Cirrus Aircraft faces the risk of being targeted by the U.S. for its original sin

The Chinese-owned, U.S.-based company has filed a second time to list in Hong Kong, aiming to become the exchange’s first aircraft manufacturing stock

Key Takeaways:

  • Cirrus Aircraft has filed for a Hong Kong listing, reporting its profit rose 3.5% last year to $91 million 
  • The U.S.-based aircraft maker is owned by a unit of China’s AVIC, which is on a U.S. sanctions list

    

By Lau Chi Hang 

The Wright Brothers invention of airplanes in 1903 changed the course of transportation history by breaking geographical boundaries and greatly shortening distances between countries and peoples. But ever since, sky-high prices have created a major barrier to the takeoff of a Jetson-like future with widespread plane ownership. 

That began to change in the 1980s when American brothers Alan and Dale Klapmeier, out of personal interest and a vision of bringing flight to the masses, built their own planes in a dilapidated garage and founded Cirrus Design in 1987. They later registered their company, Legacy Cirrus Industries in 1996.

Now, after many twists and turns, the company has come full circle, as its current Chinese parent tries to launch it once again with a Hong Kong IPO. But the listing could face stiff headwinds, as Cirrus Aircraft Ltd. flies directly into growing U.S.-China tensions.

Chinese buyer

After setting up their company, the Klapmeier brothers built their scrappy startup over time into the biggest piston-engine general-purpose plane manufacturer in the world, substantially lowering the cost of ownership to just hundreds of thousands of dollars. 

Then, in 2011, the brothers and other shareholders sold Cirrus to China Aviation Industry General Aircraft, which is 70% owned by industry giant Aviation Industry Corp. Group of China (AVIC). Since then, AVIC has held out big plans for the company, including its latest IPO application.

Cirrus Aircraft first applied to list in Hong Kong as early as last year, but never got off the ground as the market slumped. Now it’s trying once more to take flight, aiming to become the Hong Kong Stock Exchange’s first aircraft manufacturing stock.

The company’s listing application shows that Cirrus isn’t exactly taking to the skies, at least not in terms of profit growth, but nonetheless is growing steadily. Its revenue rose from $738 million in 2021 to $1.07 billion in 2023, equaling about 20% annual growth over those three years. Its profit grew more slowly from $72.4 million to $91.1 million over that time, representing annual growth of about 12%.

Cirrus has two main product lines, the SR2X series, a single-engine piston aircraft primarily targeting flying enthusiasts; and the Vision Jet targeting retail customers and, to a lesser extent, charter flight operators. The company sells its aircraft worldwide at prices ranging from $627,000 to as much as $3.24 million.

Stable business growth

Between 1984 and the end of last month, Cirrus delivered 9,500 SR2X series and 500 Vision aircraft. The company has an inventory of 1,383 aircraft, including 265 Vision aircraft on order. It has delivered about 1,850 aircraft combined over the past three years, with the figure rising steadily from 528 in 2021 to 708 last year.

One of its planes’ biggest selling points is their Cirrus Airframe Parachute System, which deploys in emergencies and returns passengers to the ground safely. That system has saved more than 250 lives since its 1999 launch, according to the listing application.

In terms of its overall performance, the company looks like a relatively solid bet in terms of market share, as well as its order book. But investors may be more concerned about the company’s future development due to its Chinese ownership.

After World War 2, the U.S. became the world’s top superpower and took steps to maintain that status. In the 1980s, as Japan rose to prominence, the U.S. signed the Plaza Accord to depreciate the dollar against Japan’s yen, as well as other major European currencies. Japan’s economy subsequently slowed drastically, leading to three decades of economic stagnation.

Now, the U.S. may be taking similar steps, this time against China, often working with allies to constrain Chinese exports and keep advanced technologies from Chinese companies. One of the favorite U.S. tools to achieve those ends lately has been the use of sanctions.

AVIC sanctioned

The U.S. sanctioned AVIC and some of its affiliates as early as 2021, banning Americans from buying or selling public securities of targeted companies without permission from the U.S. government. Last year, the administration of President Joe Biden issued a new executive order stepping up screening of foreign investment from China, Hong Kong and Macao.

Cirrus has not been sanctioned yet, and the company does not think that the 2023 executive order will adversely affect its business operations. But the reality is that the U.S. government stance could change at any time, and Cirrus has already come under attack for its Chinese ownership. 

William Kim, a researcher at the influential U.S. RAND think-tank, pointed out that although Cirrus produces small civilian aircraft, the technology can be used to develop drones for military use which might pose a security risk to the U.S. George Ferguson, a senior aerospace and defense analyst at Bloomberg, also said that even though Cirrus makes general-purpose aircraft, its expertise could also be valuable to military customers.

Those opinions aside, Cirrus has been largely spared from major attacks so far. But the military background of its major shareholders puts it at constant risk that more attacks could come at any time.

While the company itself has yet to be targeted by specific U.S. actions, its operations have been affected by some restrictions. The company has business ties with AVIC General Huanan Aircraft and AVIC General Zhejiang Aircraft, both of which were included on a U.S. blacklist in 2020. As a result, Cirrus had to suspend sales of piston-engine aircraft and parts to both companies for failing to obtain necessary export permits.

Geopolitics can also have very real impact on company stock prices. Take Lenovo (0992.HK), for example, which was accused by an industry group quoted in a Newsweek story of illegally obtaining computer user information, as the group suggested the U.S. government should consider banning the use of Lenovo’s products. Later, Bloomberg reported the remarks may have been part of a slander campaign orchestrated by one of Lenovo’s competitors, but the incident still sparked a sharp drop in Lenovo’s share price. 

Similarly, the military background of Cirrus’ major shareholder could become fodder for more direct sanctions in the future. Any negative news could undermine its stock, leading to constant uncertainty, even if reports later turn out to be unfounded. 

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