Billionaire Guo Guangchang’s flagship investment group aims to sell up to $11 billion in non-core holdings to pay down its debt. But such sales could leave it with less-desirable assets

Key Takeaways:

  • Fosun International aims to raise as much as $11 billion by selling non-core assets in the next 12 months, according to a Bloomberg report.
  • The sale of better-performing assets might leave the group with subpar businesses that would worsen its debt problem

By Warren Yang

Things are looking messy these days for Fosun International Ltd. (0656.HK), the debt-laden firm that is arguably the last man standing among a generation Chinese financial conglomerates that bit off more than they could chew by buying billions of dollars in assets in global acquisition sprees.

The main investment arm of billionaire Guo Guangchang’s Fosun conglomerate is scrambling to sell some of its assets from its own buying spree to pay down a heavy debt load set to come due over the next year. It certainly has many such assets to choose from, covering such diverse industries as tourism, pharmaceuticals, insurance and mining.

But deciding which of those to sell can be tricky. Listed or well-performing assets are easier to sell, and could help the group avoid a short-term default. But disposing of such better-quality assets raises the longer-term risk of leaving Fosun with subpar businesses that might only further weaken its financial health down the road.

Fosun’s short-term dilemma was in the headlines last week when the company, which boasts a sprawling network of businesses across the globe, told analysts that it plans to sell as much as $11 billion of non-core assets in the next 12 months, according to a Bloomberg report.

The company is among a group of Chinese conglomerates that made headlines by buying billions of dollars in high-profile businesses over the past decade. Fosun’s own list of trophy purchases includes the likes of the English Premier League’s Wolverhampton Wanderers, as well as fashion brand Lanvin and resort operator Club Med, both from France.

The problem for Fosun, like its peers, is that it relied heavily on debt to write the checks to pay for its trophies, and now lacks cash to pay the final bills.

Refinancing debt by selling new bonds has become less viable for Chinese companies in general these days as investors shun them following widespread defaults by private real estate developers. That wave of defaults has exposed a big vulnerability in China’s private sector, where companies lack implicit government guarantees enjoyed by state-owned enterprises. Beijing is also increasingly wary of companies like Fosun becoming too big and powerful, meaning the government doesn’t really mind letting them fail if they can’t get their financial houses in order. 

Making things worse for Fosun, Moody’s last Friday downgraded the company’s corporate and bond ratings further into junk territory, with a negative outlook, citing thin liquidity and difficulties it might face in trying to shore up its balance sheet. The latest rating cut for Fosun follows a similar move by S&P Global Ratings a month earlier.

Those downgrades will make it even more difficult for Fosun to raise funds from bond sales. As its creditworthiness weakens, interest in any of its bonds or other debt instruments for investors would dwindle further still. And the cost of any new bonds could also be quite high, thanks to the company’s big risk factor combined with rising interest rates that are reaching highs not seen in decades.

Growing urgency

All that said, Fosun doesn’t really have much choice about the need to raise cash – making asset sales look like the likeliest choice following the company’s latest comments, even if it might have to divest pieces of its portfolio at big discounts due to poor conditions in global equity markets.

In comments to Reuters after the Bloomberg report, Fosun said it won’t divest its 30% stake in Millennium bcp, the largest listed bank in Portugal, where it has aggressively sought acquisitions since 2014 when the country was dealing with its own debt crisis. So, what else is there for the company to sell to raise billions of dollars within a year?

One target that makes sense is Fosun’s stake in Chinese iron ore miner Hainan Mining Co. Ltd. (601969.SS). That company is listed and outside Fosun’s main core areas, which include the pharmaceutical, retail and tourism businesses, as well as Fidelidade, Portugal’s largest life insurer, according to a Citigroup report cited by Reuters. Hainan Mining is also doing pretty well, boosting its revenue by more than a third year-on-year in the first half of 2022. 

The Hainan Mining stake, which Fosun acquired in 2007, is among the legacy investments it made in cyclical industries before switching its focus to more stable areas like financial services and healthcare. Fosun originally had a majority stake in the miner but it has been reducing its ownership, which stood at slightly less than 50% at the end of June.

The company has already said it plans to sell the 60% stake it holds in Nanjing Iron & Steel Co. Ltd. (600282.SS) for the dollar equivalent of as much as $2.2 billion. Its willingness to make such a sale could indicate an interest in selling the similarly old-fashioned Hainan Mining. At Hainan Mining’s current market value, Fosun’s stake in the company is worth about 6.9 billion yuan, or $945 million.

All that said, Fosun’s options for selling its non-core assets could be limited because some of those may be unattractive to any buyer. Such assets may include Shanghai Forte Land, a real estate developer founded by Guo. While Fosun doesn’t report specific financials for the unit, the deep slump in China’s property sector means it’s probably safe to assume the unit isn’t faring well now.

Apart from non-core assets, Fosun is probably reviewing its other options for anything that’s sellable. That includes potential sell-downs – but not outright dispositions – of stakes in its core businesses. In recent months the company has cut its stakes in key subsidiaries including Club Med owner Fosun Tourism (1992.HK) and Fosun Pharmaceutical (2196.HK), as well as its insurance units.

Given Fosun’s stated emphasis on commitment to its core businesses, it will probably try to maintain control over those units, even if its stakes are reduced. But truth be told, some of their financials are rather shaky. For example, Fosun Tourism’s short-term liabilities exceed its liquid assets.

All the uncertainty is casting a cloud over Fosun International’s Hong Kong-listed shares, which are down about 40% this year, though we should also note the broader Hang Seng Index is down 34%. The company’s stock now trades at a multiyear low, giving it a price-to-earnings (P/E) ratio of about 4 – a fraction of the 58 for Warren Buffett’s best-in-class Berkshire Hathaway Inc., which Fosun has been compared to in the past for its broad investment portfolio. 

At the end of the day, Fosun may be able to survive its immediate liquidity crunch through fire sales of assets. But the quality of the company that emerges from such desperate moves could be rather undesirable, leading to potential questions about its longer-term viability.

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