STOCKS: Attractive But Hobbled, Fosun Launches Buy-Back

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Bottom line: Fosun International looks like a good stock pick for the next year due to strong profit growth, as long as founder Guo Guangchang can steer clear of China’s 2-year-old anti-corruption campaign.

Fosun’s Guo is company’s biggest asset, risk

Today marks the launch of a new series on some of my favorite Chinese companies, as I aim to spotlight a group of US, Hong Kong and China-listed names that look set for the best growth over the next 5 years. I’m kicking off the series with fast-rising private equity giant Fosun International (HKEx: 656) because it happens to be in the news, with word the company has launched a fledgling share buyback to support its struggling stock.

In many ways, Fosun encapsulates both the big potential benefits and also the major risks facing many private Chinese companies as they seek to become big players both at home and abroad. Fosun is actually part of a much larger group based in China’s commercial capital of Shanghai, and its private equity arm has been one of the most successful ventures of its savvy founder Guo Guangchang.

But some of the same factors that helped lift Guo to success are now threatening to undermine him. Most importantly, many investors worry that Guo could become ensnared in the 2-year-old anti-corruption campaign now sweeping China under President Xi Jinping. Those concerns began after Guo mysteriously disappeared in December after being seen talking to investigators. He reappeared a couple of days later, and Fosun tried to calm markets by saying he went absent to assist in a police investigation.

That disappearance spooked investors, who have shaved off about 50 percent of Fosun International’s market value since early December. The decline looks even worse over the last 8 months, with Fosun’s shares losing about half of their value since China’s domestic stock markets peaked in June of last year.

So, why do I like Fosun so much despite all the questions now surrounding its future, since the company’s success depends so heavily on Guo? I’ll admit my confidence in the company has dimmed slightly since the latest developments, but would quickly add that the factors now raising questions are also the same ones that make the company quite attractive.

Deal Makers

Over the last 3 years I’ve developed an admiration for Guo and his savvy management team, who have made a wide range of shrewd global investments, often beating out well-funding and equally savvy international rivals. Those investments run a relatively wide range, from French resort operator Club Med, to leading Portuguese insurer Caixa Geral de Depositos and the iconic One Chase Manhattan Plaza in New York.

In this case the bottom line is nicely summarized in Fosun’s most recently earnings report, which is its interim report for the first half of last year. The company saw its profit for the 6 months jump more than 80 percent to nearly HK$4.9 billion ($630 million), even as its revenue grew at a slower but still quite respectable 20 percent rate to HK$29.7 billion. (company announcement)

There’s really no indication that the growth will slow, of course assuming that Guo maintains his position at the helm of the company. What’s more, the tumble in Fosun’s stock has left it trading at a very affordable price-to-earnings ratio of around 7, which is far less than western peers like Blackstone (NYSE: BX) and KKR (NYSE: KKR), and looks quite low for a company with such good growth prospects.

In a nod to its undervaluation, Fosun has just announced its first-ever share buyback program, even though the initial size is so small to almost be laughable. According to media reports, Fosun has said it will buy back up to 1.4 million of its Hong Kong-listed shares, costing it a modest HK$14 million based on its latest stock price. (Chinese article) Despite the small figures, Fosun’s shares rallied nearly 5 percent on the news, as investors bet that perhaps Guo and his team would follow with more funds to support the stock.

Home in Shanghai

Fosun’s big advantages are numerous, starting with its position as China’s largest and one of its most successful privately owned private equity companies. Guo and his team have also drawn on the deep financial resources available to them in Shanghai to pull off global deals that would be impossible for most Chinese firms that lack both the resources and financial savvy to do such transactions, many costing over $1 billion.

Now those same advantages are potentially coming back to haunt the company. I have little doubt that Guo’s success is tightly tied to at least some people who may have “problematic” histories, since his connections with local Shanghai officials are undoubtedly a key part of his and his company’s success. But that said, Xi Jinping’s anti-corruption campaign has almost exclusively been limited so far to government officials and executives at big state-run firms, and hasn’t really touched the private sector.

At the end of the day, a bet on Fosun International is certainly more risky today than it was a year ago, which is perhaps why the shares have taken such a beating over the last year. But if Guo and his company can manage to stay out of prison, then this certainly looks like a company with very strong prospects. I’m hardly in a position to guarantee he’ll keep out of trouble, but at least for now the stock looks like a good pick for the new Year of the Monkey.

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