Cathay Pacific

New Cathay Pacific investor Kingboard urges shareholder Swire to lead airline out of ‘hard times’

The firm’s chairman tells Post in exclusive interview that Swire family should intervene to return airline to health before returning reins to the professionals

PUBLISHED : Monday, 31 July, 2017, 8:01am
UPDATED : Thursday, 03 August, 2017, 11:34pm

Cathay Pacific Airways’ new investor called for the airline’s biggest shareholder, Swire Pacific, to “lead” the loss-making company out of “hard times”.

Kingboard Chemical, which became the third largest stakeholder in Hong Kong’s flagship airline this year, said it wanted the Swire family to intervene – to be accountable and responsible – by taking temporary day-to-day control to “help” steer the company’s return to profitability amid a three-year restructuring programme.

Who is the investor with a 9 per cent stake in Cathay Pacific in just six months?

“I hope someone in the Swire family, as Cathay Pacific is in hard times at the moment, will come out and lead the company for a while before handing control back to the professionals,” Kingboard’s founder and chairman, Cheung Kwok-wing, said in an exclusive interview with the South China Morning Post. He put a six to 12-month time frame on the airline returning to health.

In a wide-ranging interview, Cheung, 61, branded himself “a long-term investor” rather than “a corporate raider”, and said that Cathay Pacific was a “once in a lifetime” investment with a strong future ahead of it and that he would only want to tighten his grip on the airline.

Cheung was animated in the interview, reflecting his ambition for the company. He endorsed new CEO Rupert Hogg and revealed that his desire to buy Swire’s holdings was rejected.

Hong Kong’s Cathay Pacific aiming for HK$4 billion in cuts over three years

According to stock exchange filings, Kingboard spent HK$3.4 ­billion for a 9 per cent stake, making it the airline’s third biggest shareholder behind Swire Pacific’s 45 per cent and Air China’s 29.99 per cent.

Kingboard Chemical’s half-time profit soars 84pc

In response, James Tong Wai-pong, Swire Pacific’s public affairs director, said the company was “fully committed” and “remains confident about the future” of the airline.

“We support their transformation programme and believe it will improve the performance of the company,” Tong added.

Cathay Pacific declined to comment ahead of the release of its half-year financial results next month. The airline has struggled financially and against fierce competition, losing HK$575 million last year and cutting 600 jobs as part of its plan to return to profitability.

Will Horton, from CAPA Centre for Aviation, said it was “unclear what benefit” direct Swire involvement would yield. Two members of the family currently sit on the airline’s board.

Seeing little merit in Kingboard’s suggestion, Horton said: “The situation is not the Swire family relaxing on a tea plantation outside Colombo oblivious to the seismic changes in Asian aviation.”

Kingboard’s motives for amassing a significant shareholding have been the subject of speculation since it was disclosed publicly.

In a recent meeting with the airline’s management, Cheung said he revealed to Cathay Pacific and Swire chairman John Slosar his intention to raise his shareholding in the airline.

“I asked him if he had any interest in selling to me. He said Swire still had no intention to sell,” Cheung said.

“If I bought more, I would buy at HK$20 [a share],” Cheung said, valuing Swire’s stake at HK$35 billion. Cathay Pacific currently trades at HK$12.

Assessing Kingboard’s valuation, Corrine Png, CEO of Asian transport research firm Crucial Perspective, said HK$20 a share was “likely the lowest” price Kingboard or Air China, frequently touted as a suitor, would need to pay, with HK$27.50 a share more realistic, valuing Swire’s stake at HK$49 billion.

“It would be hard to say no to such a deal, considering Cathay Pacific’s expected limited earnings and dividend contribution to Swire in the next few years,” Png said.

At the higher price, Cheung would need at least HK$81 billion to buy Swire and Air China’s stakes.

Png also noted that Kingboard had no experience running an airline.

Cheung said he could not seek a seat on the airline’s board because Kingboard, Swire and Air China would then be deemed a connected party holding 84 per cent of shares.

This means they would have to either launch a general offer for the shares they do not already own or reduce it to the threshold of 75 per cent mandated by stock market rules so that the number of publicly traded shares could be maintained at 25 per cent.

Cheung’s companies, spanning industrial, technology and property sectors in Hong Kong and in mainland China, were hugely profitable last year. Kingboard Chemical earned HK$3.2 billion in underlying profit from HK$35.8 billion in revenue.

Kingboard said it used its voice as a major shareholder to chastise Cathay Pacific management over its losses from fuel hedging.

However, Cheung said the airline’s financial health and business model remained sound despite the substantial losses arising from low oil prices.

Cheung maintained the company had a “future” and urged management to reverse the negative mindset of frontline staff amid job cuts.