Fire Sale! China’s “Warren Buffett” Races To Sell Assets
Yue Wang, Senior Contributor
Oct 24, 2022,06:30am EDT
The debt crisis that roiled China’s real estate market has spread to one of the country’s largest conglomerates. Fosun, owner of an English Premier league soccer team, Portugal’s largest bank and Club Med, can no longer raise capital so it must sell off assets before it defaults on its short-term debt.
Guo Guangchang, the billionaire cofounder of Chinese conglomerate Fosun, likes to say that he emulates Warren Buffett by following the same investment strategy of using the steady cash flow from insurance firms to acquire other businesses. It enabled him to build Shanghai- based Fosun into an eclectic empire that includes Wolverhampton Wanderers from the English Premier League, Portugal’s largest bank Millennium BCP, as well as French fashion house Lanvin and resort owner Club Med.
But now, Guo is struggling with a problem Buffett never had. Fosun had been borrowing heavily to fund its acquisition spree and analysts are concerned that it doesn’t have the cash to cover its short-term liabilities. Guo, who had previously relied on funding from bond markets as well as easy credit from banks, saw his flagship investment arm Fosun International downgraded by the rating agencies deeper into junk territory.
Fosun International’s dollar bonds recently fell to records lows. Even now, the 5.05% note due 2027 currently trades at just 32.7 cents on the dollar - a level well into distressed territory, and suggesting that investors are pricing in an eventual outcome of default, says Trung Nguyen, a Singapore-based senior credit analyst at research firm Lucror Analytics.
Funding for borrowers like Fosun dried up after China Evergrande Group, Kaisa, Sunac and other real estate developers began defaulting on their debts. Spooked bond investors are now staying away from firms with high levels of debt, as they wait to see the outcome of Evergrande’s restructuring and gauge the political environment.
Chinese authorities continue to be intent on curbing the amount of leverage in the private sector to reduce financial risks, while directing funding to industries deemed a priority for the government (i.e., green energy and high tech, as outlined in the 20th party congress where President Xi Jinping secured a precedent-breaking third term ). As a result, the country’s banks are wary of lending to debt-laden firms, particularly those that aren’t state-owned. Analysts say this has left Guo with little choice but to keep selling his prized assets at discounted prices for cash, an approach that risks shrinking his empire to a shadow of its former self.
“Fosun is in a dire situation where it doesn’t matter whether it is making a loss or profit [from asset sales],” says Nguyen. “Whichever asset has liquidity, they would be looking to sell.”
Fosun International’s shares resumed trading in Hong Kong last Thursday, as the company announced its intention to dispose its entire 60% stake in the the parent of Shanghai-listed Nanjing Iron & Steel to Jiangsu Shagang Group for no more than $2.2 billion. Prior to this share sale plan, the divestments from Fosun International as well as its parent Fosun Holdings had already reached at least $3.2 billion, up 350% from 2021, according to data from Dealogic.
Fosun International needs to pay down 650 billion yuan ($90 billion) in total liabilities, an increase of 8% from last year. And according to its interim report published towards the end of August, 40% of that is interest-bearing debt, including $17.2 billion in principal payments maturing next June—outstripping its cash and cash equivalents of just $16 billion. Fosun International’s “elevated refinancing pressure” and “less than adequate” liquidity were the factors that spurred both Moody’s Investors Service and S&P Global Ratings to downgrade the company in August and September, respectively. Moody’s placed on September 30 Fosun International on review for further downgrade, as the company’s refinancing risk rises amid “the fast and significant decline” of the market value of its listed assets. Fosun, in the meantime, notified the rating agency in October that the company would cease to provide it with relevant information in the future.
The company didn’t respond to emails and phone calls seeking comment. Shares of Fosun International have tumbled almost 50% over the past year, and reached a 10-year low since its listing in 2007. Guo, whose wealth is largely based on his 72% stake in his Hong Kong-listed flagship, is now worth $2.5 billion—down two-thirds from last year’s $6.9 billion.
Meanwhile, Fosun International’s profit fell 33% to $375 million in the first half, although its revenue rose 18% to $11.5 billion.
Fosun groups its businesses under happiness, health and wealth, saying the three branches cater to Chinese families’ growing demand for quality products in areas such as hospitality, medical treatment and wealth management, although none of the three branches have been spared from the recent sales.
Fosun sold a 2% stake in its Hong Kong-listed tourism arm and Club Med owner Fosun Tourism at a 15% discount to market prices. It also disposed of shares in Shanghai-listed Fosun Pharmaceutical, which is the exclusive distributor of BioNTech’s mRNA Covid vaccine in the Greater China area.
Even Guo’s core insurance business had to be pared back. Fosun International sold in April the U.S. insurance group AmeriTrust for $740 million, before four of its units cut in early September their combined stakes in Shaanxi- based Yong’an Insurance from 40.7% to 14.7%.
Fosun also sold in the same month a 0.89% stake in Hong Kong-listed New China Life Insurance through block trades. Although the price of the deal wasn’t disclosed, but the shares have fallen 33% since Fosun first invested at HK$22 apiece back in 2016.
“Who would sell at such a discount if it wasn’t for a difficult position to raise cash?” says Shen Chen, a partner at Shanghai Maoliang Investment Management. “Many of Fosun’s assets aren’t that easy to sell, and the more liquid insurance companies may still be next in the line.”
Guo, to be sure, is no stranger to crisis. But Shen Meng, managing director of Beijing-based boutique investment bank Chanson & Co., says the conglomerate’s current troubles run deeper than previous times. Cofounded by the mogul in 1992, the company, along with the likes of Anbang Insurance and HNA Group, was once the country’s most aggressive dealmakers overseas. But many of their signature investments were later undone as the government started to crackdown on what was perceived as irrational foreign acquisitions.
Anbang’s former chairman Wu Xiaohui was sentenced in 2018 to 18 years in prison for financial fraud, and the government rebranded the company as Dajia Insurance a year later after taking it over. HNA chairman Chen Feng, together with chief executive Adam Tan, was detained last year by police on “suspected crimes,” and the conglomerate with billions of dollars in debt is said to have completed its restructuring work this April.
Guo managed to emerge relatively unscathed, although the billionaire disappeared briefly in 2015, before resurfacing a few days later to announce that he had been assisting with an unspecified investigation. In subsequent years, Fosun’s pace of investments slowed, and many of its acquisitions—such as those in the pharmaceutical industry—were aligned with Beijing’s national goals.
The mogul, who comes from a humble family background in the eastern Zhejiang province and later studied philosophy and business administration at the elite Fudan University in Shanghai, also openly said he is a devoted student of Warren Buffett. He bought into the Shaanxi-based Yong’an Insurance in 2007, initially spending $66 million for a 14.6% stake.
Fosun’s insurance holdings were later expanded to include stakes in Portuguese insurance firm Fidelidade, Hong Kong-based Peak Reinsurance Company, as well as Shanghai-based life insurance firm Pramerica Fosun.
The billionaire, who now resides in Hong Kong, clinched control of Club Med in 2015, and then acquired Wolverhampton Wanderers FC the following year. He has said he also draws inspiration from Buddhism, Confucianism and Daoism to refine his investment approach, and practises the Asian martial art of Tai Chi—which hones his patience to wait for the right moment to ink a deal.
But as Chinese authorities continue to focus their attention on debt levels in the financial system, Guo’s priority is to shore up Fosun’s balance sheet. The slumping economy and repeated lockdowns have battered Fosun’s retail and tourism arms, and the country’s low interest-rate environment is poised to squeeze the profitability of its insurance business. This is because insurance companies tend to make less of a return from fixed-income investments after central banks hike interest rates.
“The stormy waves Fosun has now encountered are greater and more complex,” Chanson & Co.’s Shen says. “Fosun’s business fundamentals have been hit.”
Guo has recently sought to boost investors’ confidence with posts on social media. In a post published via China’s Twitter-equivalent Sina Weibo, he said Fosun would sue Bloomberg for what he described as an untrue and misleading report that relied upon anonymous sources. The story said Chinese authorities had told state-owned firms to check their financial exposure to Fosun. Fosun did not respond to repeated requests for comment on this. A Bloomberg spokesperson says he doesn’t have a comment.
“A company’s job is to make good products and provide the best services to customers,” Guo wrote, after returning to Shanghai following a months-long business trip abroad. “But sometimes, noise from the outside can bring a very serious impact.”
The billionaire made a public appearance in early October, when Fosun Pharmaceutical announced a strategic partnership with the Hong Kong-listed and state-owned China Resources Pharmaceutical Group to jointly develop new medicines and medical equipment. Fosun, meanwhile, maintains it isn’t as indebted as it appears on the balance sheet.
In a September 18 press release, the company said the 650 billion yuan in total liabilities include the consolidated debt at its subsidiaries, which it doesn’t have an obligation to repay. It insists that the actual debt incurred by Fosun International is only 100 billion ($14 billion). S&P Global Ratings estimates that excluding the debt at various affiliated units, Fosun International’s own obligations stands around $16 billion.
But analysts say the company’s debt woes still go deep. There is no ruling out that Fosun International hasn’t guaranteed the liabilities borrowed by its complex and tangled web of subsidiaries, many of which are deeply indebted. Shanghai Fosun High Technology, for example, has $24 billion in short-term liabilities maturing next June, according to its interim report, against cash holdings of only $5 billion. Its Shanghai-listed department store unit Yuyuan has $633 million in cash, but needs to pay down $3.8 billion of short-term debt coming due in a year. In September, Fosun sold a 5% stake in Yuyuan to Zhejiang-based metal processing firm Qingzhan for $176 million.
If its subsidiaries default or eventually face liquidation, then Fosun faces the difficult choice of whether or not to bailout. “Right now it doesn’t have the money to stage a rescue,” says Shanghai Maoliang’s Shen. “But if it chooses to sit back then the assets would just be gone.”
“I don’t think Fosun would fall,” he adds, saying that if Guo doesn’t end up selling his controlling interest in Fosun, then it would be considered a successful outcome of the current crisis.