Fosun scales back M&A splurge; seeks unicorns

CEO Liang Xinjun tells FinanceAsia that Fosun will narrow its M&A focus. He spoke as new details emerged on the reason behind the chairman's disappearance.

After spending more than $9 billion on outbound acquisitions snapping up brand names all over the world since 2008, Fosun International, China’s largest privately owned conglomerate, says it will now slow foreign purchases and cut debt. 

“There is no doubt Fosun will be different in the next five years compared with the last five. We will make more effort on internal growth [than on overseas acquisitions],” Liang Xinjun, chief executive of Fosun International told FinanceAsia in an exclusive interview on Friday. He aded the company will also hunt for unicorn firms with the goal of making big profits with small investments.

The Shanghai-headquartered conglomerate has been aggressively expanding overseas by buying global brands ranging from France’s Club Med, Canada’s Cirque du Soleil to insurers and property. Its investments pushed up the company’s debt from Rmb54 billion ($8.3 billion) in 2011 to Rmb115 billion ($18 billion) last year. 

However the serial Chinese acquirer has yet to make a single outbound purchase this year, while oth er Chinese companies have spent $92 billion on 184 foreign deals, which is close to last year’s record annual volume of $107 billion, according to data provider Dealogic.

Guo Guangchang, the billionaire co-founder and chairman of Fosun, echoed Liang’s sentiment. “We are always like this: When everyone gets excited, we become more cautious,” he told investors at a Fosun event in Hong Kong on Thursday, his first public appearance in the city since he went missing in December. His company later clarified he had been “assisting a government investigation”.

The disappearance of Guo, one of China’s most high-profile entrepreneurs, dented investor confidence in the company. Fosun-related stocks tumbled in value in mainland China, Hong Kong and New York, at the time because investors worried Fosun's overseas spending no longer enjoyed government favour.

According to one person with knowledge of the issue, Guo was assisting with a probe into Ai Baojun, a former vice mayor of Shanghai, who had been under investigation by the country’s anti-corruption watchdog late last year. Guo introduced Ai to a friend of his, from whom Ai alledgedly purchased a property at a discount. At the time Ai was working at the Shanghai-based Baosteel, a state-owned iron and steel company before he became vice mayor in December 2007, the person said.

When asked about the circumstances of Guo's disappearance, Fosun’s corporate communications department said “it is the responsibility of any Chinese citizen to assist a government investigation” but it declined to offer details of the nature of the investigation in which Guo was assisting. 

CEO Liang told FinanceAsia that both Guo and Fosun “weren’t involved in any illegal business” and everything was back to normal. “He [Guo] didn’t do anything wrong. He was just a witness. His testifying was long over.” The government has taken no further action. 

“Both Fosun’s bond issuances and IPOs [of firms Fosun invested in] were subject to government approvals. And we also signed strategic agreements with a number of big Chinese state-owned enterprises. If this matter wasn’t completely over, it would be very hard for you to imagine how we could get these approvals under the very sensitive circumstances,” Liang added.

Fosun in January entered into a strategic cooperation with conglomerate China Merchants Group, as Fosun takes an interest in investing in logistics businesses of the country’s oldest SOE. Five of Fosun’s subsidiaries, including Shanghai Fosun Pharmaceutical Group, have issued domestic bonds totaling Rmb12.42 billion ($1.9 billion) so far this year, according to the company.

Guo was allowed to travel to the US within one week of being released and attended this year’s “two sessions” – plenary meetings of the country’s top legislative and consultative bodies in Beijing in early March, as a member of China’s top advisory organization.

New investment targets

Chairman Guo said on Thursday Fosun would narrow its investment focus from developed economies, such as the US and Europe where it has splurged on acquisitions in the past, to mainly emerging markets, notably Russia, Brazil and India, where valuation of companies is lower. 

Commodities have also caught his eye, although he admitted Fosun’s $441 million acquisition of Australia’s Roc Oil in 2014 wasn’t a success due to the plunge in oil prices. “We were a little early,” he said. “This year is a good timing and Fosun will make more investments in commodities.”

Founded in 1992 by philosophy student Guo, genetic engineering student Liang and two other college friends from the prestigious Fudan University in Shanghai, Fosun quickly developed into one of China’s most high-profile privately owned successes. One of its recipes for success is to emulate Warren Buffett.

After running six insurers globally including Portugal’s largest insurance company Fidelidade, the ambitious Chinese company keeps looking for insurance assets in Japan, Australia and China, CEO Liang said, in a bid to use premiums generated by insurance operations to accumulate long-term capital to finance investments.

“We already have European and American insurers. No need to buy that many,” Liang said. “We have assets in Japan, but we don’t have reasonable insurance premiums to match them. The same case in Australia.  And we have loads of assets in China, but the size of premiums is very small. The two don’t match at all.”

Out of Fosun’s Rmb160 billion ($25 billion) investable assets of insurance segment, euro-denominated assets account for 43%, usd-denominated for 39% while Rmb and yen only for 8.8% and 1.7%, respectively.

Apart from looking for a larger pool of insurance capital, Liang said Fosun will further capitalize on the high leverage of its insurance funding, which has the average ratio of about 4.5 times, way below more than 10 times sometimes practiced in the industry.

Meanwhile, it has become cautious on outbound MA of late. In December Fosun dropped its interest in European merchant bank BHF Kleinwort Benson Group, which was followed by its termination of a $460 million bid for 52% of Israeli insurer Phoenix Holdings in February after certain pre-deal conditions were not met.

“After we gave up the Israeli deal, there were rumors saying Israel doesn’t like Fosun or Fosun doesn’t like Israel. Fosun will use another deal to prove we still like Israel,” said Liang, adding the company would announce the deal (not in the insurance industry) in Israel soon.

Fosun’s $18 billion debt burden seemed to have played an important role in its acquiring spree, with short-term debts accounting for 43% as of end 2015.

“These cancelled plans indicate that management is becoming more prudent in investment and financial management, although it will take more time to see whether the company has significantly reduced its risk appetite and improved risk management,” Kai Hu, an analyst at Moody’s, said in a note on February 18. 



Cutting debt

In its annual results release on Thursday, Fosun for the first time brought up the goal of improving its credit rating to investment grade, as it is currently rated BB/Ba3 by S&P and Moody’s respectively.

“The group is determined to reduce its debt ratio,” CEO Liang said. “We want to improve our credit rating, so that the leverage ratio of insurance [premiums] could be increased automatically.”

Fosun’s net gearing ratio fell from 73% in 2014 to 69% last year, while its average funding cost declined from 5.61% to 4.97% over the same period. Liang said its debt ratio will keep dropping this year, but he declined to set a goal.

“It depends on how fast we can sell assets [to pay back debt], which is up to the valuation in the market … We have assets worth tens of billions of yuan that we could sell,” he said, adding the company won’t rush to dispose of assets until “the market turns good”.

Apart from numerous properties, the company has a large portfolio of minority equity investments, some of which it may sell to alleviate funding pressure, according to Liang.

These include an 8.7% stake in Focus Media, the first Chinese company to de-list from the US and re-list in the A-share market through a backdoor listing in Shenzhen, 25% of Alibaba-backed online lender MyBank, and 10% of Cainiao Network, a logistic affiliate of Alibaba.

“Fosun’s investment division, which has less secondary market exposure, performed well,” analysts at Goldman Sachs said in a note on Thursday, referring to nearly Rmb3 billion net profit generated by the division last year with 12 projects listing in mainland China and Hong Kong.  

Looking for unicorns

In order to reposition itself in investors' eyes from a debt-laden conglomerate, Fosun will also seek to “discover, invest and nurture unicorns”. 

A unicorn in finance refers to that rare enity, an unlisted company valued above $1 billion.  Chairman Guo used the word "unicorns" 20 times in its letter to shareholders.

Guo said Fosun will seek unicorns, transform its existing projects into unicorns, and team up with non-Fosun unicorns. “The group will also work to develop itself into a ‘Unicorn’ enterprise in the long term,” he said in the letter.

Fosun’s standard of what constitutes a unicorn is higher than the generally accepted definition. “Unicorns are those in which we can make a profit of $1 billion in two years or the valuation of our investment can increase by $1 billion in two years,” Liang said. He added unicorns should grow exponentially rather than linearly as they rely less on capital expenditure to boost growth.

He revealed Fosun has already invested in a few unicorns in “health, wealth and happiness”, three core segments of the company’s business, in Hong Kong, but declined to elaborate further.

In addition, Fosun has been trying to building its existing investments into unicorns, notably those in the healthcare (excluding pharmaceutical unit) and tourism segments, both of which will go public in the future, according to Liang.

He cited as an example, in which Fosun invested $65 million for a nearly 10% stake last year. It soon develops into the country’s largest online hospital appointment-booking platform with 82 million subscribers and 17% of market share.

Toto Castineiras and audience member at a Cirque du Soleil's show in 2011 in California

For its more sizeable tourism business, Fosun has already kicked off a pre-IPO fundraising round to bring in investors into its leisure portfolio, which includes global brands such as Club Med, Cirque du Soleil, UK’s Thomas Cook as well as local names like Shanghai Yuyuan Tourist Mart.

“We could actually close the fundraising today as we’ve already received three good offers [from Chinese and international investors]. But we want to wait and see a bit more,” Liang said.

“We will prove to investors and shareholders that Fosun is really transforming,” he added. “They will know this is our strategy, not a show.”

On a personal note, Liang, 47 years old and second-in-command at Fosun, said he was busier last year, spending 60 days overseas, and didn’t enjoy much leisure time.

“I didn’t even get a chance to celebrate my birthday last year as I was travelling overseas,” he said. “But I enjoy being so busy as work brings me a lot of fun.”

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