Caixin
Sep 25, 2021 08:01 AM
BUSINESS

In Depth: Behind HNA’s Fall, a Web of Nepotism Spreading from New York to Hainan

HNA Chairman Chen Feng.
HNA Chairman Chen Feng.

More than seven months after Chinese conglomerate HNA Group Co. entered a government-led bankruptcy restructuring, the company’s chairman and its CEO have been detained by police on suspicion of criminal misconduct, casting more clouds over one of China’s most complicated bankruptcy cases.

The detentions add a new twist to the rise and fall of HNA, a conglomerate started as a regional airline and later expanded globally through a highly leveraged buying spree of stakes ranging from the Hilton hotel chain to Deutsche Bank. The company entered bankruptcy proceedings earlier this year.

Details of the alleged crimes committed by the two executives were not disclosed by the police, but Caixin’s year-long investigation, including a review of the company’s filings and previous interviews with multiple former and current executives, found that HNA Chairman Chen Feng, now deceased co-founder Wang Jian and multiple senior executives owned companies controlled or invested in by family members that conducted business with HNA. These businesses, many registered in New York as well as Hainan, where the company headquarter was located, obtained funds and contracts from HNA ranging from aviation materials to real estate development, advertising and insurance. Some of those relatives even became frequent guests in New York’s philanthropy circle and leaders of Chinese businesses associations in the U.S.

None of the related-party transactions, some of which were related to the conglomerate’s overseas acquisitions, were fully disclosed in HNA’s regulatory filings.

Chen’s and Wang’s brothers were both involved in aviation material businesses that have supply contracts with HNA. HNA might have paid 30% to 50% more than competitors for aviation materials and 10% more for aircraft, a former HNA executive said.

“The more expensive, the more commission they could get,” the former executive said. “This is impossible at state-owned enterprises. Isn’t this embezzlement?”

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Photo: VCG

Brothers’ business ties

In 1989, following the establishment of Hainan — a huge, remote southern island — as a province, the provincial government decided to set up a local airline company with 10 million yuan ($1.55 million) of registered capital. Starting from scratch, the planned Hainan Airlines faced difficulties from the beginning because of a lack of capital, airplanes and talent.

In 1990, Wang and Chen along with several co-workers from the Civil Aviation Administration of China in Beijing quit their jobs to join the new airline. Wang and Chen soon became vice presidents and major shareholders after a joint-stock ownership restructuring.

Shortly after Chen joined Hainan Airlines, his younger brother Chen Guoqing in 1991 set up Hainan American Co. (HAC) in the U.S. The original shareholders and business scope of HAC are unknown. In the first couple of years, the company had several transactions with the New York branches of Citic Ka Wah Bank (later renamed China Citic Bank International), Bank of China and Bank of Communications, according to information from the New York Department of Finance. The amount and purpose of these transactions are also unknown.

In 1999, Hainan Airlines’ A-shares were listed on the Shanghai Stock Exchange. Its prospectus shows that Hainan Airlines had investments in HAC, but the timing and amount weren’t disclosed. In 1997, Hainan Airlines sold its interest in HAC to its subsidiary HNA Aviation Import & Export Co. Ltd. for $1.5 million, according to the prospectus.

The prospectus also for the first time revealed the business relationship between Hainan Airlines and HAC. In 1996, Hainan Airlines paid HAC 25.59 million yuan ($3.96 million) in commissions for aviation material procurement. Next year, the figure was 14.75 million yuan.

In 1997, HAC moved its office into the north tower of the World Trade Center in New York, which was destroyed in the 2001 terrorist attacks. Its aviation materials business boomed with the expansion of Hainan Airlines’ fleet.

In the next two years, HAC procured aviation materials including aircraft engines for Hainan Airlines from Allied Signal Aerospace, Boeing and CFM International and obtained funds through the New York branches of Citic Ka Wah Bank and Bank of Communications. Chen Guoqing was chairman of HAC, and its vice chairman was Tang Xiangdong. Tang, who is now the HNA vice chairman and CEO, was detained by police together with Chen Feng.

As of March 1999, Hainan Airlines entrusted HAC to import aviation materials and paid it 76 million yuan in deposits.

In 1999, HAC changed its name to Pacific American Co. (PAC). The next year, the company procured engines from Pratt & Whitney Canada for Hainan Airlines’ 328 planes. Citic Ka Wah Bank provided loans for the deal.

In 1994, Chen Guoqing  registered another company also named HAC in Bermuda. A verdict related to a vessel detained in South Africa revealed HNA’s relationship with HAC. The ship was owned by Grand China Shipping Co. Ltd., a subsidiary of HNA, while HAC owns a 10% stake in Grand China Shipping, according to the verdict. Grand China Shipping claimed HAC was a private investment company.

Chen Guoqing’s wife Liu Ming and his wife’s brother were also listed as shareholders of Bermuda HAC. His wife’s brother, identified as Mr. Liu, is a longstanding employee of HNA, a former executive of a number of HNA’s subsidiaries and the current chief executive of an associated company, the verdict said.

In 2000, HNA prepaid HAC 94.4 million yuan for aviation materials, according to HNA’s annual report. HNA also had 13.8 million yuan of long-term payables to HAC, on which HNA paid 10% to 12.5% annual interest. Meanwhile, during 2001 to 2005, PAC also provided aviation material financing leasing services for HNA, which listed PAC as one of its long-term payable recipients. As of 2002, HNA had 59.43 million yuan of payables to PAC, on which HNA had to pay 3.2 million yuan of interest.

Notably, HNA in its reports used the names PAC and HAC on the same payable items during that period. It’s unclear whether HAC referred to the New York company that changed its name to PAC or the Bermuda company, or whether the two companies are actually the same.

Chen Guoqing’s complex ties with HNA in terms of equity investments, business and company management are also documented in other little-known overseas court records. A 2013 court ruling on the bankruptcy of Dornier Aviation (North America) Inc., an American subsidiary of German aircraft manufacturer Fairchild Dornier GmbH and supplier of aircraft equipment to HNA, shows that HNA placed orders with Dornier through PAC, which was an affiliate of HNA. HNA didn’t dispute that PAC was its agent and had authority to order parts on its behalf, the court ruling said, even though HNA claimed PAC was an independent business.

 Read more  
In Depth: HNA Charts New Course Back to Airline Basics

Properties in Manhattan

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Bio of Chen Guoqing on Committee of 100 official website

Chen Guoqing was involved in HNA’s property investments in China. Hainan Airlines disclosed in 1997 that it invested 38 million yuan for a 20% stake in a real estate development firm called Beijing America Center Real Estate Development Co. The exact time the investment was made wasn’t disclosed. The name of the company couldn’t be found in a business registration database. But a company called Beijing America Tower Real Estate Development Co., registered in 1994 with 150 million yuan of capital, listed Chen Guoqing as the legal representative and HAC as a shareholder with a 50% stake. The registration of the company has since been canceled.

Chen Guoqing and companies associated with him were also behind the equity changes in many HNA affiliates. In 2000, HAC was listed as the seventh-largest shareholder of Hainan Airlines with 1.15%, and it exited as a shareholder in 2003. In 2006, Hainan Airlines completed a private placement with a group of investors, including Hainan Taiheng Industrial Co. Ltd., where Chen Guoqing’s wife Liu Ming was an executive. Taiheng’s legal representative Li Dongjiang was also CEO of PAC. Another executive at PAC, Meng Fanchen, was once director at Headstream Investment Co. Ltd., which holds a 17.5% stake in HNA.

As HNA expanded through overseas acquisitions, Chen Guoqing also gobbled up properties in the U.S. In 1997 through HAC, he bought a unit in Trump Tower in New York that is now worth about $3.7 million. In March 2003, Chen and his wife bought another apartment in the Park Imperial in midtown Manhattan. Four months later, he bought another unit in the same building through PAC. Citic Ka Wah Bank provided a $1.1 million mortgage to him, and Hainan Airlines guaranteed the loan.

In 2006 and 2010, PAC bought two luxury apartment units in the Time Warner Center overlooking Central Park. Citic Ka Wah Bank provided a $3.3 million mortgage on one of the units, guaranteed by Hainan Airlines and HNA. PAC sold the two units in 2012 and 2015.

Chen and his wife entered the elite social circle in New York through philanthropy and business associations. Among his many social engagements, Chen is a vice chairman of China General Chamber of Commerce in the U.S., a member of the board of trustees of the Asia Society and founder of the Asia Society Policy Institute, and as a parent, remains a trustee on the Board of prestigious Brown University. The bio of Chen at Brown’s corporation trustee page referred to him as one of the founders of HNA Group, chairman of HNA North America and vice chairman of the HNA Foundation.

The Wang brothers

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HNA's co-founders Chen Feng (left) and Wang Jian (right) attended an internal meeting in 2013. Photo: VCG

HNA’s late Co-Chair Wang Jian was one of the twin engines powering the company together with Chen. In 2017, Wang commented on his relationship with Chen in an internal meeting as harmonized and unified, although some company sources said the co-leaders are not as amicable as they appeared to be.

“You hardly saw them together cheerfully,” a person close to Chen and Wang said. “Chen was on the front stage taking all the attention, but it was Wang who decided everything in the back.”

But the two were tightly coordinated in their personal links with HNA’s business networks. Caixin learned that while Chen’s family profited from deals with HNA, Wang’s brother Wang Wei was also deeply engaged in lucrative businesses with the aviation giant.

Wang Wei is the controlling shareholder of Hainan Aviation Import and Export Trade Co. (Hainan Aviation Trade), one of the earliest HNA subsidiaries, which was later spun off. According to Hainan Airlines’ 1999 IPO prospectus, Hainan Aviation Trade was a noncontrolling shareholder of Hainan Airlines at the time.

Financial records of Hainan Airlines showed that between 1996 and 1999, Hainan Airlines paid more than 65 million yuan in commissions to Hainan Aviation Trade for equipment purchases. In 1999, Hainan Aviation Trade owed 28.7 million yuan to Hainan Airlines in the form of accounts receivable.

In 2006, Hainan Airlines disclosed in its annual report that it had written down 6.38 million yuan of bad debts related to Hainan Aviation Trade as well as 6.5 million yuan of bad debts with HAC.

In addition to Hainan Aviation Trade, Wang Wei also controlled a company called Hainan Jianheng Industrial Investment Co. Ltd., which engaged in a wide range of businesses including property, aviation trade, logistics, golf courses and finance. Hainan Jianheng had close business links with HNA and its affiliates.

In 2000, Hainan Jianheng joined HNA and Hainan Airlines in setting up a trading venture, Hainan HNA Aeronautics Import & Export. Hainan Jianheng held 30% of the venture, equivalent to HNA’s holding.

From 2000 to 2016, Hainan HNA Aeronautics earned 420 million yuan from aviation equipment imports for Hainan Airlines.

A former HNA employee said it is common that the company’s procurement orders went to businesses affiliated with senior executives.

“We had contacted suppliers and done a lot of work but got no response when it was reported to Wang Jian,” the former employee said. “Many (of the orders) eventually went to Wang Wei.”

For a while, Wang Wei controlled all of HNA’s printing-related businesses. “One copy of the product cost only 1 yuan in Beijing, but we had to do it in Hainan where it cost 4 yuan,” the person said.

 Read more  
Cover Story: HNA Group’s Final Crisis

The hidden network

A 2005 regulatory warning issued to Hainan Airlines offered a glimpse of HNA’s sprawling hidden network with affiliates and business dealings. The China Securities Regulatory Commission in the notice criticized Hainan Airlines for failing to disclose 440 million yuan of transactions with Shaanxi Xinyuan Industrial Trade Co.

Business registration records showed that as of December 2003, Shaanxi Xinyuan was 83.3% owned by Changjiang Leasing Co., formerly known as HNA Aviation Leasing Co. Changjiang Leasing was 97% owned by four affiliated companies of Hainan Airlines.

It is unclear how many of HNA’s business partners are affiliated with the company and its executives due to the complicated shareholding structures. It is also difficult to track the capital flows between HNA and such affiliates.

According to Hainan Airlines’ 2004-05 financial report, a company called Hainan Jiahui Investment Co. had a large amount of debt transactions with Hainan Airlines. Hainan Jiahui, whose business registration has been canceled, was registered in 2003 and 20% owned by Yangtze River Investment, an HNA affiliate. Hainan Jiahui’s legal representative, Zhang Yigang, took senior management posts in several companies linked to Wang Wei.

After announcing the detention of Chen and Tan Friday night, HNA held a management meeting chaired by party chief Gu Gang, urging executives to reflect on the company’s 28-year development as the bankruptcy restructuring enters a key stage.

One week earlier, Gu said in an internal meeting that under the restructuring plan, HNA’s assets would be divided into four independent units — aviation, airport operation, finance and commercial. All existing shareholders, including the largest shareholder Hainan Cihang Charity Foundation, will no longer hold any interest in the company after the revamp, according to Gu.

“Existing shareholders’ stake will be wiped out, a practice that follows market rules and the legal obligations of bankruptcy restructuring,” Gu said. “It is the responsibility that shareholders must bear and a result of a private company’s reckless growth.”

Contact reporters Denise Jia (huijuanjia@caixin.com) and Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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