Nicholas Ionides SINGAPORE
Two Beijing-backed Hong Kong investment groups have gone public with plans to invest in China's aviation sector as major government restructuring gathers pace on the mainland.
CITIC Pacific and China National Aviation Company (CNAC) announced their plans while releasing improved profits, largely due to their aviation interests in Hong Kong.
CITIC, a diversified conglomerate, already controls more than a quarter of Hong Kong's industry through stakes in Cathay Pacific Airways, Dragonair and Hong Kong Air Cargo Terminals (HACTL). It says it is "exploring new opportunities to expand in the sector with cargo of particular interest". Chairman Larry Yung says CITIC sees great potential in mainland China as the industry undergoes a major restructuring. Not only are carriers being encouraged to merge, but state regulator the Civil Aviation Administration of China (CAAC) is being stripped of its equity ties to carriers.
CNAC also says it aims to expand its aviation holdings as economic conditions improve in China and the Asia-Pacific region. Executive general manager Thomas Tsang says CNAC, the biggest individual shareholder in Dragonair, is targeting fresh acquisitions. Apart from its 43% stake in Dragonair, it holds a 50% stake in ground handler Jardine Airport Services and recently secured a 25% stake in a new Hong Kong logistics venture.
Although the unit reports to a local Hong Kong-based vehicle, CNAC's ultimate parent is Beijing's China National Aviation Corp, with which it shares the same initials. However, this corporation is, in turn, itself ultimately controlled by the CAAC.
The Chinese Government recently decided that the CAAC would be forced to give up its airline stakes, specifically in the 10 which it directly controls. Observers have speculated that CNAC will also be affected by this order and will have to give up its airline holdings - something Tsang strongly denies. He says that CNAC will not be affected by the order and claims the Chinese industry restructuring will create new opportunities.
"The ultimate parent will be affected as such by the restructuring scheme, under which the CAAC will separate itself from commercial activities," Tsang says. "But there will be more opportunities for us overall."
CNAC's investment plans were stalled by the Asian economic downturn, which was hitting as it listed in December 1997. "Up to now we have been very cautious-but in the coming years we hope to expand our aviation and aviation-related businesses both within Hong Kong and elsewhere," states Tsang.
While he will not comment on specific investment targets, CNAC does has first right of refusal on Air Macau and Zhejiang Airlines, which are both controlled by the CNAC's parent corporation in Beijing. However, as a company incorporated outside mainland China, CNAC will only be able to purchase up to 35% of Zhejiang. Tsang says the Hong Kong arm is "reviewing things all the time" and may seek to take over the assets from its parent, although no timeframe is given.
Six years ago CITIC and CNAC were involved in a bitter public fight with Cathay over control of Hong Kong's aviation industry in the run-up to China's 1997 take-over of the then-colony from the UK. Early in 1996 a compromise deal was reached under which CITIC, Cathay and its parent Swire Pacific sold down stakes in Dragonair to CNAC in return for a promise that CNAC would not launch a competing airline in Hong Kong. CITIC at the same time increased its stake in Cathay to 25% from 10%.
Source: Airline Business
