When the reported disappearance of Guo Guangchang, chairman of China’s biggest privately owned conglomerate Fosun Group, rippled through markets and tumbled Fosun-related stocks late last week, it also exposed the so-called “key man” risk for investing in Chinese companies.
Guo, the billionaire co-founder and chairman of Fosun Group, which runs businesses from insurance to pharmaceuticals, was reported to have gone missing, according to a report by Chinese financial publication Caixin, citing unidentified sources late on Thursday.
The group immediately suspended trading of six of its listed companies in mainland China and Hong Kong, including Fosun International, Shanghai Fosun Pharmaceutical, Nanjing Iron and Steel and Hainan Mining, according to company statements and their filings to stock exchanges on Friday.
Fosun cited “the release of an announcement containing insider information” as the reason without further elaborating. It added the company’s current business operations remained normal.
However, the mysterious whereabouts of Guo, one of China’s most high-profile billionaires and the country’s best known advocate of Warren Buffett, still sent most Fosun-linked shares sinking in mainland China, Hong Kong and New York.
In the A-share market, 13 out of 14 listed companies partially held by Fosun Group that didn’t halt trading fell on Friday, with Dirui Industrial Company, a medical testing equipment maker, and Anhui Shanhe Pharmaceutical Excipients declining the most – 6.53% and 4.89% respectively. By comparison, the benchmark Shanghai Composite Index was barely down 0.61% on the day.
Meanwhile, these companies also saw about Rmb3.7 billion ($570 million) of market value evaporate on Friday, according to an estimate by the Beijing News, a local newspaper.
Outside mainland China, Hong Kong- and US-listed Chinese firms in which Fosun holds stakes unsurprisingly tumbled in light of the news.
For example, New China Life Insurance, China’s third-largest life insurer by premiums, and Minsheng Bank, China’s largest private bank by assets, fell 3.09% and 1.37% respectively in Hong Kong on Friday, while the Hang Seng Composite Index was down 1.31%. Fosun holds about a 3.17% and a 4.4% stakes in New China Life Insurance and Minsheng Bank.
In addition, Nasdaq-listed internet media company Sina, in which Fosun owns an 8.75% stake, dropped 3.41% on Friday. Also, Fosun International, the parent company and investment arm of Fosun Group, plunged 16% in over-the-counter trading on Friday in New York.
According to Nicholas Yap, a Hong Kong-based credit analyst at Mitsubishi UFJ Securities, the case of Fosun’s chairman is the latest example of the so-called “key man risk” in Chinese companies, which is usually higher in Chinese privately owned firms than their state-owned peers.
The term generally refers to the threat posed to a company due to over reliance on key personnel for decision making. A few of China’s largest private firms, such as the Chinese IT triumvirate known as the BAT (for Baidu, Alibaba and Tencent) as well as large property developers Dalian Wanda Commercial and Evergrande, all have iconic individual founders and leaders.
“A lot of private companies tend to be majority owned and controlled by their original founder. They are usually tied with one guy. If this guy goes down, there will be big risks for the company as a whole,” Yap told FinanceAsia.
“Unlike the domestic securities firms, which are also currently under government scrutiny, we see the 'key man risk' at a firm like Fosun to be materially higher as it cannot count on the backing of a large SOE group,” he added.
Fosun’s chairman Guo is the latest in a string of senior executives who have recently “gone missing”, which in China typically means the person has been investigated or, more luckily, has been asked to assist with an investigation of someone else.
Fosun said in a conference call with investors on Sunday night that Guo was in Shanghai and was helping Chinese judicial authorities on certain investigations.
According to Liang Xinjun, chief executive of Fosun International, the investigation was about personal issues and not about the company’s business. “It is the responsibility of any Chinese citizen to assist a government investigation,” he said.
Guo falls into a long list of corporate executives to have come under scrutiny as President Xi Jinping’s sweeping anti-corruption campaign has expanded into the country’s financial industry this year.
Last month, Yim Fung, chairman and chief executive of Hong Kong-listed brokerage Guotai Junan International, was also out of contact.
According to Chinese media reports, he was taken away to assist with an investigation into Yao Gang, the now disgraced vice-chairman of the China Securities Regulatory Commission. Yao was a general manager at Guotai Junan Securities from 1999 to 2002.
Shares of Guotai Junan International dropped as much as 30% since then to HK$2.24 on December 11.
Even at Citic Securities, the country’s largest brokerage by assets and which has a strong backer – the state-owned conglomerate Citic Group, its shares still tumbled on the news of its influential president Cheng Boming being probed for alleged insider trading and leaking inside information.
The broker’s share price in Hong Kong fell about 14% from September 16, when Cheng was taken away, to a year low of HK$13.16 on September 29.
Back at Fosun, this is not the first time Guo has brought unwelcome attention.
In August, Fosun and Guo were officially linked to a corruption case by the state-run Xinhua News Agency. It reported in August that the company and Guo had sold two villas cheaply to Wang Zongnan, former head of state-owned Bright Food Group, in return for unspecific benefits.
Wang was sentenced to 18 years in jail for corruption and embezzlement. Fosun quickly denied any wrongdoing and said the discount on the property was “reasonable”.
Stocks of the Hong Kong-listed Fosun International plunged as much as 30% in light of the news from mid August to late August.
In 2013, Fosun International and Shanghai Fosun Pharmaceutical saw Rmb6.9 billion ($1.07 billion) wiped off their market capitalisation in one morning’s trading after rumors emerged claiming Guo was restricted from leaving the country and later was detained by the government.
Guo, 48, who grew up poor in a farming village in the eastern Zhejiang province, co-founded Fosun with three college friends in 1992 after graduating from the prestigious Fudan University in Shanghai.
Fosun, of which the Chinese name Fuxing means “stars from Fudan University”, soon developed into one of China’s most high-profile privately owned successes.
Over the past few years, it has snapped up some of the world’s best-known names, such as France’s tourism group Club Méditerranée and Canada’s entertainment company Cirque du Soleil, as well as buying up insurance companies to secure solid funding for further acquisitions.
According to data provider Dealogic, Fosun has spent $5.75 billion on acquiring assets overseas this year, an eightfold increase from 2013.
This year, Guo is 17th on the latest Hurun Rich List, with a personal wealth of Rmb50 billion ($7.75 billion).
Like some other Chinese entrepreneurs, Guo engages in the country’s political issues. He was a delegate to the National People’s Congress, China’s legislature, and serves as a member of the Chinese People’s Political Consultative Conference, the country’s top advisory organisation.
He’s also one of the top Chinese corporate executives, along with Ding Xuedong, chairman of China Investment Corporation, and Wu Xiaohui, chairman of Anbang Insurance, who accompanied president Xi during his state visit to the UK in October.