Caixin
Nov 11, 2020 05:57 AM
BUSINESS & TECH

Alibaba-Backed Cainiao Joins Group Buying Stake in Air China Cargo

Since 2017, China has pushe forward so-called mixed-ownership reform in the three airlines to attract new capital and bolster business.
Since 2017, China has pushe forward so-called mixed-ownership reform in the three airlines to attract new capital and bolster business.

China National Aviation Holding Corp., parent of the country’s flag carrier Air China Ltd., agreed to sell 31% of its freight business unit Air China Cargo Co. Ltd. to investors including Alibaba Group’s logistics arm Cainiao as part of a restructuring of the state-controlled aviation industry.

Cainiao along with Shenzhen International Holdings Ltd., State Reform Shuangbai Development Fund and a company representing Air China Cargo employees paid a combined 4.85 billion yuan ($733 million) to the freight carrier. The deal values Air China Cargo at about 15.7 billion yuan, of 1.72 times book value, according to a Caixin calculation.

Shenzhen International, a Hong Kong-listed logistics and construction company, earlier this week said it would purchase a 10% stake in Air China Cargo. Cainiao and other investors haven’t disclosed details of the investment. State Reform Shuangbai Development Fund is a government-backed fund dedicated to restructuring state-owned enterprises.

Air China Cargo was a unit of Air China until a 2018 divestiture as part of the Chinese government’s efforts to restructure freight units of the country’s three major state airlines — Air China, China Eastern Airlines and China Southern Airlines —to turn around their loss-making cargo businesses.

In 2015, the central government pushed to consolidate the three airlines’ cargo units to create a business behemoth to compete with international giants like FedEx and DHL. But the effort failed because of the complexity of the restructuring.

Since 2017, the government shifted strategy to push forward so-called mixed-ownership reform in the three airlines to attract new capital and bolster business. Eastern Air Logistics, the freight unit spun off by China Eastern in 2017, was the first to launch the revamp by bringing in nearly 2.3 billion yuan from investors including Legend Holdings Co. and Global Logistic Properties Investment (Shanghai) Co.

The investment helped Eastern Air Logistics reduce its debt ratio and fueled its business growth. The company filed a prospectus for an initial public offering in Shanghai in July and may debut as soon as this month, Caixin learned.

In September, China Southern kicked off ownership restructuring for its wholly owned cargo unit, China Southern Cargo Ltd., planning to invite as many as 15 new investors to acquire 49.5% of the company.

Air China Cargo listed its 31% stake for sale in August. The company said the share sale is to diversify the company shareholding structure and improve financial strength to boost its transportation, procurement and sales capacity. After the share sales, China National Aviation’s holding will be reduced from 65.2% to 45%. The second-largest shareholder, Hong Kong’s Cathay Pacific Airways Ltd., will hold 23.99%, down from 34.78%.

As separate ownership revamps unfold in the three freight carriers, the possibility for China to create a new industry giant through consolidation will be low, said Yu Zhanfu, a partner in consulting firm Roland Berger’s Beijing office.

“It will be the main trend for the three companies to restructure separately for business transformation,” Yu said.

Several aviation industry insiders said Air China Cargo and China Southern Cargo are expect to follow Eastern Air Logistics in seeking a public offering once the restructuring is complete. But the three companies will face the same investor concerns over heavy reliance on business with the parent, they said.

According to company reports, Air China Cargo had 8.9 billion yuan of net assets as of the end of July and operates 15 cargo flights. The company posted 10.5 billion yuan of revenue for the first seven months, with net profits totaling 2.1 billion yuan.

Lu Yutong contributed to this story.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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