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On the last evening of 2022, Guo Guangchang, chairman of conglomerate Fosun International Ltd. (OTCPK:FOSUF) (OTCPK:FOSUY) (0656.HK), visited a lantern festival at Yu Garden, the famous Shanghai tourist attraction operated by one of his company’s units. The rags-to-riches billionaire made New Year’s wishes that life would return to normal in China, and that Fosun’s global partners could visit a country cut off from the rest of the world for three years by strict Covid curbs.
“2022 witnessed grief and misery. I hope there’s light in 2023 after the darkest times,” Guo wrote on his personal blog.
His wishes appear to be coming true, as China reopens its borders and ends other measures that were strangling its economy under a previous “zero Covid” policy – moves that should also ultimately benefit Fosun.
Guo’s Yu Garden wishes didn’t include a return to health for his own company, which struggled alongside the rest of China’s economy last year under its own large mountain of debt. But growing signals are showing such a rebound may be already happening for Fosun as it raises cash through a series of asset sales to meet its financial obligations.
Fosun disclosed the latest of those last week with its announcement that it and one of its units sold their stakes in four steelmakers for 6.7 billion yuan ($990 million), a move the market interpreted as reflecting improving liquidity conditions for the company.
Investors were unmoved by the actual news, with Fosun International’s shares falling slightly the day after the announcement. But the stock is up 11.6% so far this year, in line with a broader rally for offshore-listed Chinese stocks, indicating investors believe Fosun is part of a larger group that will benefit from a new chapter of stronger state support for China’s ailing private sector.
That includes Beijing’s apparent ending of a ruthless private sector crackdown on a wide range of industries, from the internet to property developers. The rapprochement could be a boon to Fosun, which desperately needs state support to help ease its liquidity stress. Such state support was notably absent in the recent collapses of conglomerate HNA and insurance giant Anbang.
A reversal of fortune would be hugely welcome for Fosun, which was the subject of a steady stream of negative headlines in 2022. Those included credit downgrades by global rating agencies Moody’s and S&P, and pandemic-induced losses at some units. Those worries helped to knock down Fosun International’s shares as much as 46% last year, as its bonds also plummeted on default worries.
But its Hong Kong-listed shares began rebounding in September, and their Wednesday close of HK$7.10 represents a six-month high. Fosun’s bond prices have also bounced back sharply.
The rebound was surely aided by the broader stock market revival, as well as rising valuations of Fosun’s listed units, including Fosun Tourism (OTCPK:FSNGF) (1992.HK), Yuyuan Tourist (600655.SH), Sisram Medical (OTCPK:SRAMF) (1696.HK) and Shanghai Fosun Pharmaceutical (OTCPK:SFOSF) (600196.SH; 2196.HK). But it’s also underpinned by improved market perceptions about Fosun’s own financial health.
Difficult times
The latest lift for Fosun International’s shares contrasts with mid-2022, when a series of similar asset disposals were seen as a desperate fire sale to avoid collapse of a business empire laden with 261 billion yuan of debt – roughly half of that short term – even though the company only had 117.7 billion yuan in cash.
Rumors also swirled that Fosun’s actual debt totaled 650 billion yuan. The company later clarified that larger figure included liabilities from its financial businesses such as insurance, where high leverage is the norm.
Since January last year, Fosun has recouped more than 30 billion yuan in cash by selling some, or all, of its stakes in roughly a dozen companies, including Fosun Pharma, Jinhui Liquor (603919.SH), New China Life Insurance (OTCPK:NWWCF) (601336.SH) and Hainan Mining (601969.SH), Guotai Junan Securities said in a recent report. Fosun also announced plans to sell its 60% stake in Nanjing Nangang Iron & Steel United Co. for up to 16 billion yuan.
Cash proceeds from the sales should be enough for Fosun to repay its debts due in the next six months, removing any short-term liquidity issues, the brokerage estimated.
In a call with Citigroup in November, Fosun executives said the company plans to raise another 50 billion yuan to 80 billion yuan by further selling non-core assets, such as Tianjin Dragon Steel and its stake in Alibaba-owned logistics company Cainiao.
At the same time, Fosun is emphasizing it will retain controlling stakes in assets related to family-oriented consumer discretionary and healthcare businesses, which it considers two of its core areas. Its management reiterated it doesn’t intend to further reduce its stakes in Fosun Pharma, Yuyuan and Fosun Tourism, according to the Citi note.
Analysts have become more upbeat as Fosun articulates a strategy of slimming down to its core business, which could enjoy a robust rebound with China’s reopening.
Fosun Tourism, whose assets include French resort brand Club Med, is expected to witness a boom for its domestic business as China relaxes restrictions that discouraged travel within the country to slow the spread of Covid.
A similar rebound has already occurred in Club Med’s other markets with the dismantling of similar Covid curbs in many countries last year. Club Med’s global recovery momentum continued in the fourth quarter on strong pent-up Asia demand, and its China business started to pick up from late December with the relaxation of Covid measures, according to Citi.
Fosun’s financial health is also improving on the back of bank support as the group expands its financing channels at a time when Beijing is boosting its funding to the private sector – now seen as crucial for economic growth and job creation.
Late last year, the company entered into strategic agreements with leading state lender ICBC, as well as HSBC. And one of its key units is close to securing a credit line from some of China’s biggest state banks, Bloomberg reported this week.
Fosun’s reversal wasn’t purely the result of Beijing’s recent policy changes, with founder Guo’s crisis management skills also playing a role. Guo has repeatedly said that running a business is “like walking on thin ice.”
Immediately after rumors emerged in mid-September about a Chinese government health check of Fosun’s business, Guo moved to soothe market panic by posting a message on his Weibo social media account saying he was already in Shanghai after several months overseas. He also held meetings with institutional investors to ease their concerns.
Industrial Securities now expects Fosun International’s profit to grow 9.9% this year, doubling from 2022’s expected pace of 4.9%. The brokerage has set a price target of HK$9.06 for the company, roughly 30% higher than the current level, rewarding Fosun’s clear, and well-communicated turnaround strategy.
Disclosure: None
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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