May 24 (Bloomberg) -- Temasek Holdings Pte, a Singapore state-owned investment company with $85 billion of assets, may join its unit Singapore Airlines Ltd. to bid for a stake in China Eastern Airlines Corp., Morgan Stanley said.

A joint investment with Temasek means the carrier could gain ``strategic'' control of China Eastern without paying for the stake on its own, analysts Chin Lim, Sophie Loh and Edward Xu wrote in a report. Temasek owns 56 percent of Singapore Airlines, Asia's most profitable carrier.

``With a co-investor whose interest is aligned solely with Singapore Airlines, the carrier would be in the sweet position of having effective strategic control without paying significant upfront capital and assuming initial associate losses,'' the analysts said in the report, released late yesterday.

Singapore Airlines may be close to announcing plans to buy China Eastern, the country's only publicly traded airline to post a loss last year, after both companies suspended the trading of their shares on May 22. The Singapore-based carrier said it's in ``advanced'' talks for a potential investment, without elaborating, before requesting to lift the trading halt.

``I cannot speak for China Eastern Airlines as to who else they may have, or be, talking to,'' Stephen Forshaw, spokesman at Singapore Airlines, said in an e-mailed response to questions. Temasek won't comment on market speculation, the company said in a separate e-mailed statement.

Tiger, Air China

Closely held Temasek has teamed up with Singapore Airlines before. The two jointly invested in Singapore-based budget airline Tiger Airways Pte. Singapore Airlines' cargo unit and Temasek also started a joint venture cargo carrier with China Great Wall Industry Corp.

Temasek, set up three decades ago to nurture Singapore industries, is owned by Singapore's finance ministry. Profit for the year ended March 2006 jumped 71 percent to a record S$12.8 billion ($8.4 billion), Temasek said in September. Its investments in China include stakes in China Cosco Holdings Ltd. and Air China Ltd.

Shares of Singapore Airlines declined 1.1 percent to close at S$18.50 in Singapore today. The stock has gained 5.7 percent this year.

Singapore Airlines said on May 22 that the potential investment isn't expected to constitute a transaction requiring disclosure under Rule 1008 set by Singapore's stock exchange. That suggests Singapore Airlines won't be required to make a disclosure if the value of the transaction is less than 5 percent of its $15 billion market value, or about $750 million, according to Morgan Stanley.

Domestic Majority

Chinese airlines have to remain under domestic majority ownership, according to government regulations. Singapore Airlines can buy a maximum of 25 percent, a stake valued at $1.2 billion at the current market price.

The Singapore carrier's comments suggest ``it's unlikely to commit more than $750 million to buy a strategic equity stake,'' the report said. ``This would then necessitate investing with a co-investor'' in China Eastern that is ``friendly'' to Singapore Airlines to ensure ``effective strategic control,'' it said.

Splitting the holdings with Temasek has other benefits. Singapore Airlines won't have to account for the Chinese carrier's losses if its stake falls below 20 percent, according to Morgan Stanley.

To contact the reporter on this story: Chan Sue Ling in Singapore slchan@bloomberg.net

Last Updated: May 24, 2007 06:13 EDT