China Eastern sells stake to Singapore Airlines, shares soar

SHANGHAI (AP) - Shares in China Eastern Airlines soared Monday after the carrier announced a deal to sell a combined 24 percent stake to Singapore Airlines and Temasek Holdings, Singapore's government investment arm. 

China Eastern's shares, which had been suspended from trading since May 22 after news of the talks on the deal surfaced, resumed trade Monday and surged 3.55 points, or 95 percent, to 7.28 Hong Kong dollars by midmorning on the Hong Kong Stock Exchange. 

The alliance with Singapore Airlines and the combined financial support from both investors will bring a crucial infusion of cash, and is expected to help the Shanghai-based carrier upgrade its management and services amid intensifying competition. 

"We are determined to ensure the success of our strategic investors,'' China Eastern Chairman Li Fenghua said at a news conference Sunday in Shanghai marking the signing of the deal, worth 7.2 billion Hong Kong dollars (US$923 million; euro440 million). 

Singapore Airlines will pay 4.7 billion Hong Kong dollars (US$602 million; euro440 million) for a 15.7 percent stake in China Eastern, while Temasek will pay 2.5 billion Hong Kong dollars (US$321 million; euro234 million) for an 8.3 percent stake, the airlines said. 

"We are proud to be playing a growing role in China's aviation market,'' said Stephen Lee, chairman of Singapore Airlines.  

"We are confident we can bring more business to each other's airlines.'' 

China Eastern is the country's third-biggest carrier. Like other state-owned airlines it has suffered from soaring jet fuel prices and intensifying competition. 

The company reported net losses in 2005 and 2006 and in the first half of this year, according to international accounting standards. 

"One thing for sure is that joining with Singapore Airlines will bring a lot of capital to China Eastern,'' said Ma Yin, an analyst with Haitong Securities. 

The airlines said the deal will enable China Eastern to reduce the ratio of its liabilities to assets to 80.2 percent from 95 percent, improving the Chinese carrier's debt structure and reducing financing costs. 

China Eastern's Li said he was confident that the airline would manage to return to profitability for full-year 2007, but he did not say under which accounting standards. 

The deal calls for China Eastern to issue 2.985 billion new shares on the Hong Kong Stock Exchange at a price of 3.80 Hong Kong dollars (US$0.49; euro0.36).  

Once the deal is completed, state-owned parent China Eastern Airlines Group will own a 51 percent stake in the company. 

Publicly traded shares will account for a total of 25 percent of the company's equity. 

Chinese airlines are seeking strategic investors to help build their cash bases and upgrade services: China's flagship Air China, based in Beijing, has cross-shareholdings and cooperative arrangements with Hong Kong carrier Cathay Pacific Airways. 

China limits foreign ownership in domestic airlines given their strategic importance to less than 50 percent, and that minority investor status could limit Singapore Airlines' say. 

However, under the terms of the deal, Singapore Airlines will have the right to nominate two board members, with Temasek holding the right to nominate one. 

Singapore Airlines' executives said they were confident the arrangement with China Eastern would work better than the carrier's previous strategic investments, in Air New Zealand and Sir Richard Branson's Virgin Atlantic Airways. 

"The China Eastern investment is different in that we are going to participate in management. That is the crucial difference,'' said Singapore Airlines' Lee. 

With air traffic demand expected to grow 9 percent a year, all of China's airlines are seeing strong increases in demand. 

China Eastern reported a 12 percent rise in passenger traffic in the January-June period to 26.5 million. 

Next year's Olympic Games in Beijing are certain to boost demand further. 

"The biggest thing SIA gets out of this is a growth opportunity,'' said Richard Pinkham, a consultant in Singapore with the Sydney-based Center for Asia Pacific Aviation. 

"China is where the future is,'' he said.

For another perspective from The Straits Times, a partner of Asia News Network, click here.

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