Note: This is an edited version of an article published earlier on fundsupermart.com.hk on 3 Jan 20.
Highlights:
- Fosun International has a large and highly-diversified investment portfolio in terms of sector and geographical allocation. Net profits have been growing steadily, and the business performance is good.
- The company has a stable debt profile. The debt structure has improved following the reduction of short-term debt repayment pressure.
- Investors should consider the FOSUNI 5.25% USD notes due 2022, which have about two years of remaining maturity.
Fosun International Limited have investments across wide-ranging sectors as the company adopts a diversified business strategy. We notice that the company has a positive track record in its investment management, and has taken proactive steps to improve its portfolio liquidity. In this article, we highlight the USD notes due 2022 issued by Fosun International. Information of the aforementioned bond is as follows:
- Bond name: FOSUNI 5.250% 23Mar2022 Corp (USD)
- Issuer: Fortune Star (BVI) Limited
- Guarantor: Fosun International Limited
- Bond credit rating (S&P): BB
- Annual coupon rate: 5.250%
- Maturity date: 23 Mar 2022
- Years to maturity: 2.220
- Ask price: 100.094
- *Net ask yield to maturity: 4.869%
(Data as at 31 Dec 19)
*Net ask yield to maturity is calculated net of accrued interest, FSM’s processing and platform fees.
Company background
Fosun International Limited is a Chinese international conglomerate with diversified business lines across different sectors.
Founded in 1992, Fosun International is a large-scale integrated private enterprise in China. Fosun International was listed on the HKEX in 2007 (stock code: 0656), and currently has a market capitalisation of approximately HKD 90 billion.
Fosun International invests in companies across a myriad of sectors including healthcare, property and consumer services. The group categorises its businesses according to three “ecosystems”, namely Health, Happiness and Wealth.
The Health business of Fosun covers pharmaceutical manufacturing and R&D, healthcare service, medical devices and medical diagnosis, pharmaceutical distribution and retail, health insurance, healthcare management service, health products, etc. The Happiness business covers travel and leisure, fashion and experiential products and services. Lastly, the Wealth business covers insurance, banking and other financial businesses such as investment, asset management and property development and management. The company's customers are mainly located in China, Portugal and other overseas countries and regions.
Business overview
The group's operating performance is satisfactory with a growing net profit. Profit from the Wealth business has been stable, while the Health and happiness segments are expanding.
In 2018, Fosun International's revenue exceeded RMB 100 billion, with its net profit standing at RMB 13.4 billion. Its operating performance was satisfactory. In 1H19, the Group's revenue reached RMB 68.48 billion, representing a 57% YoY increase.
Among its businesses, Fosun Pharma, Yuyuan, Fosun Travel, Fosun Insurance Portugal and Peak Reinsurance accounted for more than 80% of total revenue. The group's net profit continued to grow for the seventh consecutive year and reached RMB 7.61 billion, up 11% YoY. The net profit in 2017 and 2018 also exceeded RMB 13 billion.
Figure 1: Net profit of the group
Drilling into the different earnings sources, the Happiness segment contributed a net profit of RMB 1.82 billion in 1H19, up 86% YoY. The increase was mainly due to a swing to profitability of Fosun Luwen and the Premier League football club Wolverhampton Wanderers. Net profit of the Health segment increased 4% YoY to RMB 870 million thanks to the profit contribution of Fosun Pharma and its subsidiaries.
At present, the group's Wealth ecosystem, comprising of its insurance, finance and investment businesses, provides the largest profit contribution. In 1H19, Wealth recorded a net profit of RMB 4.92 billion, down 3% YoY. Due to capital market fluctuations, the net profit of Fosun Insurance Portugal and Fosun International’s investment segment declined on a year-on-year basis. However, the investment business still contributed RMB 3.1 billion or about 40% of the Group's net profit.
Figure 2: Net profit breakdown by segments
| Net Profit (RMB Million) | 1H19 | 1H18 | YoY % | |
|---|---|---|---|---|
| Health | 865.1 | 828.9 | 4.4 | |
| Happiness | 1,822.3 | 981.7 | 85.6 | |
| Wealth | Total Wealth | 4,921.4 | 5,047.7 | -2.5 |
| Insurance | 1,015.9 | 1,078.6 | -5.8 | |
| Finance | 804.6 | 658.6 | 22.2 | |
| Investment | 3,100.9 | 3,310.5 | -6.3 | |
| Total | 7,608.8 | 6,858.3 | 10.9 | |
| Source: Company reports | ||||
Figure 3: 1H19 net profit breakdown by segments
In terms of profit composition, the aggregate proportion of net profits of the Health and Happiness segments increased 8.9 percentage points (“ppt”) YoY to 35.3% in 1H19. The increased profit contribution from Health and Happiness reflects the company’s continued optimization of its business model, shifting its focus from mostly industrial investment to incorporate industrial management and operations.
Credit overview
The group has a stable debt level with improved debt structure and lower refinancing pressure.
In 1H19, Fosun International actively managed its debt level and continued to optimize its debt structure. As at 30 Jun 19, total debt was RMB 193.19 billion and net debt was RMB 89.44 billion. Net debt had increased from RMB 79.82 billion six months ago due to the expansion of the group's various business segments.
The group's debt level has been stable over the past three years. In 1H19, the group's net gearing ratio (net debt over equity) was 52.7%, a relatively healthy level in our view. The ratio had increased from about 55% in 2007 to a high of 73.3% in 2014, before gradually decreasing to about 50% in recent years.
The high gearing prior to recent years reflects Fosun International’s focus on investments and merger and acquisitions in its early-growth stage starting 2007. The rapid expansion had required large capital investments, which led to a significantly higher debt level.
Figure 4: Fosun’s net gearing
In 1H19, the group's reported interest coverage ratio (EBITDA over net interest expenditures) was 4.6x as compared with 4.8x in 2018, indicating that its profit was sufficient to cover interest expenses. As at 30 Jun 19, cash and bank balances and time deposits were RMB 103.75 billion. Short-term borrowings maturing within one year added to RMB 66.84 billion, which were amply covered by the group’s liquidity and cash flows.
In 1H19, Fosun International's short-term debt accounted for about 35% of the total debt. The group’s current ratio was 1.1x, suggesting that its liquidity was at an acceptable level. Meanwhile, Fosun International has continued to optimize its debt structure in recent years, by reducing its gearing ratio and extending its debt maturity profile. As at 30 Jun 19, the proportion of medium- to long-term debt increased further by 1.8 ppt to 65.4%, implying that the group’s short-term debt repayment pressure was reduced.
The international rating agency Standard & Poor's on 29 May 19 raised its outlook on Fosun International from "stable" to "positive", affirming the group’s BB issuer rating. The upgrade mainly reflected S&P’s expectation for the group’s portfolio liquidity to improve and its track record in investment and value creation.
Bond review
Fosun International’s 5.25% USD bond due 2022 may be appealing to some bond investors.
Figure 5: Fosun International’s USD bonds
| Bond Name | Bond Credit Rating (S&P) | Indicative Ask Price | Net Ask YTM | Years to Maturity |
|---|---|---|---|---|
| FOSUNI 5.375% 05Dec2020 Corp (USD) | BB | 100.976 | 3.692% | 0.924 |
| FOSUNI 6.875% 31Jan2021 Corp (USD) | BB | 102.490 | 3.865% | 1.080 |
| FOSUNI 5.250% 23Mar2022 Corp (USD) | BB | 100.094 | 4.869% | 2.220 |
| FOSUNI 5.950% 29Jan2023 Corp (USD) | BB | 101.060 | 5.268% | 3.075 |
| FOSUNI 6.750% 02Jul2023 Corp (USD) | BB | 102.767 | 5.633% | 3.497 |
| Source: FSM; data as at 31 Dec 19 | ||||
There are currently five Fosun International USD bonds on our platforms for investors to choose. When comparing their yields and remaining maturity, we note that the FOSUNI 5.250% 23Mar2022 Corp (USD) (grey circle in Figure 6) has a net YTM of around 5%, and the remaining investment period is about two years. In contract, the net YTM of the FOSUNI 5.95% ‘23s is only around 0.4 ppt higher. Considering that the trade-off between the slight yield pickup and higher risk, we think the FOSUNI 5.25% ‘22s provide better value for money.
Figure 6: The FOSUNI bonds
Corporate risks
There are various companies and brands under Fosun International. At present, the group is also actively involved in investments and acquisitions across the Health, Happiness and Wealth ecosystems. In the process of business integration and operations, it may encounter operational and management issues. In addition, the group also has many overseas businesses with assets and liabilities denominated in foreign currencies, so exchange rate fluctuations will affect the profit or asset value of the group.
In addition, Fosun International actively invests in the group’s science and technology capability. The timeframe from capital expenditure to monetization could be long for investments in science and technology, and much capital and resources are required for research and development. The outcome of the group’s research and development efforts is uncertain. For example, the research and development of new pharmaceutical products in Fosun International’s health business is costly and may not generate desirable results.
Declaration:
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) has a principal position in FOSUNI 5.250% 23Mar2022 Corp (USD). The analyst(s) who produced this report holds a NIL position in the abovementioned securities.
