China's aviation-to-property conglomerate HNA Group has been on a wild ride in recent years. The group went on an aggressive overseas M&A spree, completing over 25 investments between 2015 and 2018, spending more than $50 billion and quadrupling the company's assets.
But in the past year HNA has been in the news for missing payments. In September, an airport backed by HNA failed to make good on a $200 million bond, while its Hong Kong Airlines subsidiary had seven aircraft seized in mid-December by the airport authority. The airline had almost gone bankrupt two weeks before, saved by a last-minute capital injection.
The question for HNA, now that it has attracted the Chinese government's scrutiny, started selling assets and begun refocusing on its core aviation platform, is whether this is all too little, too late.
Originally concentrating on aviation activities based in China's Hainan island, the group picked up businesses around the world including assets related to the travel and tourism industry, like Hilton hotels. But it also branched out into financial institutions like Deutsche Bank and real estate.
HNA was not alone in its international M&A binge; other Chinese players like Fosun and Dalian Wanda were similarly snapping up assets like there was no tomorrow and leaving even the most prolific international private equity investors in the dust.
A series of factors led to this M&A activity, including easy access to cheap financing; the Chinese government's desire to create national champions to compete on a global stage; and ambitious company leaders keen to create global empires.
HNA's founding chairman Chen Feng was quoted in a Reuters interview in 2015 comparing global M&A opportunities to shopping in a wet market: "You see so many fresh vegetables, you eat here, pick this and that."
Eventually, the Chinese government began to worry about the spiraling debt levels required to fund these acquisitions and the wider ramifications for the banking sector and economy in case of defaults. It instructed HNA to reverse its acquisition program and start selling assets in order to reduce debt levels that had climbed as high as $85 billion.
HNA's strategy of creating a global transport-to-tourism conglomerate was not necessarily a bad one, with potential for revenue synergies across the units and a high-growth market at home. But it was taking on too many things in too little time.
The heavy debt load to fund the M&A spree and capital expenses associated with its subsidiaries' aggressive expansion plans have resulted in cash flow problems, despite the acceptable operating performance of most of HNA's subsidiaries.
The ability of the group to support those subsidiaries in trouble has been eroded as the group has become troubled by its financial obligations. A healthy conglomerate should have easily anticipated and addressed the recent issues at HKA and Haikou Melian International Airport, but HNA's room for maneuver appears limited.
HNA management has been too distracted with deal making and chasing a grand vision that is common among Chinese business leaders. The low-margin, high-risk aviation industry in particular is not suited for this approach.
While management was on an M&A high deal after deal, they lost sight of the fundamentals of the underlying business, which started bleeding money. Include the slowing growth of the Chinese economy and a major demand shock caused by the ongoing protests in Hong Kong and you end up in the situation the group is in today.
Is there a way out of these troubles for HNA? Best for the company would probably be a radical process to bring debt to a manageable level and put the company on a sustainable path. The government will probably want to avoid this, however, given the potential impact on the stability of the financial institutions supporting HNA, the drop in business and consumer confidence and the loss of face for China Inc.
It is more likely that the government will find creative ways to prop up the company. Tellingly, the Hainan provincial government is one of the bidders for HNA's majority stake in Swiss aircraft maintenance business SR Technics.
HNA should consider bringing in outside management to turn around the business. It needs people skilled in cost control and making the most money out of every seat.
It needs to let go of its grand visions, refocusing on a limited set of opportunities that play to its strengths, for example the China market. This change in mindset may be better achieved if the group is headed by fresh leadership with experience in airline turnarounds, a model commonly used by struggling carriers elsewhere in the world.
A more fundamental strategic rethink may be needed, including separating the airport and airline assets and merging the airline assets into one of China's big-three state-owned carriers. This would not be inconceivable, given the creation of Chinese national champions in various industries, most recently in shipbuilding. It would be a "clean" way to make HNA's problems go away, China-style.
Michel Brekelmans is managing director at SCP/Asia, a Singapore-based consulting firm that supports companies in business strategy development, organizational improvement and M&A services across Asia.