China's aerospace giant AVIC taps capital markets for growth
BEIJING (Reuters) - Aviation Industry Corporation of China (AVIC), the country's dominant aerospace and defense contractor, plans to raise more money in the mainland and Hong Kong stock markets to bankroll future growth and develop its first top-of-the-line jet engine.
Beijing is opening up a sector traditionally shielded from competition and public scrutiny as it taps private-sector funds to help speed up the development of its aviation and defense firms to compete with global giants such as Lockheed Martin Corp (LMT.N).
China is also looking to build its first high-performance engine for its commercial aircraft and fighter jets to end the country's dependence on Russian and Western manufacturers. AVIC has already set aside about 10 billion yuan ($1.61 billion) of its own funds for engine research and development over the next three years.
"We hope to partly finance the project with funds raised from the capital market. About how much we want to raise, I would say the more the better," AVIC Chairman Lin Zuoming told the media on the sidelines of the 18th Communist Party Congress late on Monday, without giving details.
AVIC is also considering injecting its holdings in some mainland-listed units into AviChina Industry & Technology Co Ltd (2357.HK) as the state-owned giant makes the Hong Kong-listed subsidiary its key fund-raising platform for its aviation business, Lin said, without identifying the mainland firms.
"There will be more and more stakes to be injected into AviChina as an investment vehicle," Lin said.
Shares of AviChina jumped as much as 7.7 percent in Hong Kong on Tuesday, outperforming a 1 percent fall in the benchmark Hang Seng Index .HSI.
AviChina already holds stakes in China Aviation Optical-Electrical Technology Co (002179.SZ), CN AVIC Avionics Equipment Co Ltd 600372.SZ, Jiangxi Hongdu Aviation Industry Co (600316.SS) and Hafei Aviation Industry Co Ltd (600038.SS).
AVIC - aiming to quadruple its sales to 1 trillion yuan ($157.7 billion) by 2020 from 2011 - plans to inject 80 percent of its main businesses into some of its listed companies by the end of next year, industry officials say. The group has already injected more than 50 percent of its businesses into the firms.
Listed subsidiaries of top Chinese military contractors aim to buy at least 20 billion yuan of assets from their state-owned parents in the second half, according to filings with the Shanghai and Shenzhen stock exchanges.
Lin ruled out the listing of the entire AVIC group, citing the complexity of its structure. The sprawling Beijing-based enterprise has more than 400,000 employees and 200 subsidiaries, including two dozen listed units.
"We are too big and unwieldy with too many kinds of businesses. A whole listing would be hard to be accepted by the stock market," Lin said.
Beijing is pressing ahead with an ambitious program to privatize a big chunk of a defense industry employing more than a million workers at more than 1,000 state-owned enterprises.
The long-term goal is to transform some of the country's leading contractors such as China State Shipbuilding Corporation (CSSC), AVIC and China Aerospace Science and Industry Corporation into homegrown versions of Northrop Grumman Corp (NOC.N) and BAE Systems Plc (BAES.L).
AVIC, expected to generate profits of more than 10 billion yuan on sales of over 300 billion yuan this year, is aiming to build a high-performance jet engine by around 2020. It will draw on internal resources, funds raised from the capital market and support from the state, Lin said.
"We have made a good plan," Lin said. "We hope our manufacturing of a high-performance engine, as well as its commercial potential, would reach a relatively advanced level in the world in about 10 years."
The government is evaluating a 100 billion yuan proposal to galvanize a disjointed and under-funded engine research effort, aviation industry officials say.
China's ability to develop engines for passenger aircraft could have considerable potential for technology transfer to the military, experts say.
AVIC said separately on Tuesday that it forecasts China's commercial aircraft fleet size will more than triple to 6,309 by 2031, from 1,755 aircraft at the end of 2011.
In its China Market outlook, AVIC added that while economic growth and urbanization would benefit the country's aviation industry, a shortage of pilots and airports as well as congested airspace would have a negative impact for some time.
AVIC forecast China's aviation market will grow steadily over the next 20 years, with passenger traffic rising an average of 8 percent a year and cargo to increase 9.5 percent annually.
(Additional reporting by Alison Leung and David Lin; Editing by Ryan Woo)
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