Igor Kutyaev
Moody’s downgraded the Shanghai-based financial conglomerate last month, saying it could have difficulty repaying its ‘sizable debt’ maturing over the next 12 months.
A group of Chinese conglomerates went on a global buying spree starting about a decade ago, netting such trophy assets as the fabled Waldorf Astoria hotel in New York, a major stake in Hilton Worldwide (HLT) and French resort operator Club Med, among many others. Fast forward to the present, when nearly all of those buyers, most notably former highflyers Anbang and HNA Group are now largely insolvent or don’t even exist anymore, the victims of taking on too much debt.
One of the few companies to survive largely intact from that era has been Fosun, one of the more transparent names in that group, whose portfolio contains a large number of listed companies led by its flagship Fosun International (0656.HK) (OTCPK:FOSUF) (OTCPK:FOSUY), the holding company for many of its assets. But Fosun is now showing its own signs of stress, making recent headlines as it starts to sell down some of its assets to raise cash to service its massive debt load.
The latest of those sales was in the headlines this week, when Fosun International reduced its stake in New China Life Insurance Co. Ltd. (1336.HK; 601336.SH) (OTCPK:NWWCF), financial media Caixin reported, citing a stock exchange filing from New China Life. The Hong Kong Stock Exchange website shows Fosun International’s holdings of New China Life’s Hong Kong-listed shares have fallen from 17.10% at the start of the year to 15.08% at present. A Fosun spokesman said the sale was part of the company’s normal trading among the many assets in its portfolio.
The sale came just two weeks after another major Fosun investment, Fosun Tourism (1992.HK) (OTCPK:FSNGF), disclosed that its parent would sell down its large stake in the company. Stock exchange records show that sell-down has just begun, with Fosun International recently paring its stake in Fosun Tourism, whose main asset is the Club Med resort chain, to 81.70% from 82% at the start of this year.
Fosun International also appears to be selling some of its shares in Fosun Pharmaceutical (OTCPK:SFOSF) (2196.HK; 600196.SH), one of China’s leading private drug developers and one of the group’s crown jewels. Hong Kong Stock Exchange filings show Fosun International’s holdings in Fosun Pharma’s Shanghai-listed A-shares fell slightly to 46.60% of the company from 46.65% at the start of the year.
All of this comes as Fosun sits on a huge mountain of debt, which totaled 261 billion yuan ($37 billion) at the end of June, up from 237 billion yuan at the end of last year, according to the company’s interim results released last month. Such a large debt figure isn’t necessarily a cause for alarm, and Fosun pointed out that its debt-to-capital ratio stood at a relatively healthy 53.8% at the end of June.
But investors don’t seem to agree that all is well at the company, previously considered one of China’s most successful privately owned private equity investors led by billionaire Guo Guangchang. Fosun International’s stock is down 40% so far this year, and now trades at a nine-year low. That’s left the stock trading at a price-to-earnings (P/E) ratio of just 3.7 times, well below the roughly 16.5 times for U.S. giants BlackRock (BLK) and Blackstone (BX), and even below the 5.5 for the smaller Carlyle (CG).
Moody’s downgrade
Fosun generally gets high marks for the quality of its investments, which are pretty solid companies in both China and abroad. But, in this case, the company may be struggling under a heavy near-term debt load that is stretching its resources. The situation is being made worse by volatile global markets that could make its assets harder to sell, combined with rising interest rates that will make it more difficult and expensive to get new financing to meet its obligations.
The brewing “perfect storm” reached a crescendo last month when Moody’s released a decidedly bearish report on Fosun International, including downgrades on the company’s corporate family rating and on bonds guaranteed by the company. Moody’s also downgraded the outlook on all of its ratings for the company to “negative” from a previous “under review.”
Moody’s attributed its downgrades to concerns that Fosun could have difficulties repaying its “sizable debt” maturing over the next 12 months. It added that Fosun International’s current cash on hand, which its interim report said totaled 118 billion yuan at the end of June, was “insufficient” to cover its obligations over the next 12 months.
The recent stake sales seem to show the company is trying to raise the necessary cash to meet those obligations. But as we’ve already noted, current market sentiment is quite negative, meaning the company is unlikely to find many buyers willing to purchase the big blocks of shares it needs to sell to raise the kinds of funds it needs.
Adding to the negative sentiment surrounding the company, Bloomberg reported last week that China’s banking regulator had instructed the nation’s largest banks to check their exposure to Fosun International debt, implying it was worried about the potential for defaults. Fosun initially said it hadn’t received any notice of the regulator’s requests, and later denied the report.
Without more information, it’s hard to say how bad Fosun International’s situation really is. The company’s interim report certainly looks healthy enough, including a 17.7% year-on-year revenue rise in the first half of the year to 82.9 billion yuan. Its profit was less stellar, down about 33% year-on-year to 2.7 billion yuan. Remarks from Guo in the report also hint at the short-term difficulties the company is facing.
“In the face of the volatile epidemic situation and many external uncertainties in the first half of the year, Fosun maintained its strategic focus, insisted on doing the right things, the difficult things, and things that take time to develop, continue to develop in technology and innovation and globalization, demonstrated full resilience in its interim results, accumulating momentum for future development,” he said in a statement.
Whether Fosun will be able to weather its own looming cash crunch has become the billion-dollar question. History certainly isn’t on the company’s side, as reflected by the disappearance of pretty much all the big acquirers we mentioned above. But the company could stand better chances of success than its predecessors due to its better management and the better quality of its assets. The company is also likely to get support from the government in its hometown of Shanghai, China’s financial capital.
Disclosure: None.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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