Share issue to turn carrier around

PUBLISHED : Wednesday, 10 March, 2010, 12:00am
UPDATED : Wednesday, 10 March, 2010, 12:00am

China Southern Airlines said it would expand its fleet by up to 10 per cent a year after unveiling a 10 billion yuan (HK$11.35 billion) fund-raising plan.

The world's fourth-largest carrier has received approval to tap the capital market within four months, and joins China Eastern Airlines and Air China in raising funds through new shares.

China Southern shares shot up 11 per cent before closing 7 per cent higher at HK$3.19 yesterday, after it announced plans to raise up to 10.75 billion yuan through a share placement to 10 specific investors, including its parent company, China Southern Air Holding.

The Guangzhou-based carrier could slash up to 500 million yuan in interest expenses a year after paying back bank loans from the proceeds.

China Southern was heavily in debt and paying more than two billion yuan in interest a year, Kelvin Lau, a transport analyst at Daiwa Securities SMBC, said.

Annual interest expenses amounted to 2.7 billion yuan on average from 2006 to 2008 inclusive. For the first nine months of last year, interest totalled 1.64 billion yuan.

The carrier posted 4.8 billion yuan in losses in 2008, but reported a turnaround in the first half of last year with 25 million yuan in net profit.

After paying back its bank loans, the total liability-equity ratio would decrease to 74.12 per cent from 85.73 per cent, according to a document filed by the carrier with the Shanghai Stock Exchange yesterday.

China Southern will pay back US$1.34 billion and 4.8 billion yuan, respectively, in bank loans through the issue of the A and H shares.

Daiwa increased the target price of China Southern to HK$3.97 from HK$3.09, on the increment of the book value of the shares after the placement.

However, Morgan Stanley said the positive impact of the fund-raising had already been priced in and maintained a target price of HK$2.43.

The carrier said it would issue up to 1.77 billion new A shares at not less than 5.66 yuan each and up to 312 million new H shares at HK$2.73 each on Monday. The placement is subject to shareholder approval.