China eastern treads mixed ownership path

2017-06-20

From:South China Morning Post

Airline gets investment from private investors for Eastern Air Logistics unit with an eye on competing with global giants like FedEx, UPS and DHL.

China Eastern Air Holding has become the latest test case in Beijing's ambitious plans to reform state-owned enterprises by bringing in private investors.

The airline operator said yesterday it will introduce four private investors, including Legend Holdings, owner of the Lenovo computer brand, to share ownership of its logistics arm, Eastern Air Logistics (EAL).

The restructuring is aimed at building a world-class logistics company capable of competing with the likes of FedEx, the company said.

The four private entities will become Eastern Air Logistics' major shareholders, with an aggregate investment worth about 2.3 billion yuan (HK$2.7 billion), the company said in a press release.

After the deal, China Eastern Air Holding will control 45 per cent of Eastern Air Logistics, Legend Holdings will take 25 per cent, Greenland Financial, a subsidiary of property giant Greenland Holdings, will own 10 per cent, while two private logistics firms - Global Logistic Properties' mainland branch and Deppon Logistics - will take a 5 per cent stake each. Core staff of Eastern Air Logistics will hold the remaining 5 per cent stake.

"The purpose of the restructuring is to build EAL into a global first-class logistics provider neck-and-neck with FedEx, UPS and DHL, while also exploring a suitable path for reform of state-owned enterprises," the press release said.

Eastern Air Logistics used to be a subsidiary of Shanghai and Hong Kong dual-listed China Eastern Airline. It was spun off and transferred to the group company this February, with total equity valued at 2.43 billion yuan.

Eastern Air Logistics recorded net profit of 21 million yuan in 2015, but slipped to a loss of 20.8 million yuan in the first six months of 2016, according to a filing by China Eastern Airlines to the Shanghai bourse in November.

The central government has been urging large state enterprises to introduce mixed ownership between the government and the private sector, to improve earnings ability and efficiency.

In early April, China Unicom, the state-owned operator of the world's sixth-largest mobile network by subscribers, announced it was getting a strategic private-sector investor, making it a major test case for the reforms.

Last week, the government of northeastern Liaoning province signed a framework agreement with China Merchants Group to establish Liaoning Port Group through the integration of Dalian Port and Yingkou Port Group, pushing up shares of the two listed firms in Hong Kong and Shanghai.

"So far there have been several high-profile SOE reform plans announced, but I am afraid people and the market are expecting some bolder steps, which apparently face great resistance from interest groups," said Larry Hu, an economist at Macquarie Capital.

Rather than mixing private and government ownership in individual firms, it would be better to formally open up the business sectors that have been monopolised by SOEs, or make a list of businesses that should be closed to the private sector, he said.

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