Fosun Group

Fosun International pivots from asset buyer to seller in bid to lower leverage

Insurance-to-tourism conglomerate Fosun International, controlled by billionaire Guo Guangchang, cashes out of several businesses in effort to lower debt

PUBLISHED : Tuesday, 20 December, 2016, 4:44pm
UPDATED : Tuesday, 20 December, 2016, 10:15pm

Following a global buying spree, China’s largest privately-owned conglomerate Fosun International is ratcheting up an asset-sale push to bolster investor confidence in its credit profile.

The insurance-to-tourism empire controlled by Shanghai billionaire Guo Guangchang is celebrated as one of the most acquisitive Chinese firms, scooping up Indian drugmaker Gland Pharma, French resort operator Club Med and British travel giant Thomas Cook in some of China’s highest profile overseas deals.

However, more recently, Guo, a self-styled protégé of US investment legend Warren Buffett, is leading his sprawling conglomerate into a new narrative of cashing out of some businesses to reduce leverage.

In a letter to Fosun employees dated December 8, Guo wrote: “The recent asset disposal let people know that Fosun should excel in both buying and selling.”

The 49-year-old Fosun founder was referring to Fosun’s agreement last week to sell its casualty insurance unit Ironshore to US-based Liberty Mutual Group for nearly US$3 billion, which he hoped would bode well for Fosun’s credit ratings.

Soon after Guo’s remarks, Fosun announced it would sell a 50 per cent stake in a mixed use retail and office complex Shanghai Bund Real Estate, also known as Bund 8-1, for 5.33 billion yuan.

The project, on Shanghai’s premium and scenic Bund, was acquired by Fosun after it paid Beijing developer SOHO China 4.59 billion yuan for a half share of Bund 8-1, ending one of the most contentious legal battles in China’s property market last September.

A Fosun spokesperson told the Post that the recent asset spinoffs would beef up its liquidity and financial strength.

“Buffett said timing is very important for value investing, regarding not only buying, but selling,” the spokesperson said, drawing a parallel to the Berkshire Hathaway model which Fosun chairman Guo has long emulated by using insurance as a platform for unrelated investments.

The latest asset sale push triggered a ratings upgrade by global credit agency Moody’s Investor Service, which last week revised Fosun International’s outlook to positive from stable.

“The two major asset disposals, if successful, should generate approximately 26 billion yuan in cash proceeds for Fosun, which will help improve the company’s liquidity profile and lower its leverage,” says Lina Choi, a Moody’s vice president, who expects the conglomerate will use part of the proceeds to repay debt.

Investors applauded the Ironshore sale announcement, sending Fosun shares jumping the most in over two months on December 6.

Morgan Stanley forecasted in a note last week a 70-80 per cent chance Fosun’s shares will rise relative to the industry over the next two months, while Bank of America Merrill Lynch said the Ironshore deal will lift Fosun’s net asset value by about 7 per cent, optimising its gearing ratios.

But the Hong Kong-listed investment group is still rated three notches under investment grade at Moody’s, against the backdrop of its debt-fuelled growth which saw Fosun spend more than US$15 billion in overseas mergers and acquisitions since 2010. As of June 30, the total debt of the company swelled to 119 billion yuan from 39 billion yuan six years ago, with more than a third maturing within one year.

Meanwhile, Fosun is still rated two levels under the benchmark at S&P Global Ratings, which in May lower its outlook to negative in the belief that leverage at its industrial units -- essentially overcapacity-hit steel and mining -- would “remain high over the next 12 months”.

Analysts said the Chinese conglomerate, which owns the landmark 28 Liberty building in downtown Manhattan, has slowed the pace of its overseas expansion since late last year, underscored by its withdrawal from a number of overseas bids, including that of Israeli insurer Phoenix Holdings. During the first half, Fosun sold its holdings in Chinese video streaming service Youku Tudou, German privatebank BHF as well as real estate agent Lianjian for a combined US$557 million, according to Post calculations.

Profit at Fosun’s insurance business fell 43.5 per cent for the first half despite a more than doubling of revenue. That has fuelled market concerns over the well-being of one of Fosun’s “twin drivers” central to the core “insurance plus investment” strategy Guo borrowed from Buffett’s Berkshire Hathaway.

While Guo insisted in August to investors that Fosun was “under no pressure” to sell a certain amount of assets to repay its hefty debts, he admitted the company was making an attempt to “fine tune its asset structure”.

Recent efforts to win investment grade credit ratings, a goal Fosun laid out in its interim result, appeared to be on track. Fosun’s debt-to-equity ratio by June 30 dropped to 1.442 from 1.532 a year earlier, touching the lowest level since 2012.

As to future investments, Guo suggested in the letter that he has now turned his attention to artificial intelligence technologies, particularly robotics.

Guo added that Fosun’s investment focus remains on healthcare, wealth management and tourism.