Finance

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Investors regard the behavior of executives in the same way that laissez-faire parents approach a teenage party: I don't want to know what you get up to -- just don't make a mess.

Take a look, for instance, at the performance of U.K. clothing retailer Sports Direct International Plc. Its Chief Executive Officer Mike Ashley held drunken management meetings in bars and on one occasion ended up vomiting in a pub fireplace, according to evidence produced in a lawsuit against the company by a former employee last month.  

Sports Direct's shares reacted to that news with a yawn:

Drinking Games
Sports Direct shares took testimony July 3 of drunken behavior by the CEO in their stride
Source: Bloomberg
Note: Intraday times are displayed in ET.

Here, though, is what happened two weeks later, when the company posted unexpectedly high revenue and predicted further earnings growth in the year ahead:

Show Me the Money
Sport Direct shareholders care much more about earnings than scandal
Source: Bloomberg
Note: Intraday times are displayed in ET.

That pattern stands to reason. To the chagrin of corporate social responsibility advocates, investors generally don't care how a company makes money, as long as it makes money. In its legal battles with a high-profile and colorful antagonist, HNA Group Co. risks forgetting that.

The acquisitive conglomerate is seeking at least $300 million from exiled Chinese tycoon Guo Wengui in a case brought in New York over Guo's "repeatedly false and defamatory statements" about the company, the Wall Street Journal reported Thursday. Followers of Guo's social media accounts will be well aware of the lurid stuff he's been alleging in recent months, and others can get a flavor of it from HNA's June court complaint:

Excerpt from court document

It's only natural that a company of HNA's size should want to protect its reputation -- particularly when many of Guo's claims center on its alleged political connections, a touchy topic in the run-up to China's Communist Party Congress later this year. Still, there are more pressing matters that deserve management's attention.

HNA's financing costs more than doubled in the first half from a year earlier, Prudence Ho of Bloomberg News reported Thursday, hitting 14.2 billion yuan ($2.2 billion) in the six months through June. That's more than the trailing 12-month interest costs of Apple Inc. and General Electric Co. put together:

When the Bill Comes Due
HNA's finance costs put it in the ranks of the world's biggest corporate debtors
Source: Bloomberg
Note: Shows trailing 12-month finance costs (HNA) and trailing 12-month interest payments (all other companies). The numbers are similar but not identical.

There's nothing wrong with taking on a lot of debt, of course, as long as you're using it to finance productive investments that generate the profits necessary to cover interest bills. On that front, HNA is badly falling down.

Financing costs in the first half comfortably exceeded earnings before interest and tax, Ho reported, meaning the company has to take on more debt simply to keep current on existing borrowings. That's in keeping with the group's usual way of doing business -- Ebit hasn't exceeded the conventionally safe level of one times interest in any of the five years for which Bloomberg has data. 

Breaking Cover
HNA Group's interest coverage has yet to reach the conventionally safe level of one times
Source: Bloomberg
Note: Data not available for 2012 and 2013 fiscal years.

The usual way that companies get out of such a tight corner is to sweat their assets to generate more earnings and gradually reduce indebtedness. But HNA doesn't appear to have any special genius for achieving such improvements. Returns on invested capital haven't exceeded 2 percent in any of the eight years for which Bloomberg has data, compared with 10-year averages of 6.8 percent and 7.5 percent at similarly-acquisitive Berkshire Hathaway Inc. and SoftBank Group Corp.

While profitability is standing still, HNA seems to be paying more for its borrowings. Group net interest, as a proportion of average net debt, has climbed from 4.5 percent in its 2014 fiscal year to 6.8 percent in 2016.

Don't Worry, Be Happy
HNA Group International Co.'s 2018 8.125% bonds are trading close to par value
Source: Bloomberg

Creditors don't seem concerned. HNA's $473 million of 8.125 percent dollar bonds due in December 2018 have recovered strongly since a brief dip in July, and are now trading only narrowly below par. In ignoring Guo's scandalous allegations, the holders of those notes are only doing what investors usually do -- but their nonchalance about the state of HNA's balance sheet is another matter entirely.

The growth of this Chinese giant has been a thrilling journey. Increasingly, though, it's looking like investors have hitched a ride on a runaway train.

--Shuli Ren contributed to this column.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Sports Direct won the case.

  2. Or, theoretically, sell assets -- but to date HNA has mostly been doing  the opposite.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net