The record high of US$269.8 billion spent on outward investments last year by China companies, coupled with bank loans amounting to US$1.84 trillion, remains threatening towards China’s credit-fueled economic strategy as debt worries swell.
Failure in such an investment would damage China’s banking system since majority of the debts are funded through bank loans, generating a “Snowball” effect in bad debts, resulting in a potential financial crisis.
In its latest directive on 18 August 2017, China has undertaken further steps to tighten its capital outflows and has given prominence to its One Belt One Road Initiative (OBOR). Despite the crackdown, Fosun International’s share price has rallied 63.7 percent from a low of HK$11.8 on 14 August 2017 to HK$19.3 on 23 October 2017 over a six-week period.
One will question how would the government’s clampdown on capital outflows affect Fosun’s expansionary plans and, in the bigger scheme of things, influence its share price?
Comply Or Oppose The Government?
The main concern lies primarily in overseas sectors such as real estate, hotels, entertainment clubs and sports clubs which the government deems as non-beneficial towards its economic development and does not aid in its OBOR infrastructure initiative.
According to a Bloomberg Article, Fosun International’s executive director, Xu Xiaoliang has commented “Now that we know what the government encourages and discourages, we have a clearer idea of where to expand our global footprint.” With that in mind, he also mentioned that “Over time, will demonstrate to the government what we are trying to achieve.”
On 20 December 2017, the group announced its acquisition of a 17.99 percent stake in Tsingtao Brewery for HK$735 million or at HK$27.22 per share, from Asahi Group. The acquisition was made at a 32 percent discount to its latest closing price of HK$40. The deal is expected to be completed by 1Q18. Tsingtao Brewery, a domestically preferred premium beer brand with footprints around the world, is an acquisition that should be widely welcomed by the Chinese government since it’s an investment that would benefit the economic development of China.
On an intangible note, purchasing a stake in a Chinese brand from a Japanese group will score Fosun International some patriotic points.
Moving forward, the group has further expanded its outward investments by acquiring a majority stake in Raffaele Caruso SpA, Italy’s luxury menswear on 20 October 2017 that seeks full control over the company. Concurrently, it is also in discussion over the sale of a majority stake in Italy’s luxury lingerie brand, La Perla, and the outcome will be known in the next few months.
In its latest attempt to align itself with the government’s goal, the group has also reduced its foreign real estate holdings which saw a divestment of its 95 percent stake in a Sydney office tower for US$109 million and also the disposal of its Lloyd Chambers property in London for US$140 million.
Financial Health Of The Group
Fosun International achieved a remarkable financial performance in 1H17, chalking up double-digit percentage gains in both its top-line and bottom-line. The group is essentially an investment holding company consisting of three main segments, Wealth, Healthcare and Happiness with its core focus on the wealth segment.
Impressively, revenue rose by 11.6 percent to RMB36.3 billion largely driven by its wealth segment accounting for RMB19.8 billion. Furthermore, stellar performance by Fosun Pharma under its healthcare segment saw an increase of 20.34 percent in revenue to RMB8.27 billion which boosted the top-line substantially.
In tandem, bottom-line was uplifted which saw net profit hit a record high of RMB5.86 billion, a 33.6 percent increase from previous period. In addition, the compounded annual growth rate (CAGR) in net profit was over 25 percent for the previous 5 years. Wealth segment accounted for nearly half of the net profit percentage gains, primarily contributed by Banco Comercial Portugues (BCP) that reported a reversal of net loss to a net profit of EUR89.9 million due to a recovery in Portuguese economy.
The group has improved its cash position by 50 percent to RMB78.3 billion, leading to a net gearing ratio of 47.4 percent, a huge improvement from 60.3 percent in FY16. This is further supported by domestic banks, through granting them the use of general banking facilities to support their capital needs which will help ease the growing concerns of financial risk.
Assuming that the earnings perform consistently well for the next half of the year, Price-to-Earnings (P/E) ratio can come in as low as 13.4 times while industry average sits at 22.8 times which shows that the stock is undervalued, barring unforeseen concerns, as at HK$18.28 on 3 January 2018.
Future Growth Aspects
The group’s most recent acquisition in Tsingtao Brewery may be seen by some as a move to improve its cross-selling opportunities through its majority-owned subsidiary, Club Med, for further market penetration into the international market and further boost its revenue streams.
There have been suggestions that the group is in talks with banks to raise minimally U$500 million by listing its tourism business which includes Club Med and Thomas Cook Group as reported by Reuters. People familiar with the situation mentioned that the listing venue will most likely be in Hong Kong and will take place as early as next year.
This action is believed to expedite development pace of Club Med in China, to support the growing population of tourists in Greater China Region which expanded by 15 percent year-on-year to 107,000 in 1H17 and to improve its balance sheet.
In view of such developments, the group appears to be focusing its expansion locally through its recent acquisition and overseas divestments. Aligned with China government’s objectives, the moves are widely regarded as being positive and will eventually lift investors’ confidence and not frowned upon by the government.
As at 3 January 2018, the last trading price for Fosun International is HK$18.28.