HNA Seeks Stake in Dangdang Amid Debt Battles

After months of slowdown in acquisition pace amid public concerns over its debt-driven investment spree, Chinese conglomerate HNA Group Co. is moving toward another deal to buy a stake in one of the country’s e-commerce forerunners — Dangdang Inc.

Tianjin Tianhai Investment Co. Ltd., the Shanghai-listed subsidiary of HNA, said in a Friday filing that it is seeking a stake in Dangdang. Details about the deal have yet to be confirmed. In response to Caixin’s request on Saturday, Dangdang didn’t comment directly on the deal but said “the company has seen fast profit growth in recent years and has been approached by many investors.”

Dangdang is one of China’s earliest e-commerce platforms, starting off as an Amazon-like book retailer in 1999. But the company has struggled to secure its market share amid fierce competition in China’s white-hot e-commerce market.

The deal raised market eyebrows as it comes at a time when HNA has strived to handle its huge debt pile after years of aggressive spending, with $50 billion of deals in aviation, tourism, real estate and other sectors.

HNA has slowed its acquisition pace since last year amid regulatory scrutiny over private companies’ overseas spending. Authorities are concerned about mounting debt risks and capital flight. Last June, the banking regulator told commercial banks to study bad loan risks related to major dealmakers, including HNA, Fosun International and Wanda Group, tightening the grip on their access to bank loans. International rating agency S&P Global Ratings has lowered its informal credit rating on HNA from B to CCC+ to reflect its deteriorating liquidity position.

HNA has pared back some of its offshore assets to reduce debt over the past months. The latest move was to sell land in Hong Kong for HK$6.4 billion ($825 million), which was announced Thursday.

Caixin learned from sources close to the matter that HNA has held talks with domestic institutions on the possible sales of some of its domestic assets, including properties in Shanghai, Haikou, Beijing and Suzhou. A document viewed by Caixin listed assets that HNA is considering selling, including the Tangla Hotel in Beijing, a commercial complex in Haikou, and the Crown Plaza Resort in Sanya. Most of the assets are priced between 2 billion yuan and 6 billion yuan.

But the company is apparently still squeezed by capital drain. A source from an aircraft leasing company and a separate source from a Shenzhen-based aviation fuel supplier told Caixin recently that HNA has delayed payments to them for awhile.

In January, HNA Chairman Chen Feng told Reuters that the company was facing liquidity troubles after a big number of mergers but said it could solve the problems and had support from banks.

It is unclear how much Dangdang’s stake will be valued at and how HNA plans to manage the funding. Tianhai Investment said in the Friday filing that it may issue new shares and raise funds for the purchase of Dangdang.

According to a Reuters report in October, HNA was seeking to buy a 90% stake in Dangdang and may value the company at between $1.2 billion and $1.5 billion, although Li Guoqing, CEO of Dangdang, denied the report at that time.

Why Dangdang?

Tianhai Investment, a shipping and investment arm of HNA, has been repositioning its business to focus on cloud computing and technology solution. A company executive was cited by domestic media as saying that the investment in Dangdang will bring Tianhai Investment expertise in managing e-commerce customers and big data operations.

Dangdang was set up in November 1999 as a rival of Amazon in China. That was five years before JD.com, now China’s second largest e-commerce company, launched its website for online retail.

Dangdang quickly became China’s largest online bookseller. The company went public on the New York Stock Exchange in 2010 and raised $272 million — the biggest initial public offering (IPO) by an Asian tech company that year.

But Dangdang has failed to catch up in the fast evolving market. Since 2012, China’s once quiet e-commerce market started to boom and soon became a hot battlefield for cut-throat price wars ignited by Alibaba Group, JD.com and Suning.com. Online retailers have poured huge amounts of money to expand their product categories while offering big discounts to lure shoppers.

Dangdang lost its ground in the cash-burning price wars to win market share, partly due to concerns that the heavy spending may hurt its financial performance as a listed company.

Despite attempts to expand into a wider range of the e-commerce market, Dangdang’s presence has mainly stuck in the small niche of online book market, a market worth 45.9 billion yuan in 2017, compared to the 24 trillion yuan worth overall e-commerce market which covers a wide range of goods from cloth, electronics to groceries and fresh food.

Dangdang “made efforts to tap grocery and home appliance markets, but was not affirmed. Its root in book market is too strong,” said an e-commerce analyst.

In May 2016, Dangdang delisted from the New York Stock Exchange in a $556 million privatization led by its founding team. Caixin learned from a former Dangdang employee that the company has talked with Alibaba about a possible merger after the delisting, but the two sides failed to reach an agreement.

Game of capital

Tianhai Investment was thrust into the international spotlight after buying global information technology products distributor Ingram Micro for $6 billion in 2016. It was one of China's largest high-tech purchases in the sensitive U.S. market.

The deal caught wide attention because Tianhai Investment, with revenue of 720 million yuan in 2015, acquired a much larger target, Ingram Micro, which had 280 billion yuan worth revenue that year.

Market records and public information showed that Tianhai Investment paid 8.7 billion yuan with its own cash on the deal, with the rest coming from partners and bank loans.

The 8.7 billion yuan paid for Ingram Micro came from the 11.99 billion yuan Tianhai Investment raised in 2014 from a private placement to investors including Pudong Development Bank, Huaxia Bank and Industrial and Commercial Bank of China.

The placement was set to raise money for Tianhai Investment’s plan to acquire 14 crude oil and gas tankers, which was later scrapped due to the shipping market downturn, a source close to Tianhai Investment said.

With the money in hand, HNA and Tianhai Investment have actively sought for investment targets to provide better returns or a proper exit for its investors, said the source. The companies set their eyes on the overseas market since late 2015 due to turmoil in the domestic stock market.

After the Ingram Micro deal, Tianhai Investment’s shares surged to over 10 yuan per share as of December from 6 yuan before the announcement in July. The company’s 2016 financial report showed that most of its investors in the 2014 share placement sold their shares.

The acquisition of Ingram Micro boosted Tianhai’s total revenue to 146 billion yuan in the first half 2017, 106 times higher than the previous year. But net profit declined 72.6% to 24.9 million yuan.

“(The Ingram Micro deal) is not a story of improving business, but a story of capital (maneuver),” said the source close to Tianhai.

Contact reporter Han Wei (weihan@caixin.com)