Fosun pivots to technology
The group has set a target of 100 billion yuan for technology investment in the next decade
It seems Wang Qunbin is harking back to the days when he was a lecturer at the Genetic Research Institute at Fudan University. “The way we run our business is like [preparing for] 高考 (gāo kǎo),” shares the CEO of Fosun International, comparing it to China’s dreaded Higher Education Entrance Examination. While the exam takes place in June each year, Wang says at Fosun “we prepare every day and manage our time properly; we find problems and solve them; we create value. Even today, from our mission, vision and value, we still have a lot of problems to solve.”
The past few years have no doubt been challenging times for Fosun, which styles itself as a disciple of the legendary American investor, Warren Buffet. China’s crackdown on financial risk in 2017 ahead of the 19th Party Congress exposed the limits of expansive Chinese companies going overseas such as Fosun.
It did not help that Fosun was lumped together by China’s banking regulator with the likes of Anbang Insurance, HNA and Wanda and in mid-2017 subjected to financial review. Meantime, Liang Xinjun, the CEO of Fosun since 2009, and one of the three founders, quit suddenly on March 28 2017, citing health reasons.
That left Guo Guangchang, chairman and CEO Wang, the two other founders, still with direct involvement. What lies ahead is going to be another big test for Fosun. In recent years, the company has placed more than half of its investment in what it calls the wealth sector, particularly finance companies and insurance; another third in tourism, fashion and consumer brands; and only 10% in higher-growth sectors such as tech and healthcare.
The outcome has been mixed. Now, softening consumer demand in China is constraining sales of luxury goods. Meanwhile, its staple of insurance and financials have underperformed. The group is fine tuning its portfolio to tech and healthcare – the so-called unicorns because of their growth potential – to boost overall growth and return on investment.
“In the first half of 2018, we invested 4 billion yuan (US$576.2 million) in technology and innovation, and we will continue to increase our investment in technology, research and innovation. We hope to increase our technology investment to 20 billion over the next three years, 100 billion yuan in 10 years,” says Wang.
This year, Fosun completed a couple of domestic technology investments, including Chinese big data company Fonova where it took a majority stake for US$40 million.
“We believe that artificial intelligence and blockchain represent the future, so we have to increase investment in this area,” the 47-year-old CEO explains. “We will try to link more of our business with blockchain and apply the blockchain technology in areas like shared administration and procurement.”
Fosun is open to both partnerships and management roles in its new ventures, Wang says. “What we always emphasize is our globalization and development strategy should adhere to compliant and transparent principles.”
“If we find that the (other party’s) management team shares common values with us and creates value, we will also invite them to be our global partners so that we can grow together.”
Some of the company’s earlier ventures are already showing potential. The Shanghai-based conglomerate is looking to exit from its portfolio in technology company Babytree Inc, a domestic pregnancy and parenting online portal, after completing a US$450 million funding round for the unit two years ago. Babytree, which also has e-commerce giant Alibaba as an investor, is eyeing to raise US$1 billion in an initial public offering in Hong Kong.
Fosun also plans to spin off its tourism and hotel unit, which owns the French holiday resort chain Club Med, into a separate listing in Hong Kong that could raise up to US$1 billion. The conglomerate will use the funds raised from the listing to expand its investments.
Wang did not name specific investment targets ahead, but says the company has 173 billion yuan in unutilized banking facilities for opportunities that may arise. According to its interim results, the debt-to-ebitda ratio increased to 2.3x from the 2.2x in 2017. Meanwhile, its cost of capital is trending higher touching 5.18% in the first half of 2018 from the 4.47% in 2016.
The company’s debt ratio – currently at 53.6% - is closely watched by rating agencies and investors. And Wang too is keeping an eye to ensure that the total stays below the 60% ceiling set by the company.
“The ceiling was suggested by credit rating agencies. Future business plans and debt ratios of well-managed global companies were taken into consideration,” Can Wang, Fosun CFO said at a press conference in late August.
In May, global rating agency S&P affirmed Fosun’s ‘BB’ long-term issuer credit rating. It said Fosun will sustainably grow with a balanced investment and divestment strategy, while maintaining a loan-to-value ratio of 30%-40% over the next two years.
With consumer demand in China mirroring the softness in economic growth, Fosun, however, has struggled to show returns on its stable of luxury brands in the Chinese market. This despite its grand plan to combine China’s growth momentum with international brands that it set into motion a decade ago.
Its “happiness ecosystem” - consisting of international brands in tourism, fashion and consumer sectors – clocked the lowest profitability growth at 5% in the first six months of 2018.
The challenge Fosun faces in translating its China advantage to global brands is illustrated by the case of Club Med, the French resort operator specializing in premium all-inclusive holidays. Among its earliest forays in the international market, Fosun bought a 9% stake in Club Med in June 2010. Following a prolonged takeover battle that started in 2013, Fosun eventually succeeded in taking control of Club Med paying €939 million (US$1.07 billion).
In 2017, growth in Asian visitor numbers was just 3.9%, a considerably slower rate of expansion than overall global growth at 6.6%. The American market saw by far the strongest upturn in client numbers, rising by almost a fifth in 2017 from a year ago and registering a 19.6% rise in visitor numbers.
Other international brands acquired by Fosun for the happiness division have also struggled in China. Many relied on bricks-and-mortar retail outlets and had been badly affected by the boom in e-commerce shopping. Israel cosmetic product provider AHAVA, acquired by Fosun in 2016, has just two stores in China, according its official website.
It also has not helped that Fosun stumbled on one investment – Greek luxury jewellery and handbag maker Folli Follie.
In August, Greece’s securities regulator slapped a E4 million fine on Folli Follie and nine executives, citing market manipulation of its 2017 financial information. A probe into the Greek company’s books revealed that it overstated its revenue from Asia by 90%.
The three-month investigation was prompted by reports that the company had far fewer sales locations globally than the company claimed. Fosun bought a 9.5% stake in Folli Follie for E84.59 million back in May 2011. A few months later in October, the Chinese group boosted the stake further to 13.9%
The deal was believed to have been inspired by a shopping trip by Fosun chairman Guo and his wife. During a press conference to announce the deal, Guo proudly stated that his wife’s affection for Folli Follie bolstered his determination to invest in the fashion brand.
The misstep is prompting Fosun to have a rethink of its M&A approach especially of taking a minority stake in branded businesses, which the former CEO Liang had promoted as he believed that Fosun has to be seen as a benign shareholder.
Wang now suggests that Fosun intends to take a significant stake so that “we may suggest or send people to the management team”.
Despite the recent gaffe, Wang still sees value in Fosun’s portfolio of brands.
“We must continue to focus on our core operations while developing our pioneering technology and innovation platforms so we can become not just a global company with Chinese roots, but a global operator of world-class products and services that can leverage the growth momentum both in China and overseas.”
Wang says Fosun aims to keep double-digit growth and ensure its talented people stay in their jobs to drive the company’s reinvention.
Convincing investors is another challenge. Fosun’s share price has fallen by over 33% year-to-date closing under HKS12, underperforming the Hang Seng index.
If running Fosun is like gāo kǎo, as Wang suggests, only time will tell if investors will give him more than a passing mark.