Fosun is on a roll. China’s largest privately owned conglomerate has spent more than $8 billion in the past two years on acquisitions including a Hollywood movie studio, a Portuguese insurer and a New York tower.
The deal machine is crunching numbers on more targets for this year as it attempts to turn itself into a Chinese version of Warren Buffett’s Berkshire Hathaway.
“I think [we’ll buy] one or two more financial companies, like an insurer or a bank, especially from Europe or Japan,” Fosun International’s chief executive Liang Xinjun told FinanceAsia. Fosun International is the group’s Hong Kong-listed unit that makes most of its overseas acquisitions.
Fosun has become one of the most prolific dealmakers out of China and its churn of assets across many markets has kept analysts reworking their forecasts and worried about earnings volatility and leverage.
Founded in 1992, Fosun has grown by levering up its own balance sheet with debt. Liang said gearing peaked in 2014 as the Shanghai-headquartered group turns to a more staid form of capital – insurance premiums.
Fosun’s net gearing declined to 80% of total equity as of the end of June from 86% in 2013 according to analysts. Fosun is targeting a 60% gearing ratio in coming years.
Fosun is in the vanguard of a new breed of privately run Chinese companies expanding overseas. Others include property developer Dalian Wanda and the world’s largest e-commerce company Alibaba.
Some credit analysts worry that the Chinese will overpay due to a lack of experience in other markets and fall into the same trap as the Japanese in the 1980s, when they went on a debt-fuelled corporate spending spree that eventually led to widespread bankruptcies.
Liang counters that Fosun has hired locals to scout for deals in its target markets. It has five people stationed in the US, another five each in mainland Europe and Hong Kong, one in Britain, two in Japan, and one in Southeast Asia.
Also Fosun’s investments are performing well so far. In a recent update with analysts, for example, Fosun said that its Portuguese insurance firm Fidelidade’s net investment yield is on track to expand from 1% in 2013 to 2-3% in the next two years and to deliver premium income growth at double-digit rates.
Liang also stressed that Fosun holds to rigorous valuation ratios. “The Japanese overpaid because they thought prices in overseas markets were very cheap, compared with in Japan. We never think in that way,” he told FinanceAsia.
For Fosun to consider an acquisition the target’s net operating income growth rate has to be well above 6% and its funding costs less than 3% to 4% he said.
Equity analysts so far like Fosun’s investment approach. “The company’s outlook is positive, benefiting from strong financing and investment capability,” said Moses Ma, an equity analyst at broker Jefferies.
The hunt for cheap capital
The key to Fosun’s push overseas is access to cheaper funding than can be found in China.
Massive quantitative easing by central banks has lowered the cost of capital for Japanese, US and European companies, making them more attractive targets, said Liang, who is 47 years old and one of the four co-founders of Fosun.
"It's a good time to invest in insurance assets in the euro zone, US and also in Japan," said Liang.
Fosun, in particular, is looking to marry management’s deal-making acumen – Fosun’s internal rate of return on its investments was around 30% from 1994 to 2013 – with insurance companies’ large pools of funding.
It is a model exemplified by Warren Buffett’s Berkshire Hathaway, which is held as a paragon by Fosun management.
Putting this plan into action, Fosun has made a string of insurance sector acquisitions in recent years. It acquired US insurance firm Meadowbrook for $433 million in December, a 20% stake in Ironshore in August, and 80% of Portugal’s Fidelidade in January last year.
Insurance contributions to the assets of the group have shot up to 37% of assets as of June 30 from 3% in 2013 [see pie charts]. Fidelidade alone brought in €10 billion ($11.3 billion) of investable assets from insurance premiums and Fosun’s total investable assets reached Rmb146 billion ($23 billion) as of November.
To be sure many insurance companies aren’t allowed by regulators to invest a large proportion of assets outside of OECD countries or to invest in unlisted equities. So Fosun has to partly finance its acquisitions by other means.Fosun has already used its insurers’ investable assets to make purchases, such as a 23% holding in German clothing company Tom Tailor. It also used Fidelidade’s funds to invest $100 million in Alibaba’s IPO in New York, according to a person familiar with the matter.
“We cannot transfer every coin from Japan and Europe to China,” Liang said.
When it can’t use insurance assets Fosun has Rmb34 billion ($5.4 billion) in private funds it can tap. As a last resort Fosun uses its own balance sheet for greenfield investments or purchases of companies with volatile earnings; such as Australian oil exploration and production operator Roc Oil which Fosun acquired on November 14.
Fosun’s balance sheet will also benefit from disposals. Liang said Fosun has sold Rmb5 billion-worth of assets each year for the last three years.
“So in the future the capital demands on our own balance sheet will continue to fall and debts shrink,” Liang said who was speaking to FinanceAsia on the sidelines of an insurance conference in Hong Kong.
New targets in sight
Fosun is seeking to recycle the investable assets from its insurance company holdings into companies that appeal to the growing ranks of China’s middle-class.
Fosun has already snapped up international brands such as Greek jeweller Folli Follie, American apparel firm St John Knits International, Spanish ham producer Osborne, and is set to acquire French holiday resort operator Club Méditerranée after a long-running bidding war.
“I had a lunch with several Chinese entrepreneurs who have invested in St. John’s Chinese business yesterday. During the lunch almost two-thirds of them asked me the same question: where can I buy your ham?” said Liang, who was wearing a Caruso suit, a company that Fosun invested in during 2013.
Fosun is also investing heavily in Chinese mobile internet banking. It is the second-largest shareholder in a private bank in which Alibaba also owns a stake.
“The opportunities coming from meeting personal financial demands will boom in the future”, said Liang. "We want to push all our traditional business to mix much better with the internet and we will also invest in new models under mobile internet."
Fosun’s recent purchases are gradually reorienting the conglomerate away from China’s steel and property sectors, which are suffering from overcapacity and are heavily regulated.
In addition, Fosun is venturing deeper into emerging markets. Ever since Liang spoke on stage with Russian President Vladimir Putin at a conference organised by VTB in October in Moscow, Fosun has established a team of almost 20 people working on three or four projects in Russia.
The projects span mining, manufacturing, and agriculture such as fisheries and tourism.
Liang noted that many consumer products made in China can be sold in Russia. “We can transfer manufacturing capacity there,” he said.
However he is cautious about the economy’s contraction and reputation for a lack of transparency.
“We should be very careful,” Liang said
