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Airbus A330 from Hainan Airlines at the gate of Berlin-Tegel International Airport (Photo: VanderWolf Images/Shutterstock.com)

Temasek invests in debt-laden Hainan Airlines, in a move that analysts say is overpriced

It was reported on Sunday (10 Jun) that Hainan Airlines would sell up to 20% of its Shanghai-listed shares to raise up to RMB 7 billion (S$1.458 billion). The shares will be sold to no more than 10 investors, one of which is Temasek Fullerton Alpha, a wholly-owned subsidiary of Temasek Holdings.

Trading of shares in China’s 4th largest airlines have been suspended since January over possible “major assets restructuring” and the enormous debt of its parent company, the HNA group.

HNA group went on a $50 billion acquisition spree since 2015 where it purchased stakes in companies ranging from asset management to hotels. The acquisition spree subsequently alarmed regulators, and mounting debt forced HNA to dispose US$14 billion worth of assets in the first 4 months of 2018.

While the proceeds from the sale of such shares will be used to fund aircraft purchases and maintenance, one analyst was more critical.

Ms. Corrine Png who was Executive Director and the Head of Asia Pacific Transportation Research at J.P Morgan from 2008 to 2016, believes that there is “a strong likelihood that Hainan Airlines will have to acquire tourism-related assets from parent HNA Group to ease HNA’s debt burden”.

The analyst added that “depending on the purchase prices, this could prove negative for Hainan Airlines”.

Bloomberg columnist: The acquisition by Singapore Inc. is overpriced

In an opinion piece on Bloomberg, columnist David Fickling describes the acquisition as being essentially overpriced even though the placement is done at a 35% discount to the last traded price.

While he acknowledges that Hainan Air has seen double-digit passenger traffic growth for the past five years and manages to keep its cost competitive, the key concerns is the US$7.8 billion (S$10.41 billion) debt Hainan Airlines has on its balance sheet.

Post placement, Hainan Airlines will have an enterprise value of around 50 percent more than that of Singapore Airlines. This is despite the fact that effective earnings before interests, taxes, depreciation and amortization are around 15% lower than Singapore Airlines.

Fickling considered that the acquisition could be as a result of a strategic advantage by gaining a share of China’s lucrative domestic air routes. Back in 2008, Temasek had attempted to purchase 24% of China Eastern Airlines but the bid was rejected by shareholders.

Furthermore, he also believed that it was unlikely to materialise due to the minority shareholding in China's fourth largest carrier while the "regulatory release doesn’t even mention a board seat". He added that "Temasek’s cash barely gets it a foot in the door".

“The worrying prospect is that the transaction will be a repeat of the investments that both Singapore Air and HNA have made in Virgin Australia Holdings Ltd. Like Hainan Air, Virgin is a decent carrier for passengers and a miserable one for investors, with an immense debt load and shares that barely change hands”.

“Singaporeans should extract some bargain prices in return for their cash. Judging by this first deal, there’s precious little evidence of that. That feels like a rich price to pay.” he concluded.