Over the past few years, many Chinese corporations undergoing transformation and upgrading have experienced a rare “double whammy” in the capital market, pressured by both broader market conditions and their internal challenges.
Now, alongside a renewed optimism about China’s economic outlook, as well as these corporations restoring growth after the challenges of transformation, the “double whammy” they previously experienced may turn into a significant positive momentum boost, underpinned by both a more favorable broader market environment and the strengthening of the companies’ own competitive standing.
Recently, the Chinese listed stocks have become a hot topic in the global capital markets.
Since April, many foreign investment banks have turned bullish on A-shares. UBS has raised its rating on A-shares. Goldman Sachs has recommended global investors to increase their holdings of A-shares, and optimistically forecasted a 40% upside for A-shares. Deutsche Bank, Morgan Stanley and HSBC also remain upbeat about the Chinese market, highlighting the attractive investment opportunities in Chinese assets and the most direct way is to invest in Hong Kong stocks.
Notably, the Hong Kong stock market has reversed the downtrend it had been since February 2021. From 20 April to 20 May this year, the Hang Seng Index had maintained its bullish momentum, rising from around 16,000 points to nearly 20,000 points, with trading volume consistently expanding.
Amid this broader market upturn, a group of well-known privately-owned listed companies have been rallying back from their lowest levels.
Fosun International (HKEX: 0656) is one of them.
As of 27 March 2024, Fosun International’s share price had dropped to a 10-year low of HK$3.93.
However, its share price has surged over 30% from the bottom in less than two months, outperforming the Hang Seng Index by more than 10 percentage points, demonstrating its great rebound momentum.
The turnaround from dropping to a historical low to staging a strong rebound has certainly been underpinned by the company’s solid performance. Fosun International delivered better-than-expected results in 2023, with revenue reaching RMB198.2 billion, up 8.6% year-on-year, and a profit attributable to owners of the parent increasing by RMB2.21 billion year-on-year to RMB1.38 billion.
Nonetheless, a re-rating of Fosun is likely to have a greater impact than its recent solid performance.
The “Davis double play” is a concept known in the capital markets. When a company’s performance trends downward, the market’s valuation expectations for the company will also decline. As a result, the company’s share price will take a beating from both the falling earnings and falling valuation multiples. Conversely, when a company is performing well, its share price will benefit from the combination of better earnings and a higher market valuation.
Fosun International’s recent declines could be considered as a “double whammy”.
First, Fosun endured the “double whammy” faced by Chinese assets.
Ever since the US launched the trade war against China in 2018, the Chinese economy has had to contend with an added layer of uncertainty. The COVID-19 pandemic, the debt crisis among real estate enterprises, and the downturn in the property market since 2020 have all contributed to weakening market expectations and an actual slowdown in economic growth.
Despite their strong underlying performance, Chinese listed companies were hit by a “double whammy” from the broader market, as expectations weakened and growth slowed.
And some privately-owned corporations such as Fosun International have been even more unfortunate.
Firstly, the pandemic has dealt a severe blow to the development of Fosun’s businesses, with operations in consumer and tourism sectors virtually grinding to a halt.
Secondly, the combined pressure of tight cash flow and a dramatic market liquidity crunch have temporarily saddled the company with debt and cash flow challenges.
Having already endured the “double whammy” due to the broader market conditions, Fosun International then experienced its share price plunging significantly and its valuation falling from 0.7x P/B (Price-to-Book Ratio) all the way down to below 0.3x.
However, the plunge also presents opportunities. Once the trend shifts from a “double whammy” to a “double play”, the plunge could transform into a sharp rebound. It is very likely that Fosun International can transit from a “double whammy” to a “double play” now.
Firstly, there are signs of a broader “double play” for Chinese stocks and assets in global capital markets. As mentioned earlier, China’s economic outlook has been improving, with greater expectations stemming from the upcoming third plenary session of the 20th Communist Party of China (CPC) Central Committee. Meanwhile, the threat of US interest rate hikes is receding. With US stocks at record highs and Hong Kong/A-shares severely oversold, the foundation for a bullish trend in Chinese markets is strengthening.
Secondly, and most importantly, Fosun International is poised for a “double play” based on its own development and market expectations.
In fact, Fosun International experienced a strong outperformance from 2016 to 2018. During that period, the Hang Seng Index rose from around 18,000 to 33,000 points, while Fosun’s share price surged from HK$8 to over HK$18.
This outperformance was attributed to Chairman Guo Guangchang’s strategic adjustments and repositioning of Fosun.
At the time, Fosun had a highly diversified global business portfolio, but its core business was not focused enough.
Even as the real estate and related industries were booming, Guo Guangchang recognized the underlying risks and opportunities, he believed the Chinese economy would rapidly transform towards consumer-driven and innovation-driven growth. He initiated a new round of strategic changes for Fosun. While maintaining its globalization strategy, Fosun began to focus more on consumer and technology innovation sectors. At the same time, Fosun strengthened the development of its core businesses.
With this new strategy, Fosun International timely halted its investments in capital-intensive real estate businesses, deleveraged, and strengthened the development of its core industries. This gradually shaped its current four major business segments, Health, Happiness, Wealth, and Intelligent Manufacturing, and clearly defined Fosun’s new positioning as a global innovation-driven consumer group.
As a result, the capital market began to reassess the prospects of Fosun International.
In hindsight, Fosun International’s strategic adjustment was very timely and correct. It had already been making adjustments well ahead of time. Therefore, when the headwinds hit in 2022, Fosun was better equipped to withstand the impact. In addition, Fosun accelerated the divestment of non-core, non-strategy assets, consolidated its financial strength and strengthened the development of its core industries, thoroughly carrying out the strategic adjustment.
During this period, Fosun determinedly de-leveraged and divested from non-core businesses, resulting in a total cash flow of nearly RMB50.0 billion in 2022 and 2023. In addition, Fosun bolstered the development of core businesses by tapping into its technology innovation and globalization capabilities, thereby enhancing the profitability of core businesses.
In 2023, Fosun International’s industrial operation profit reached RMB4.9 billion, up 20% year-on-year. Its four core subsidiaries, namely Yuyuan, Fosun Pharma, Fosun Insurance Portugal, and Fosun Tourism Group (FTG), all saw significant revenue growth, contributing 72% of the total revenue.
After a round of major optimizations and adjustments, Fosun International, leveraging its outstanding global resource integration and industrial operational capabilities, has reoriented its core businesses around pharmaceuticals, tourism, consumption, and insurance sectors. Fosun’s core businesses have not only achieved a global presence, but they have also accelerated the globalization and resource synergy across these core business segments, all aimed at driving steady and profitable growth.
The pharmaceutical, tourism, consumption, and insurance sectors all share a common characteristic. They have qualities that protect them against market downturns and volatility, and long-term growth potential. This diversified business portfolio can better balance risks during market downturns and capture opportunities when the market is booming.
For instance, when tourism and consumption sectors were hit hard in recent years, Fosun Pharma remained resilient and profitable, which helped stabilize the overall performance of Fosun. When the overall market is thriving, the different sectors can share resources amongst each other, achieving the “multiplier effect” as described by Guo Guangchang.
This has fundamentally changed Fosun International’s outlook as it is now driven by sustainable business operations and profitability.
Fosun International’s positioning is gradually becoming clearer. It focuses on “core businesses in the household consumption sector”. Fosun has been focusing on industries where it has established competitive advantages and continuously enhancing its business presence, resulting in greater certainty and growth potential than a single industry.
While there is still a lot of work to be done for Fosun International to truly realize this objective, the trend has been established and is beginning to manifest in the growth of its core businesses.
Taking results of the 2023 and the 1Q2024 as an example, Fosun International’s subsidiaries, FTG, Yuyuan, Fosun Pharma and the insurance business have largely achieved double-digit revenue and profitability improvements, and are exhibiting new growth potential.
In particular, Fosun Pharma’s flagship innovative drug company, Shanghai Henlius, achieved profitability for the first time in 2023 and is accelerating the pace of internationalization. Recently, Guo Guangchang’s remarks at a forum regarding the potential to “cure cancer” have garnered widespread attention. Guo Guangchang’s remarks are underpinned by Fosun’s comprehensive strategy in cancer treatment, spanning from monoclonal antibodies to CAR-T platforms, as well as the ongoing delivery of leading breakthroughs in this field.
In terms of globalization, Fosun has now established a profound business presence in more than 35 countries and regions across five continents globally. In 2023, its overseas revenue accounted for 45% of the total revenue, and total investment in technology innovation amounted to RMB7.4 billion, representing a year-on-year increase of 14%.
In end-May, Fosun International announced the sale of 99.743% of its subsidiary’s shares in the German private bank HAL to ABN AMRO Bank for a total consideration of approximately EUR670.3 million, while fully retaining HAL’s asset servicing business. As for the market rumors about Fosun potentially selling Atlantis Sanya and Shede Spirits, according to an insider source, these were found to be just unfounded rumors. Fosun not only has no plans to divest these assets, but is in fact further strengthening their operations. This further underscores Fosun International’s commitment to focusing on its core family consumption business.
All in all, Fosun International has encountered challenges since 2022, but this has actually led to a more thorough execution of the strategic transformation since 2016. This has resulted in a fundamental transformation for Fosun. Fosun has successfully undergone a transformative upgrade to truly focus on the high-potential global family consumption sector.
Alongside its strong share price performance, Fosun’s US dollar-denominated offshore bonds have also been steadily recovering since Q4 2023 from the steep declines they experienced in 2022 due to overly pessimistic market sentiment. Currently, the valuation of Fosun’s US dollar bonds has returned to early 2022 levels, making it one of the most well-performing bonds in the broader Asian high-yield bond market.
The latest round of challenges and transformation for Fosun International reflect the larger economic transformation happening in China
Over the past few years, many Chinese corporations undergoing transformation have experienced a rare “double whammy” in the capital market, pressured by both broader market conditions and their internal challenges. Now, alongside a renewed optimism about China’s economic outlook, as well as these corporations restoring growth after the challenges of transformation, the “double whammy” they previously experienced could possibly turn into a significant positive momentum boost, underpinned by both a more favorable broader market environment and the strengthening of the companies’ own competitive standing.
