The Most Challenging Year for Fosun International

During the same period, Happiness, Wealth and Intelligent Manufacturing recorded significant declines in profit, with the exception of its Health business. This reflects how the pandemic severely affected Fosun's business operations such as retailing, overseas tourism and insurance.

With the launch of new products in the third quarter and sales contributions from anti-pandemic products such as the nucleic acid test kits for 2019-nCoV, the Health business is steadily recovering. Fosun Pharma recently signed a joint venture with BioNTech for the local production and commercialization of mRNA vaccines. Such plans are expected to potentially increase the revenue of the group.

Revenue from the Happiness segment recorded a RMB 280 million loss last year, mainly due to the decrease in profit contribution from Fosun Tourism Group (“FTG”) and decreased investment gain due to the volatility of the financial market. However, it was partially offset by the increase in profits of Yuyuan. After the pandemic came under control, Yuyuan quickly recovered. It has completed the acquisition of Jinhui Liquor and Shede Spirits, which means the Group will be investing in the high-quality liquor industry.

The Wealth business was dragged down by the decline in investment income from asset management, whereas the insurance business remained steady. Meanwhile, Intelligent Manufacturing’s decrease in profit was mainly due to the provision of gas and oil asset made by Roc Oil which was affected by the drop in oil prices,

It is worth noting that apart from the Health, Happiness and Wealth segments, Fosun has made the Intelligent Manufacturing segment one of its core business segments, and moved Nanjing Iron & Steel, Hainan Mining and FFT from the Wealth segment into the Intelligent Manufacturing segment. These major enterprises in the segment have extended their footholds in high value-added technology industries such as high-end automation production lines, new energy batteries, etc.

Although Fosun's 2020 full-year results have declined significantly, the Health, Wealth and Intelligent Manufacturing segments recorded a significant rebound in the second half of 2020. The Happiness sector turned losses into profits while Fosun Pharma and Yuyuan delivered a steady performance under the pandemic. Motivated by the economic recovery, FTG is also expected to see a great improvement. We believe that Fosun’s diversified business portfolio will continue to support the long-term growth of the group.

Credit Overview

As of 31 December 2020, the total assets of the Group amounted to RMB 767.7 billion, up 7.3% YoY. The ratio of total debt to total capitalisation was 54.3% and their net gearing ratio has been kept at a manageable level. Interest coverage declined to 3.6 times due to the decrease in EBITDA of the group. However, the group's liquidity remained decent and cash on hand was sufficient to cover debt maturing within one year.

In addition, the group maintained smooth financing channels and ample existing bank credit facilities. As at the end of 2020, the group had unutilized banking facilities of RMB 175.8 million. Fosun remained active in the open market and debt financing. In addition to the three USD bonds issued in July, October and December in the second half of last year, Fosun also issued another two USD bonds this January and May. The bond issuance costs have not only continued to decrease, but also recorded oversubscription, which shows the market's recognition of Fosun and their bonds. At the same time, Fosun redeemed some existing bonds, reflecting the group's active control of debt levels and optimization of the debt structure.

Bond Review

Both Fosun International and its bonds have a credit rating of BB (S&P). Its bonds are considered non-investment grade bonds.

As the bond due 2022 matures in less than a year, its actual YTM would be lower. The other six bonds have remaining investment periods ranging from one and a half to six years, and the bond yields are relatively close, offering YTMs between 3.1% and 4.7%. Investors may consider short- to medium-term bonds, such as the bonds due 2023 and 2024. Taking into account the issuer's background, credit quality and the currently low interest rate environment, we believe the bonds provide reasonable yields. 

On a side note, investors may also consider incorporating investment grade bonds into their portfolios to balance risk and return.

Source: BSM Data as at 15 June 2021

Corporate Risks

The group has a large portion of tourism and consumption-related businesses, which are inevitably affected by the pandemic and economic downturn. This may adversely affect the operations, financial condition and cash flow of the business. Fosun’s credit quality is more susceptible to the risks incurred by the poor operation of companies and brands under the group, which would lead to declines in the related value and dividend income. In addition, the group has a lot of assets and liabilities denominated in foreign currencies. Consequently, the risk of exchange rate fluctuations might affect the profit or asset value of the group.

Conclusion