Chinese airlines fly high with A-share placements

More Chinese airlines taxi down the runway in search of fresh equity to reduce high leverage and finance expansion.
Raising paper from mainland equity markets
Raising paper from mainland equity markets

A group of Chinese airlines have announced plans to tap the A-share market for fresh capital as the sector seeks to reduce its high leverage and finance expansion during a period of low oil prices and growing traffic volumes.

Since the end of June, Air China, Spring Airlines and Juneyao Airlines have all announced plans to raise equity finance, joining China Eastern and Hainan Airlines, which executed private placements in April.

Should all the deals be completed, the five will raise a combined total of Rmb59 billion ($9.5 billion). The only major airline yet to flag a deal is China Southern, although analysts believe an announcement is likely to be forthcoming soon.

Until recently, the sector made heavy use of debt to finance capital expenditure. The carriers were not only able to take advantage of the mainland’s low interest rate environment but also borrow money at cheaper rates from the big banks because of their government-backed status.

But a reliance on debt financing resulted in a big spike in gearing levels. The big three airlines – Air China, China Eastern and China Southern – reported net debt-to-equity ratios ranging from 193% to 308% at the end of 2014.

However, they spotted an opportunity to change this as oil prices started falling in the middle of 2014 and mainland equity markets began to rebound, pushing up share prices that had been languishing in the doldrums for some years. And notwithstanding the recent stock market correction, the big airlines have seen their share prices soar four to five fold over the past year.

Over the past 12 months, for example, Air China has risen from Rmb3.57 to Rmb15.36 by Tuesday’s close. China Eastern is up from Rmb2.51 to Rmb11.54 and China Southern from Rmb2.5 to Rmb12.68. 

During the past few weeks, they have all rebounded close to their June peaks. 

Air China refuels with equity

On Tuesday, Air China confirmed plans to raise Rmb12 billion from a private A-share placement to partially fund the acquisition of 15 Boeing 787 aircrafts.

The nation’s flag carrier plans to issue 994 million A-shares at a minimum price of Rmb12.07 each, according to a company statement. The offer price has been set at a 21.4% discount to Air China’s Rmb15.36 closing price on 29 June, the last trading day before its suspension.

Air China Group, the controlling shareholder of Shanghai and Hong Kong-listed Air China, will subscribe to 8.3% of the total offering.

The company will use Rmb7.45 billion of the proceeds to fund the Rmb24 billion purchase from Boeing.

Analysts said the deal should be mildly positive since it will enhance the group’s capital structure and balance sheet. Deutsche Bank analysts added that an A-share issue makes more sense than an H-share offering since the airline’s A-shares are trading at a 101% premium to its H-shares.

At current trading levels, Deutsche values the group at 3.2 times forward price-to-book, with the new deal accounting for 11.6% of the group’s existing A-share capital.  At the end of 2014, net gearing stood at 193%.

Low-cost carriers maximise stock price highs

Low-cost carriers such as Spring Airlines and Juneyao Airlines are also in the market for equity funding less than six months after completing their initial public offerings.

Shanghai-based Spring Airlines debuted in January and last week announced its return with a Rmb4.5 billion private placement.

Meanwhile, in mid-July Juneyao Airlines revealed plans to raise Rmb3.6 billion from a share placement, just two months after its market debut in May.

Both stocks have soared since their IPOs. Spring Airlines is up almost six times from an IPO price of Rmb18.16 to Rmb110.55 by Tuesday’s close, while Juneyao is up from Rmb11.18 to Rmb62.50.

Newer players such as Qingdao Airlines and Ruili Airlines are also preparing to grab a slice of the highly competitive market. These new airlines were set up in 2013 after the cancellation of a six-year ban on establishing privately owned airlines.

Bigger players are, therefore, expected to face more intense competition as China continues to liberalize the aviation industry through the introduction of private capital. 

China Eastern's jumbo offering

In April, China Eastern responded to the threat with a Rmb15 billion private A-share placement to fund the acquisition of 28 new aircrafts from Boeing and Airbus to expand its fleet.

According to its stock exchange filings, it sold up to 2.33bn shares at a maximum price of Rmb6.44 compared to a close of Rmb7.83 when it was suspended. Its parent did not subscribe to shares resulting in dilution from 64.35% to about 54.36%.

According to JP Morgan analysts, this would have helped reduce the company’s net gearing ratio from 308% at the end of 2014 to about 197%. Other analysts estimated that it increased book value per share by about 18%.

China Eastern has been benefiting from the establishment of the Shanghai free trade zone and the opening of Shanghai Disneyland, expected in the first half of next year. As such, the airline has been actively seeking partnership with foreign airlines in a bid to capture a potential upswing in business and tourism to Shanghai.

An alliance with Australian carrier Qantas was proposed earlier this year, but on Monday it was announced that US-headquartered Delta Air Lines is buying a 3.55% stake for $450 million.

The provincial government-backed Hainan Airlines also announced a Rmb24 billion A-share private placement in April. China’s fourth-largest airline by fleet size used the proceeds to finance the purchase of 37 new aircrafts and the acquisition of a 48.21% stake in Tianjin Airlines.

The company said it would issue a maximum of 6.7 billion shares at Rmb3.58 each.

On the runway?

Hong Kong Airlines, a sister company of Hainan Airlines, also plans to revive a $800 million initial public offering in Hong Kong after failing to structure the city’s first dual-currency IPO last year, sources familiar with the company told FinanceAsia.

Both Hainan Airlines and Hong Kong Airlines are owned by HNA Group.

And analysts also expect a deal from China Southern given its high net gearing ratio of 254% at the end of 2014. Again they believe an A-share deal is most likely since its domestically traded shares are trading at a 116% premium to its H-shares.  

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