On Monday this week, investors successfully blocked a proposal by China Oilfield Services Ltd (COS) to lend money to its parent group. Now the jumbo-sized Air China Ltd (Air China, 0753) prospectus touches down in Hong Kong with a plan to raise HK$6,522m (US$838m) for the company net of expenses. We're not going to comment on the merits of this stock - decide for yourselves. But wait. Before you decide, you should be aware of a company called China National Aviation Finance Co., Ltd (CNAF), which is a 52% subsidiary of Air China's parent, China National Aviation Holding Company (CNAHC). Air China also holds 42.5% of CNAF. You guessed it. CNAF is another one of these "non-bank finance companies" the only customers of which are members of the CNAHC group and its "investees" - companies in which the group owns less than 50% of the stock.. In the prospectus, nestled in the undergrowth of 30 pages of connected transactions you will find the lesser-spotted section dealing with this on pages 133-135. It discloses that Air China both lends (or, as they would put it, "deposits") money to CNAF as well as borrowing smaller amounts from it. In the 3 years to 2003, Air China lent as much as RMB2,357m to CNAF, and borrowed up to RMB1,180m from it. The Stock Exchange has granted Air China a waiver until 31-Dec-06 to continue with this practice, subject to a maximum deposit of RMB5bn with CNAF, and maximum borrowings of RMB3bn. After that, they will have to go to independent shareholders with a request for approval - which of course, we would not give. The only slight mitigating factor is that CNAF has undertaken that the aggregate of its loans and investments outside of Air China will not exceed the aggregate of the deposits from customers other than Air China plus the equity of CNAF. However, this is not much comfort, for the following reasons:
What all this boils down to is that Air China could lend up to RMB5bn (HK$4.72bn, US$602m), an amount equivalent to about 72% of the IPO proceeds, to CNAF, a member of its parent group. It is often said that in Asia, ageing parents rely on their children for financial support due to the underdeveloped social welfare system. The same seems to be true of Chinese companies and their offspring, particularly state-controlled ones. Even in Hong Kong, no tycoon today would dream of seeking "deposits" from his listed company to fund his private enterprises, or pooling all the private and public company monies in one vehicle. OK, maybe he would dream of that, but they wouldn't get approval for it from shareholders - we've moved on from that kind of behaviour which was more common in the 1980s, when Tung Chee Hwa's private companies almost bankrupted Orient Overseas (Holdings) Ltd, as it then was known. He wrote at the time:
So now you know. Take your seats if you want, but remember, this flight comes with excess baggage. Copyright Webb-site.com, 2004 Sign up for our free newsletter Recommend Webb-site.com to a friend Important notice: All material on this site, except where otherwise accredited, is copyright to Webb-site.com. Media and researchers are welcome to quote from articles on this site, provided that such quotation is attributed to Webb-site.com. The information in this site should not be relied upon by any person in making any investment decision. No responsibility or liability is accepted by Webb-site.com or any person related to it for any loss arising from or in reliance upon the whole or any part of the contents of this site. Persons who are in any doubt about an investment or potential investment should take professional investment advice. From time to time parties associated with Webb-site.com may own long or short positions in securities issued by or related to companies or governments on which we comment. |