Hainan-based HNA Group gearing for int’l merger & acquisition

A world of cheap assets has been waiting for buyers from China to arrive, but Chinese investors, for all their wealth, have largely shied away. HNA Group, an opaque but highly acquisitive conglomerate, is a notable exception.

Within the last four months, it has agreed to buy a US shipping container leasing company, a chain of mid-range European hotels and a Turkish cargo airliner, and has made it to the shortlist of bidders for luxury hotels in Asia and airport stakes from Athens to Sydney. 
 
Armed with a war chest of more than $6bn of credit lines from domestic banks, HNA says it is just gearing up for the big time.

“The international merger and acquisition strategy has two or three years to run,” Adam Tan, executive director of HNA Group, told the Financial Times earlier this year. “I am focused on deals outside of China because after the financial crisis some companies were hurt [and] when there is distress you can get something cheap.”

HNA’s international focus comes after years of domestic growth, during which the company turned Hainan Airlines, its flagship asset, into one of the leading carriers in China. Early investors included George Soros, the billionaire financier.

To help stimulate and support its travel business, the company bought hotels, and thanks to the booming Chinese real estate market, those investments have given the company a substantial asset base to borrow against and fund expansion.

Today, HNA says it has revenues of about $10bn and assets worth more than $30bn that span from shipping to entertainment. Finance appears to dominate the group, however, and HNA Capital says it manages Rmb170bn ($26.7bn) in assets.

Yet despite HNA’s increasingly high profile, the company remains something of a mystery, with a convoluted corporate structure. HNA’s portfolio includes a handful of public companies, 14 airlines and dozens of subsidiaries, joint ventures and holding companies.

Its ownership structure is equally opaque. For example, Hainan Airlines, HNA’s flagship asset which is listed on the Hong Kong exchange, counts Grand China Air, an HNA subsidiary, and an arm of the Hainan provincial government among its top shareholders.

Meanwhile, the group’s global acquisition strategy sets it apart from mainstream corporate China almost as much as does its peripheral location on the southern tropical island of Hainan. Although China has built up foreign exchange reserves of more than $3,200bn, state-owned firms have been cautious in venturing abroad, sticking mainly to the natural resources sector.

Whatever the company’s background, its ambitions are impressive. In August HNA made its biggest overseas acquisition yet, agreeing to buy a container leasing business from General Electric for $2.5bn including debt.

The move attracted attention from international bankers who had previously labelled the group “tyre-kickers” – perennial lookers but never buyers – but amplified concerns about its sprawling corporate structure.

Mr Tan insists that while HNA’s interests are diverse, its approach to management, modeled on GE, ties the group together as a cohesive “catering-lodging-travelling-logistics-tourism-shopping-entertainment” service chain.

“The key is expert management. In every single division you need to have the best people managing it. I don’t know much about the logistics business but that is fine. I have hired good people who have spent many years in the sector,” Mr Tan says.

Future plans include acquisitions in the US, expansion of its air network into South America and Africa, and a strategy to use its recent $620m investment in NH Hoteles, a Spanish chain, to develop a four-star hotel chain within China.

Mr Tan says the company is mindful of the concerns of local workers and politicians and is well aware of the adverse reaction that some Chinese takeover deals have provoked in countries like the US.

“If the government is not enthusiastic that is fine. We don’t have to do anything…There is no need to do deal where the unions or the country is unhappy,” he says.

HNA also intends to bulk up in financial services. At the moment about 20 per cent of revenues come from interests in insurance and leasing, Mr Tan says, but HNA is trying to build a credit card business as well.

Mr Tan expects logistics and manufacturing to also make up an increasingly large proportion of the company’s sales. HNA purchased a Chinese shipyard during the financial crisis and recently raised capital to help it expand.

“In five years I don’t know – maybe we will be ranked 300 [in the world] maybe we will be ranked 400, maybe we will fail and we will be kicked out of the Fortune 500. We don’t know yet. But we hope at least we can be in the Fortune 300,” Mr Tan said.