Fosun Group, China’s largest privately owned investment company by revenue, is harnessing the country's growing economic power to expand overseas.
In 2013 it invested $1.2 billion in 34 new projects and in the last three years its reach has grown to 15 markets from two.
The Shanghai-based company is also looking to transforming itself from a Chinese cyclical industrial conglomerate into an insurance-focused global investment firm.
In January Fosun announced its biggest overseas acquisition yet when it agreed to buy a controlling stake in Caixa Seguros, Portugal’s largest insurer, for €1 billion ($1.36 billion).
To fund this aggressive run of acquisitions, Fosun has taken on debt. Its gearing net-debt-to-equity ratio reached 86% at the end of last year.
So to help with refinancing, Fosun International, the Hong Kong-listed unit of the group, announced a rights offering on Tuesday, through which the company hopes to raise between HK$4.8 billion ($619 million) and HK$5.18 billion ($668 million).
The issue of 39 new shares for every 500 held by investors represents 7.8% to 8.3% of Fosun’s existing issued share capital and 7.2% of the enlarged capital base upon completion.
Fosun’s chief executive officer and co-founder Liang Xinjun says Berkshire Hathaway's Warren Buffett is his role model. Like Buffett, Liang hopes to accumulate insurance assets and use the premiums as a low-cost and stable capital base.
Following the Portuguese acquisition, insurance will account for 39% of Fosun’s total assets from just 3% at the end of 2013.
“Fosun is set for a growth spurt and is similar to Berkshire Hathaway in its early days,” Liang told FinanceAsia in March.
Fosun is still tiny in comparison but Liang thinks he can improve on the Berkshire Hathaway model: “We [the management] are relatively younger in age and we are willing to understand new technologies,” the 46-year old Chinese entrepreneur said.
China’s Fosun is making the most of its connections and local know-how in one of the world’s fastest growing economies to help the foreign brands that it acquires crack this opaque market. It is also capitalising on the new Chinese administration’s increasingly favourable stance towards privately-owned companies at the expense of state-owned enterprises.
“In the past 20 years and the next 20 years to come, we have benefited and will continue to (benefit) from China’s economic growth,” Liang said.
Fosun's share price has risen sharply as its international profile has grown and more analysts track the company. At HK$9.9, it closed Wednesday some 37% higher than it did on January 10, when the Portuguese acquisition was announced. As a result, Fosun’s shares now trade at a 13% discount to 2014's estimated NAV versus a 15% to 18% discount for other Chinese conglomerates traded in Hong Kong.
The shares even edged higher after the announcement of the rights issue at HK$9.76 each as the stock overhang and worries about even greater dilution were removed. [See graph below] Net of interest cost savings, Goldman Sachs forecasts that the issuance will be up to 7% dilutive to EPS on a fully diluted basis.
Fosun’s swift growth and ambition illustrate the rise of a new breed of Chinese privately owned companies. The Chinese government’s backing of the private sector has emboldened the likes of Fosun, pork-processor Shuanghui, food and beverages company Bright Food and tech giant Lenovo to go overseas and make major acquisitions in recent years.
However, Fosun’s rise to prominence on the global stage also illustrates the inherent risks as corporate Chinese dashes headlong overseas. Fosun’s ambitious investments may weaken its financial profile and liquidity position, say credit rating analysts, some of whom warned ahead of the rights issue that they were pondering whether to downgrade the company.
Goldman Sachs analysts estimate that Fosun’s net debt would improve to 72% after the rights offer, or 62% if its outstanding convertible bond is fully converted.
The number of rights issued depends on whether the company’s HK$3.88 billion convertible bond, which has a conversion price of HK$10, is converted before the last day for transfer on April 16. Fosun Holdings has agreed to fully underwrite the offer.
Mirroring China’s growth
Fosun was founded in 1992 by Liang and current chairman Guo Guangchang and two other university classmates with the $4,000 that Guo had saved for further study in the US. Last year Fosun had total assets of Rmb291 billion ($47.5 billion).
Fosun started out as a pharmaceutical company in 1992 in the entrepreneurial culture fostered by former Chinese president Deng Xiaoping and his reform programme.
It also seized opportunities in the real estate sector as China urbanised. Fosun’s property unit Forte last year recorded profits of Rmb2 billion ($327 million), a year-on-year improvement of 33.7%.
In 2003 and 2007, it helped set up iron and steel group Nanjing Nangang and Hainan Mining and holds a 60% stake in each of these companies.
“We entered the right industries at the right time,” Liang said.
The new Chinese administration’s continuation of Deng’s reforms is opening even more doors. Privately-owned companies can control banks for the first time.
Fosun, along with nine other privately-owned companies -- including the country’s internet giants Tencent and Alibaba -- have secured approval to set up the first entirely privately-owned banks.
And in a new turn of events the Chinese government is now actively supporting privately owned companies expand overseas. As an example, the state once sent a diplomat to help Fosun negotiate with a foreign regulator in an acquisition deal, one source close to the company said.
Fosun is also looking to take advantage of the shift in China towards a more consumer-oriented economy by targeting the country's burgeoning middle class. The company invested €44 million in French resort operator Club Mediterranean in 2010 and €84.58 million in Greek high-end retailer Folli Follie.
In 2013, Fosun acquired 95.2% of Israel-based cosmetic company Alma Lasers with $221.6 million and 49% of US-based tumour diagnosis and test company Saladax Biomedical with $240 million. The Chinese firm also bought a 33.9% stake in the US high-end women wear brand St. John for $55 million and a 35% stake in Italian luxury menswear house Caruso for €15 million.
In addition, Fosun is tapping into another big trend in China – urbanisation. So far, it has developed five gated communities with a total 1.6 million square metres in Shanghai, Hainan and Wuhan.
Even so, with Chinese growth slowing Fosun has had to adjusted its business model. “In cyclical industries like mining and steel, we will wait until the de-leveraging cycle ends and meanwhile sell more raw materials overseas,” said Liang, who was wearing a Caruso suit.
