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Chinese brothers become latest airline tycoons with Juneyao Air IPO

05/27/2015| 1:00:00 PM|

Two decades ago, the Wang brothers sold flavored milk and yogurt to children in China. Last week, they sold shares in their airline in an IPO to become millionaires.

Two decades ago, the Wang brothers sold flavored milk and yogurt to children in China. Last week, they sold shares in their airline in an IPO to become millionaires.

Their journey from a poor fishing village to the largest shareholders of budget carrier Juneyao Airlines Co., which begins trading in Shanghai this week, is a success story that mirrors China’s growth. The company is benefiting from a government plan to encourage entrepreneurship in an air-travel market that’s set to become the world’s largest over the next two decades and is currently dominated by state-owned airlines.

At its offer price, Juneyao Air will be valued at 6.35 billion yuan ($1 billion). That’s about a tenth of the market value of Spring Airlines Co., whose stock has surged over 600 percent since a January listing. Every one of the 147 mainland initial public offerings that began trading over the past year has jumped the maximum 44 percent on its first day of trading.

“Certainly, Spring Air’s crazy surge, which outperformed even the broader bull market, would be on the minds of many people,” said Zhang Qi, a Shanghai-based analyst with Haitong Securities Co. “With oil prices at low levels, airlines that are more efficiently run would make an attractive investment proposition.”

Juneyao Air, whose Chinese name means lucky, is selling 68 million shares at 11.18 yuan apiece, raising 760 million yuan from the offering. The stock begins trading May 27.

Bull Market

The share sale, coming on the back of a doubling of the Shanghai Composite Index in the past 12 months, is part of an IPO boom in China. Share subscriptions for 20 IPO offerings in Shanghai will lock up an estimated 2.79 trillion yuan of liquidity, according to a Bloomberg survey published May 12.

“It’s a bull market right now, which is why so many IPOs are coming to the market,” said Cao Xuefeng, an analyst with Huaxi Securities in Chengdu. “These also tend to be companies that represent the type of industries that will form the bulk of the Chinese economy in the future.”

Still, seven of the 11 IPOs by airlines in Asia during the past five years are trading below their sale prices, data compiled by Bloomberg show. Bangkok Airways Co. has fallen 16 percent since its $622 million IPO in October, while AirAsia X Bhd., the long-haul budget carrier backed by Tony Fernandes, has lost nearly three-quarters of its value since it debuted in July 2013, according to the data.

Spring Air, which listed in January after a $291 million IPO, is the best performer, the data show.

Low Profitability

While the global airline industry is forecast to post $25 billion in profit this year, profitability hasn’t been great in the recent past. Airlines earned $2.50 per passenger journey in 2012, which rose to $4 in 2013 -- enough to buy a sandwich, International Air Transport Association CEO Tony Tyler said.

Juneyao Air will use the share sale proceeds to buy more aircraft, adding to the 42 Airbus Group NV narrow-body jets it currently uses to connect Shanghai to Beijing, Hong Kong and Macau, among other destinations.

The carrier was profitable in each of the past four years, with net income gaining 26 percent to 428 million yuan last year. Guotai Junan Securities Co Ltd. has underwritten the share sale offer, according to the prospectus.

Juneyao Air gets its name from its parent company, Juneyao Group. Both were named after the oldest of the three Wang brothers, who were born in a village on the outskirts of the eastern Chinese coastal city of Wenzhou.

Dairy Business

Wang Junyao made the family’s first fortune selling flavored milk and yogurt to children in the 1990s.

“Back then, we went with dairy because our oldest brother decided then we needed a more stable business,” Wang Junjin, the second of the three brothers and the chairman of Juneyao Group, said in a 2012 television interview.

The Juneyao Group now is a conglomerate with assets worth 20 billion yuan spanning food, department stores, schools and banking.

The Wangs caught the aviation bug in 1991 -- when flying was still a novelty in China -- when they leased a plane and offered charter flights to Wenzhou from Changsha in Hunan province.

Hunan province was their first base after leaving home. The flights initially catered to Wenzhou friends who also had moved there for business, then were offered to other fare-paying passengers, Wang Junjin said in the same interview.

“We surveyed our Wenzhou comrades in Hunan, one by one, to ask how many trips they made back home every year, so we can gauge potential demand for flights,” Wang Junjin said. “With regular flights they can even go back every week if they wanted to.”

Family Control

Juneyao Air declined requests for comment and an interview with the family ahead of the company’s listing debut.

It wasn’t until 2006 that Juneyao Airlines took shape, after a previous attempt to enter the industry fell through.

Before Juneyao Air ever took flight, however, the oldest Wang brother died in 2004, aged 38, leaving behind his wife and three children. Junjin and the youngest Wang brother, Junhao, assumed leadership of the group.

The Wang family will retain a 79 percent stake in Juneyao Air -- worth five billion yuan at the offer price -- after the IPO. The three children of the deceased Wang brother will own 30 percent, with his oldest son owning the largest single stake of 1.69 billion yuan, or 27 percent.

“The two surviving brothers have their feet firmly on the ground and generally keep a low profile,” Haitong’s Zhang said. “Juneyao Air might not grab the headlines like Spring does, but it appears to have been managed rather prudently.”

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TAGS: Juneyao Airlines | IPO | LCC
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