predicted.

However respondents remained cautious about the potential impact of economic uncertainty, which they said was acting as a brake on client spending.

IHS Markit’s surveys give an indication of the general health of a sector based on factors such as new orders, employment and delivery times, and are seen as useful early indicators of growth.

Construction has consistently been the weakest of the three sectors covered by the PMI surveys in recent months, with a shortage of skilled workers causing particular difficulties for many companies. However the headline figure was comfortably above the 50 level that indicates expansion.

Tim Moore, IHS Markit senior economist, said:

May’s survey data reveals that the UK construction sector has started to recover strongly from its slow start to 2017. Housebuilding was the key growth driver, with work on residential projects rising at the fastest pace since December 2015. A sustained rebound in residential building provides an encouraging sign that the recent soft patch for property values has not deterred new housing supply. Instead, strong labour market conditions, resilient demand and ultra-low mortgage rates appear to have helped boost work on residential development projects in May.

Airtel, Smart, Halotel, Tigo, Tanzania Telecommunication Company Limited (TTCL), Vodacom and Zantel.

Onlu none at risk are Vodacom and Tigo

Baccarat sells near 90% stake to Chinese group for €185m

Luxury crystal and jewellery maker Baccarat is to sell the 88.8 per cent stake currently owned by its majority shareholders to Chinese investment group Fortune Fountain Capital, valuing the French company at €185m.

In a statement on Friday Baccarat – which is part of the Groupe du Louvre company – said it had signed an irrevocable undertaking with the Chinese group, backed by Starwood Capital and Catterton, Baccarat’s majority shareholders. The offer is worth €222.70 a share.

Starwood, the US hotel group, owns 66.6 per cent of Baccarat, acquired as part of its 2005 takeover of champagne house Tattinger. Catterton Partners, a US private equity group, took a stake in Baccarat in 2012.

In a statement on Friday Baccarat said it would use the sale to “accelerate its strategic plans internationally, particularly in Asia and the Middle East, while supporting its growth in developed markets.

It said final approval would need the go-ahead of Chinese authorities.

As part of the deal, Daniela Riccardi, current Baccarat general manager, “will continue to lead the company during this new chapter” the statement said.

Baccarat said the Chinese group had given undertakings to “honour the 250-year old heritage” of the crystal manufacturer.

The company traces its roots to a decision by King Louis XV of France to grant permission for a glassworks in the town of Baccarat in Lorraine region of eastern France.

Production initially focused on window panes, mirrors and stemware until 1816 when the first crystal oven when into production.