With an eye on China's cash, HNA turns from hotels to banks

Matthew Miller and Julie Zhu

* HNA expects strong demand for wealth management

* Sees financials as natural extension of current business

* Reflects broader push by China into financial services

BEIJING/HONG KONG, March 10 (Reuters) - After a spending

spree stretching from hotels to electronics distribution in

2016, Chinese conglomerate HNA Group says it is now investing in

financial services, betting on asset managers and consumer

finance for growth at home and overseas.

The owner of Hainan Airlines Co inked about $20

billion in deals last year, snapping up a stake in Hilton Hotels

and investing in catering and logistics firms - spending that

raised concerns the group was borrowing too heavily and

spreading itself too thinly.

With more than $100 billion in assets, investments this year

have included a hedge fund platform, a New Zealand lender and a

3 percent stake in Deutsche Bank.

The moves reflect a broader push by China into financial

services globally as Beijing encourages its corporate sector to

expand overseas, although they face increased regulatory

scrutiny in the United States and Europe.

More than a dozen Chinese firms - not all with financial

background - are scouting for financial sector targets from

Portugal to New York, the Asia head of financial sector M&A with

a European bank in Hong Kong said. HNA is among those leading

the charge.

"We know the demand for wealth management is going to be

very strong," Guang Yang, the chief investment officer of HNA

Capital, the group's financial arm, told Reuters.

"We have a very large customer base, frequent flyers and

people staying in our hotels," he said, a readymade client list.

A person familiar with HNA strategy said the group saw

financial services - particularly asset management - as a

natural extension of its aviation and logistics businesses:

first it moved people, then freight and now cash.

"As the Chinese are getting wealthier and their demand for

investment opportunities grows, the ability to manage assets on

a global basis will (be important and) a good business to get

into early," this person said, declining to be identified in the

absence of permission to talk to the media.

HEDGE FUND, LENDER, INSURER

China's domestic asset management industry has ballooned in

recent years, with the country's 108 fund managers, 12 qualified

securities firms and one qualified insurer overseeing mutual

fund assets alone worth 9.2 trillion yuan ($1.34 trillion) at

the end of 2016, according to the Asset Management Association

of China.

Financial services produced almost a fifth of group

operating revenue and more than a quarter of gross profit in

2015, an HNA Group bond prospectus showed in September.

The unlisted group does not publish up-to-date financial

figures. The prospectus showed long-term borrowing had increased

more than 40 percent from a year earlier to $28.25 billion.

In HNA's latest deals, it bought a large stake in hedge fund

platform SkyBridge Capital from Anthony Scaramucci, a high

profile supporter of U.S. President Donald Trump and spent $460

million on New Zealand's largest non-bank lender UDC Finance.

Two people with knowledge of the matter said HNA is bidding

for UK-listed insurer Old Mutual's $900 million controlling

stake in its U.S. asset management business. HNA declined to

comment.

RISKS, REWARDS

Both SkyBridge and UDC Finance, which mainly provides car

loans and equipment finance, offer stable revenue, while

allowing HNA to increase yields by borrowing in the

institutional market and lending in the retail market.

The Auckland-based company also boasts a management system

that HNA could potentially utilise in China, where consumer

finance is blossoming from a low base.

Still HNA's rapid expansion has prompted concerns it is

spreading itself too thinly.

"The real risk for HNA is a loss of strategic focus," said

Brock Silvers, founder and managing director of Kaiyuan Capital,

a Shanghai-based investment advisory firm.

"Their plan to build a financial empire takes a lot of human

capital, resources and time."

Carol Yuan, an analyst with Aberdeen Asset Management, said

she was concerned with HNA's debt, which can sit anywhere in the

group financial structure and can be issued by any part of the

group.

"It's hard to get comfortable around how they manage risks,"

Yuan said.

($1=6.88 yuan)

(Reporting by Matthew Miller and Julie Zhu; Additional

reporting by Sumeet Chatterjee and Umesh Desai in HONG KONG;

Editing by Clara Ferreira Marques and Neil Fullick)