Hong Kong Airlines has filed its listing application with the city’s exchange ahead of its proposed landmark $500 million dual-currency listing later this autumn.
The short-haul carrier will be the first to offer two sets of shares in renminbi and Hong Kong dollars, under the sole lead of JP Morgan. Each set of shares carries its own stock code but are fully fungible and stakeholders have the same rights.
Friday’s filing on the Hong Kong Stock Exchange did not unveil details of how many shares will be on offer, provide an indicative price range or mention what percentage of enlarged share capital the deal will represent.
What is clear is that this deal is geared towards Hong Kong retail investors and their massive pools of renminbi deposits in the city. Renminbi deposits, mostly held by Hong Kong residents, totalled Rmb937 billion ($152.6 billion) as of the end of July, according to the Hong Kong Monetary Authority.
Given interest rates remain at rock bottom levels, the issuer is hoping to convince the city’s retail community that investing in its shares could make better returns than simply leaving the renminbi sitting in banks.
To entice investors, Hong Kong Airlines will offer an incentive plan, such as discounts and free tickets, to IPO subscribers who keep their shares for a specific amount of time. Details of the incentive programme are still being ironed out. But sources close to the deal tell FinanceAsia the short-haul carrier is mulling putting in place a one share, one mile option, among others. For example, if an investor buys 5,000 shares they will receive 5,000 air miles.
It will issue short-term renminbi notes between Rmb800 million and Rmb1.5 billion ($130.3 million to $244.2 million) to institutional investors, according to the filing.
Use of proceeds
Hong Kong Airlines could raise as much as $600 million to help pay for Airbus aircraft on order, which include 15 A350s, six A330s and 13 A320s. It will introduce the majority of the new aircraft to its existing fleet by 2017, bringing the total operating fleet to 54 aircraft by 2018.
It will also use proceeds to pay down its debt, which stood at HK$8 billion as of May 31, compared with HK$7.8 billion in May 2013. Borrowings fell to HK$7.6 billion as of June.
While small compared to Cathay Pacific, Hong Kong Airlines has made a name for itself by using newer aircraft models and focusing on smaller cities often overlooked by larger airlines. Its all-Airbus fleet has an average age of 2.4 years as of May, making it an attractive alternative to some of its global peers. Newer aircraft have better fuel efficiency and lower maintenance and operating costs compared to older fleets.
Hong Kong Airlines has also focused on travel between the city and Tier-2 cities in China — it also claims to be the first to offer direct flights to Okinawa and the Maldives, and plans to add new destinations and routes in Asia-Pacific in upcoming years.
The company’s profits for the first half of the year dropped compared to the year-ago period. Political upheavals in Thailand and Vietnam, the disappearance of Malaysian Airline flight 370 and the crash of Malaysian Airline flight 17 have led to declining air travellers in the region in 2014.
Net profit at Hong Kong Airlines fell 11% for the first five months of the year to HK$165.9 million ($21.4 million), compared with HK$186.1 million in the first five months of 2013.
Indeed, this year shows the inherit volatility that comes from investing in airlines. Dozens of factors can have a negative effect on airlines, from unpredictability in fuel prices to political events, such as the Ukraine turmoil, which ultimately saw Malaysia Airlines Flight 17 shot down.
Still, the company has registered steady increases in profits and revenues over the past three years, and maintains it is ideally suited given its focus on China, which remains one of the fastest growing air travel markets globally.
Net profit totalled HK$493.3 million in 2013, HK$274.7 million in 2012 and HK$147.9 million in 2011. Similarly, it recorded revenues of HK$8.5 billion in 2013, up from HK$6.3 billion in 2012 and HK$4.7 billion in 2011.
The company is partly owned by Chinese airline-to-logistics conglomerate HNA Group. Hainan Airlines, which falls under the HNA umbrella, will remain Hong Kong Airlines’ substantial shareholder post-listing, assuming the overallotment option is not exercised, according to the prospectus.
Dual-currency in Hong Kong
It is too early to gauge how investors will react to the deal. The issuer’s prospectus became available on Friday and roadshows have not yet begun. But there are some concerns that re-igniting the renminbi equity market could prove difficult, as confidence and visibility remain low, despite an effort by the Hong Kong Exchange to educate investors during a lengthy gestation period.
Hui Xian Real Estate investment Trust raised $1.6 billion in a renminbi IPO in April 2011. One year later, Hopewell Highway Infrastructure issued Rmb386 million of new shares denominated in renminbi via a placement.
The exchange has been lobbying banks in an effort to promote renminbi IPOs. But dual-currency IPOs face challenges. Some banking sources argue that only companies offering HK$2 billion in total, or HK$1 billion for each tranche, have a decent chance to complete successful dual-tranche listings. These companies can guarantee liquidity in the secondary market.
Hui Xian Reit, the first company to sell renminbi shares in Hong Kong, has slid 28% since its April 2011 listing.
Being the first also means there are a number of risks. Potential technology problems, more time and cost spending and investor unfamiliarity may have prevented issuers from trying.
Chow Tai Fook Jewellery, Haitong Securities and WH Group were all rumoured to have considered dual-currency listings but ultimately went with Hong Kong dollar IPOs.