Financial News
Written by: Zhang Weilun
2020-06-09 14:55
Date of last update: 2020-06-09 16:04Cathay Pacific Airways (0293) announced a fund raising plan of 39 billion yuan at noon. Among them, it issued a maximum of 29.25 billion yuan of funds to the government through the issuance of preferred shares, warrants and transitional loans to the government.
This is the first time the government has injected capital into private enterprises. Why is the government willing to provide huge funds for Cathay Pacific? At the same time, what role will the government appoint as observers on the Cathay Board of Directors? The government explained one by one at a press conference held at 3 pm.
Chen Maobo: The internal rate of return on investment in Cathay Pacific is expected to exceed 4%
The Financial Secretary Chen Maobo revealed at a press conference that the government will use land funds to invest in Cathay Pacific to obtain a reasonable return on investment. It is estimated that the internal rate of return of this investment is expected to be 4% to 7.5%, which is higher than the 3.7% average rate of return of the land fund invested in the Exchange Fund.
Asked why he used the Land Fund, whether he wanted to bypass the Legislative Council, Chen Maobo explained that because the Land Fund has relevant “authorizations”, reference to Ocean Park to apply for capital injection from the Legislative Council, the discussion takes time, this is the role of the Legislative Council members due diligence, because Both of Cathay Pacific’s two largest shareholders are listed companies, and discussions in the middle of capital injections are sensitive to stock prices. Therefore, the current approach is to protect public funds on the one hand and is also suitable for the current mechanism. Chen Maobo also pointed out that the government would go to the Legislative Council to be questioned by Members.
Chen Maobo also said that he had no intention of holding Cathay for a long time; he also revealed that Cathay Pacific’s major shareholders had taken the initiative to seek help from the government.
He also pointed out that the government did not intend to take over Cathay Pacific, nor did it intend to become a long-term shareholder. This rescue is to ensure Hong Kong's status as an international aviation hub. He also pointed out that the interest rate of preferred shares held by the government increased year-on-year from 3% to 9%. The later the redemption, the higher the cost of the company, and hope that Cathay Pacific will redeem the preferred shares as soon as possible.
The day-to-day operations are the responsibility of the company management
As for appointing observers, Chen Maobo said that he will find senior legal professionals, professionals, etc. to play a role in protecting government investment, and daily operations will be left to the management of Cathay Pacific.
Chen Maobo also pointed out that the capital injection of Cathay Pacific is a medium-term investment. "It will take three years. You have seen the signs of preferred stocks. You will see interest rates increase by 3% in the first three years, and then increase gradually. Only dividends can be paid to ordinary shareholders." At the same time, it is expected that Cathay Pacific's performance will improve after the epidemic. The government can profit from the sale of warrants, so the return on investment is likely to reach 4 to 7.5%.
Said to save Cathay to support aviation hub status
As for why not save Hong Kong Airlines, Chen Maobo said that the problems of the two companies are different in nature. It is quite a long time for the financial problems of Hong Kong Airlines. Before the epidemic, Cathay Pacific made a profit, but the market was invalidated due to the impact of the epidemic. Coupled with the large market share of the country, it is of great importance to the Hong Kong aviation network.
Chen Maobo pointed out that Cathay Pacific is the largest aviation group in Hong Kong. Among the more than 220 destinations in the world, there are 49 passenger routes and 17 freight destinations, which are only operated by Cathay Pacific. It is also mentioned that the aviation industry accounts for 4.9% of GDP. The third runway is currently under construction, and 123,000 jobs can be created by then.
Capital injection reduces systemic risk
Chen Maobo has repeatedly reiterated that the government has no intention of holding Cathay and the main company for a long time. The rescue is to reduce the systemic risks of key industries. Cathay Pacific is different from airlines in other countries or regions. Cathay Pacific only has international routes, so when the epidemic occurred, the load factor dropped by more than 90%. As Cathay Pacific itself has many air rights of waypoints, if Cathay Pacific has problems, it is impossible for another smaller airline to take over. Eventually, the air rights will be handed over to airlines of other countries or regions, which is not a good thing.
The Secretary for Transport and Housing, Chen Fan, added that the international airport has brought long-term development and economic contribution to Hong Kong's economy and stated that the airport is a channel for Hong Kong to connect the world. In 2018, a total of 75 million passengers used the airport and handled 5 million tons of cargo, with a total value of 473 billion US dollars, while Hong Kong’s annual import and export trade volume was 1.126 trillion US dollars.
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