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China's HNA Group reveals years of unusual cash movements

Subsidiaries' disclosures follow bankruptcy petition filings by creditors

The creditors seeking a bankruptcy reorganization of HNA Group include China Huarong Asset Management, Ping An Bank, Bank of Hainan, Chang'an Bank, a few travel agents and many suppliers.   © AP

HONG KONG -- Companies under China's HNA Group have reported finding irregular outflows of billions of dollars in cash, an ominous development following moves by creditors to call for a bankruptcy restructuring of the formerly highflying conglomerate and its subsidiaries.

Within hours of HNA's revelation on Friday evening that creditors had filed a petition with the Hainan Province High People's Court to reorganize the group, several domestically listed subsidiaries alerted their shareholders to the discovery of the irregular outflows by a state-appointed working group.

Hainan Airlines, HNA's flagship unit, said it expects to report a net loss of between 58 billion yuan ($9.02 billion) and 65 billion yuan for 2020, compared to a net profit of 543.18 million yuan a year earlier.

Pandemic-related operating losses added up to about 16.5 billion yuan, the fourth-largest Chinese passenger carrier said, with the bulk of its red ink stemming from impairment losses mainly related to irregular financial dealings with HNA itself and other group companies. Hainan Air warned that it could be put on probation for potential delisting by the Shanghai Stock Exchange if its audited financials show an excess of liabilities over assets.

The revelations "will make the (group's) restructuring process even more complex," said David Yu, a finance professor at New York University Shanghai who focuses on aviation.

"As the corporate structure of HNA Group companies has always been very complex, with many related party transactions, guarantees and cross shareholdings, the disclosure of irregularities adds to the complexity and mystery of the group."

HNA Group was previously one of China's most acquisitive conglomerates, buying assets including the Radisson hotel chain, technology products distributor Ingram Micro, aviation services company Swissport Group and stakes in Deutsche Bank and airlines and airports in countries such as Brazil, Australia, Ghana, Turkey and South Africa.

Beijing called a halt to the debt-fueled spree in 2017 to rein in financial risk. Amid continuing worries about HNA's stability, the previously privately run group last year came under the direct supervision of the Hainan government.

"The asset sale program will have hit a snag as most of their assets are travel/transport-related which will have seen valuations hampered" amid the pandemic, said Michel Brekelmans, managing director of strategy consultancy SCP/Asia. "Hard to see how they can come out of this except through a bankruptcy and restructuring."

A directive from the State Council last October set off the accounting investigations by a working group including representatives of local state-owned enterprises, the state aviation regulator and state-backed China Development Bank, HNA's largest creditor.

Gu Gang, leader of the working group and HNA's Communist Party secretary, alluded to the discovered cash outflows in a letter to employees on Thursday, noting "big holes being savagely built up and dug up which have to be treated one by one."

"How come such a good conglomerate could turn into something like this today?" he asked.

The recent filings highlighted more than 100 billion yuan in potentially problematic dealings, including debt guarantees provided by subsidiaries to HNA and other affiliates. Most of these sums were not previously disclosed to shareholders and some did not have required approvals from the units' boards or shareholders, according to the weekend disclosures.

CCOOP Group, a Shenzhen-listed retail and wholesale unit, said it expects to record up to 3 billion yuan in impairment charges due to the highlighted outflows which will give it a net loss for 2020 of as much as 4.9 billion yuan.

HNA Infrastructure Investment Group, a Shanghai-listed unit, did not quantify its expected impairment charge but said it foresees recording a net loss of up to 8 billion yuan.

In his letter to staff, Gu said his team has drawn up massive flowcharts to diagram the financial flows between HNA and its affiliates, with each section nearly three meters across. A group member likened them to "Along the River During the Qingming Festival," a classic 12th century scroll painting renowned for its fine detail and size.

While HNA's original announcement left ambiguous which and how many creditors were seeking its restructuring, the filings by the listed companies detail that the petitioners include state-owned bad loan manager China Huarong Asset Management, Ping An Bank, Bank of Hainan, Chang'an Bank, a few travel agents and many suppliers. The debtors have targeted at least 60 group companies in addition to HNA itself.

It is unclear when the Hainan court will rule on the bankruptcy petition. In the meantime, HNA Group said it will seek to continue normal operations.

HNA Group had 706.72 billion yuan in total liabilities at the end of June 2019 against total assets of 980.06 billion yuan. The group has not published financial data since then.

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