HNA Group received a formal bankruptcy notice from the Hainan High People’s Court over the debt issues, amounting to US$110 billion.
Who is this group and what is so big-deal to shout about?
This will be the case study today to demonstrate some of the disciplines that a developing or even a developed company should have.
Let’s start with a brief introduction about the Company.
The group was founded in 1993 and built a diversified portfolio over the years including aviation, real estate, financial services, tourism, logistics, and more. The group is best known for its airlines, ranging from Tianjin Airlines, West Air, Lucky Air, Suparna Airlines, Fuzhou Airlines, Urumqi Air, Beibu Gulf Airlines, Air Changan, to Guilin Airlines.
It has also plowed US 40 billion in buying up foreign assets between 2015 and 2017. The top management has been on a buying spree with big names such as Hilton Worldwide Holdings, Deutsche Bank, and the London-based currency exchange operator International Currency Exchange (ICE).
The tremendous growth has attracted the eye of Harvard Business School in 2018. The Company outlined its business model as “BIM”, representing Building, Industry, Investment, Innovation, and Management. The ultimate long-term plan was to optimize its value chain between travel, tourism, and aviation.
In the era of excess liquidity, the aggressive acquisition wasn’t an issue. Digestion/gestation period is an issue. Asset quality is also a “ONE” big question mark when its net profit margin dropped tremendously despite revenue growth. That raises the question if those assets are good to buy? Is it necessary to buy? Isn’t the management should have a strategy in place to optimize its value chain? Where are the numbers going? If it cannot manage the return of investment, why the buying spree continues?
PLEASE NOTE THAT THE ANALYSIS IS BASED ON THE BEST AVAILABLE INFORMATION ON THE PUBLIC PLATFORM AND IT IS JUST A SHARING OF MY OBSERVATION AND INTERPRETATION. NO LIABILITY WILL BE ENTERTAINED.
The Issue
Issue #1 – No consistency measure is being done except for revenue. After reading some articles about the Company, they appeared to be glamorous with endless funding support to maintain at least 25% revenue growth per annum.
Issue #2 – No sustainability measure is being done. From the net profit margin, we believe that there is no strategic measure to optimize the resources and earnings. If the group has a lack of hands to manage, they should have taken a breather and find a solution to improve the existing operations before adding more burden.
Issue #3 – Is market share more important than earnings? It depends. In our view, heavy asset companies like HNA Group should be more sensitive to their financial position. The financial threshold should be the indicator to balance between the expenditure on expansion and cash flows/ earnings. We rarely see a heavy asset company continues spending for market share due to limited resources.
Issue #4 – The Company is not focused. HNA Group didn’t limit itself within the aviation industry. It scattered its limited resources across different industries and markets, ranging from aviation, logistics, tourism, and real-estates. This seems hoping to support its aviation business. Do you necessarily own the whole food chain to operate a restaurant?
Issue #5 – Debt … Debt… Debt…
What could have been done?
#1 – Analysing, Budgeting, and Forecasting. Performance monitoring is the only key success to consistent metrics, leading to sustainability.
Without analytics in place, you’re flying blind.
“ If you can’t measure it, you can’t improve it” – Peter Drucker
#2 – Post-acquisition, the Company should take a breather by improving the new acquisition to at least self-sustaining before acquiring another new asset.
#3 – Never over-geared. The company should learn how to be an agile organization.
“Think Big, Act Small” – by Jason Jennings
“Big thinking” is based on authentic big ideas, genuinely solving customers’ problems, making something better, and creating value.
“Act small” is to understand and deliver the short-term objectives in order to achieve the long-term future.
The consistent long-term financial performance (not only revenue but all) is extremely important and that’s how a quality company distinguishes itself.
DISCLAIMER:
PLEASE NOTE THAT THE ABOVE ANALYSIS ARE BASED ON THE BEST AVAILABLE INFORMATION ON THE PUBLIC PLATFORM AND IT IS JUST A SHARING OF MY OBSERVATION AND INTERPRETATION. I WILL NOT ACCEPT ANY LIABILITY WHATSOEVER FOR ANY DIRECT OR CONSEQUENTIAL LOSS ARISING FROM ANY USE OF THIS INFORMATION.
Reference
https://asia.nikkei.com/…/HNA-extends-European-foray-in…
https://en.wikipedia.org/wiki/HNA_Group
https://www.wsj.com/…/how-chinas-acquisitive-hna-group…
https://www.crunchbase.com/…/hna-group/company_financials