Cathay Capital Injection | The government has spent huge sums of money to rescue Cathay Pacific as if it were a copy of the 1998 campaign to enter the market to fight a predator?

Financial News

Written by: Kuang Yueting, Lin Leqian

2020-06-09 19:20

Cathay Pacific Airways (0293) announced a 39 billion yuan fundraising plan, in addition to participating in the rights issue through shareholders such as Swire Pacific (0019) and Air China (0753) to raise 11.7 billion yuan; the government also provides Cathay Pacific with 273 by subscribing for preferred shares and providing transition loans 100 million yuan of funds, related funds come from the land fund. This is the first time that the government has returned to the private sector after the return of the government; its actions have taught market participants to be unexpected, and it has used land funds to provide financial assistance to Cathay Pacific.

The Financial Secretary Chen Maobo explained that the capital injection to Cathay Pacific is to support Hong Kong’s status as an international aviation hub. He stated that the government has no intention to take ownership of the airline and hold it for a long time. It is also expected that this investment in Cathay Pacific will achieve an internal rate of return of 4 % To 7.5%.

The government denounced 118 billion yuan to fight predators

Although the government's participation in the rescue of Cathay this time is the first time to provide assistance to private enterprises after the return, the use of public funds to enter the market because of a major crisis in hedging has actually occurred in August 1998. That summer was arguably the most worrying moment in Hong Kong’s financial history.

The Asian financial crisis erupted in the second half of 1997, which caused a heavy blow to the newly returned Hong Kong. At that time, the Hong Kong dollar, stock market and futures market were attacked by speculators in all directions, deliberately creating market panic, hoping to make huge profits by affecting interest rates, stock and futures pricing. In view of this, the government has taken defensive actions to defend the linked exchange rate, and in order to restore order to the financial market and rebuild market confidence.

On August 14, 1998, he entered the market for the first time to meet the predators. The HKMA's entry into the market, which lasted for two weeks until August 28, eventually used the Exchange Fund of 118 billion yuan, accounting for about 18% of the assets of the Exchange Fund at the time. The 33 Hang Seng Index constituent stocks are all targeted by the government. In order to withdraw from related investment, the next year, the government established the Profit and Wealth Fund (2800) and sold Hong Kong stocks bought in the market in 1998 in the form of ETFs. The fundraising amount reached 33.3 billion yuan, which became the largest new fund raising in Asia outside Japan at that time. Amount.

As the Hong Kong stock market was driven by the Kewang stocks in 1999, there was a round of increase. Promoting the government to enter the market in 1998 to gain support for the Hong Kong stock market, it can also enjoy the benefits of rising stock prices in the future. As for the government's shareholding in Cathay Pacific this year, the potential return from the receipt of preferred stock dividends and the future transfer of subscription options will have a maximum return of 7.5%.

Takeover of overseas trust banks in 1985

During the period of the British Hong Kong government, the government also invested in private enterprises for "saving the market." In 1985, overseas trust banks and its subsidiary, Hong Kong Industrial and Commercial Bank, faced bankruptcy due to false accounts. They suddenly suspended trading and were taken over by the government. At that time, the government was worried about affecting the confidence of the public and investors, so it passed the regulations urgently, spent 3 billion yuan in foreign exchange funds to take over the bank, then appointed a new board of directors to take over the overseas trust bank, and thoroughly investigated the reasons for the bank failure and sentenced the people involved. The government subsequently sold the overseas trust bank it took over to Dao Heng Bank for $4.4 billion in 1993, and Dao Heng Bank was later acquired by DBS Bank.

Lin Jiaqi, director of Honghui Asset Management and director of investment strategy, estimates that the government can sell Cathay shares at a premium after the market resumes. (Profile picture)

Lin Jiaqi's establishment of Aviation is only a transitional arrangement

This time, the Hong Kong government established Aviation 2020 Limited (a company wholly owned by the Financial Secretary Incorporated) to subscribe for preferred shares issued by Cathay Pacific, involving a total of 19.5 billion yuan, and can exercise the subscription rights to subscribe for 416 million Cathay shares at 4.68 yuan. Provided 1.95 billion yuan for Cathay Pacific. Aviation 2020 Limited has also provided Cathay Pacific with an interim loan financing, involving HK$7.8 billion.

Lin Jiaqi, director of Honghui Asset Management and director of investment strategy, believes that the Hong Kong government's rescue of Cathay Pacific is similar to the above actions. However, this time when the Hong Kong government set up the Aviation company, if it finally exercised the subscription rights to purchase Cathay shares, it is believed to be a transitional arrangement and there is no need to use the Yingfu Fund to sell this batch of goods.

Lin Jiaqi admits that if the Hong Kong government exercises the subscription rights at 4.68 yuan per share, its PB (price-to-book ratio) is only 0.3 times, which is very cheap for an internationally renowned airline; plus many airlines such as Air China (0753 ), Qatar Airways are all interested in acquiring shares of Cathay Pacific. It is estimated that after the market resumes in the future, the Hong Kong government may sell the shares at a premium.

Cathay Pacific management is not affected by government

For Aviation, it has the right to appoint two observers to attend the meeting of the board of directors of Cathay Pacific, and to contact the management and understand the information. Lin Jiaqi said that the government, as the major creditor of Cathay Pacific, is very normal to send personnel to observe. The government also has a say in the actions of Cathay management, but it is not easy to veto, so Cathay has not been robbed by the government. "Cathay is not like a bus or subway, it is a means of transportation that people use every day. I believe that Cathay Pacific's management will not be affected by the government!"

Guo Sizhi, vice chairman of the Hong Kong Stock Analyst Association, believes that if such a successful corporate failure of Cathay Pacific will be seriously affected The business environment in Hong Kong is similar to the government's entry into the market in 1985 when the government took over foreign trust banks with foreign exchange funds. It is believed that the government's approach to injecting private companies has no problems and can temporarily solve Cathay Pacific's financial problems.

Cathay Pacific said it was the only plan to take the initiative to submit a capital injection plan to the government

[Cathay Pacific suspension] Hong Kong government pumps nearly 30 billion yuan to save Cathay

[Cathay Pacific suspension] Cathay Pacific’s plan to issue preferred shares to the government with a 39 billion capital restructuring plan revealed

Cathay Pacific Profit Fund