Is Fosun International flying too close to the sun?

Fosun international is a privately held Chinese firm which has gone from a tiny market research venture founded in 1992 to China’s largest conglomerate with interests in a dazzling number of sectors including fashion retail (St John), finance (Minsheng bank), insurance (Meadowbank, Ironshore), healthcare (Luz Saude), tourism (Clubmed, Thomas Cook), private banking (BHF Bank) , real estate (Plaza Manhattan), entertainment (Cirque du Soleil and Bona film group), jewellery (Follie Folli) pharmaceuticals (Fosun Pharmaceutical), heavy industry (Nanjing Iron and Steel) and food (Osbourne – a Spanish ham producer) but to name but a few.

The firm was recently embroiled in controversy when its chairman Guo Guangchang disappeared apparently “helping” the government with its inquiries as part of Premier Xi’s anti corruption drive which has swept the nation. Guo who is often referred to as China’s Warren Buffett thanks to his wide ranging investment activities reappeared a few days later and insisted the matter was related to his personal affairs, but the episode prompted Moody’s to downgrade the company’s rating (Ba3) from stable to negative. Guo appeared in New York a few days later which gave the impression that he is not considered a flight risk by the government, but this has not stopped investor jitters.

However perhaps more worrying was a 30% share fall in July 2015 which could be partly traced back to many financial analysts fretting about what they saw as the company’s over expansion in recent years. Fosun spent US$6.5 billion in the first half of 2015 on 18 new companies many of which have good long term value, but others like Club Med will require a lot of investment and whose true worth is much less certain. The new acquisitions make it a tricky firm to read and analyse, simply because it is changing shape so quickly.

There is also concern its funding sources are short term, while its assets are long term, creating the potential for funding and/or cash flow problems. The firm is highly leveraged and dependent on revenues from just a few of its many operations, namely its Chinese based steel making operations, pharma and property arms, and very little else from the rest of the world.

Of course this could all change over time as the new acquisitions start to contribute more in terms of revenue and profit, but until then the company remains in a potentially precarious position.

Fosun’s international strategy will be an interesting one to watch, as a leading Chinese private firm expanding aggressively abroad its perceived success or failure could be either strong encouragement or a stark warning to other firms thinking of “going global”. Until recently state owned firms have led the charge to expand operations abroad, but now private firms are taking up the baton, driven by the desire to gain international experience, purchase lucrative brands and technology from abroad as well as the realisation that the Chinese economy is slowing and in some sectors markets are saturated and there are potentially higher returns available overseas.

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