Monday, September 24, 2007

Air China may block SIA’s China Eastern purchase

The following describes what may be a competitive counter-move by Cathay Pacific & Air China to thwart SIA's ambitions to expand in the PRC. This is a particularly interesting story because it highlights an explicit move by an international competitor to engage one of Singapore's major GLCs in head-on competition over one of the major airline assets in China, and more importantly for market share in the world's fastest growing airline market.

If the rumours are true that Cathay & Air China are trying to block SIA's acquisition, then it will be interesting to see how Singapore's flagship airline reacts. And it will also be instructive to note that while SIA has a free, dominant reign at home, it receives absolutely no red carpet treatment once it ventures beyond the political influence of the PAP.

Air China may block SIA’s China Eastern purchase

The South China Morning Post reported on Saturday that Air China (753 HK, HK$11.84, NR) has accumulated an 11% stake in China Eastern’s H-shares (670 HK, HK$9.72, NR), from a mere 5% five months ago. Meanwhile, shares of Cathay Pacific (293 HK, NR) rose 10.7% on Friday to a record HK$22.70 before trading was suspended pending an announcement of a price-sensitive proposed transaction. Shares of Air China, China Eastern and China Southern (1055 HK, HK$13.90, NR) also rose.

While there is no official explanation from Air China on the nature of its share purchases in China Eastern, there is growing market talk that Air China and Cathay Pacific, both linked by a 17.5% cross-shareholding in each other, are uniting to block the SIA-Temasek joint bid for a 24% stake in China Eastern. This latest twist came as a surprise. If SIA is thwarted in its China ambitions, it may release cash to shareholders through special dividends, which will be positive for the share price in the near term.

The Air China-Cathay Pacific alliance is probably trying to fend off a potentially strong competitor from emerging in its own backyard. The deal, which will see SIA buy a 15.7% stake for HK$3.80 per H-share and Temasek buy an 8.3% stake, will require the approval of two-thirds of existing minority shareholders.

Impact on long-term growth. If SIA is thwarted, it may be prevented from developing its base in one of the world’s fastest-growing aviation markets, and this could negative implications for its long-term growth. SIA could also be more vulnerable to competition from Middle Eastern carriers on the lucrative kangaroo route as more capacity is deployed. However, SIA may still consider purchasing stakes in smaller privatelyowned airlines in China, and build the business slowly. We believe this is not its preferred strategy.

Read the rest of the CIMB research note here

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