Category: Hospitality

HK equity market experienced snap adjustment rally in September, and is now entering stock picking phase before new round of catalyst arrives. Now is the period when investors explore resilient names whose fundamentals is robust enough to weather market turbulence. Fosun International (00656) fits into this category, with its continuous efforts on innovation and globalization, combined with solid delivery on financial result and attractive valuation.

Fosun International is one of the few leading enterprises rooted in China with global operational capabilities. Since its establishment in 1992, Fosun International has built an industrial presence in more than 35 countries and regions worldwide, continually enhancing its global operational capabilities. It has now become a global innovation-driven consumer group.

Enhancing innovation capabilities while delivering robust global operational capabilities
Over past decades, Fosun has been enhancing and deepening its globalization capabilities via launching new products and advancing its international operation.

Take pharmaceutical products for example, the biosimilar HANQUYOU has pioneered the international market expansion for Fosun. With licensing agreements covering approximately 100 countries and regions and marketing approvals in 48 countries and regions, HANQUYOU has become the China-developed biosimilar with the most marketing approvals.

Thanks to the overseas expansion of biosimilars, Fosun has not only established its reputation internationally, but has also gained experience in the globalization of first-in-class drugs. HANZISHUANG, the world’s first anti-PD-1 monoclonal antibody approved for the first-line treatment of small cell lung cancer (SCLC) independently developed by Shanghai Henlius, is an example of success. Fosun’s overseas expansion of biopharmaceutical has resulted in the advancement of both first-in-class drugs and biosimilars. In 2023, Shanghai Henlius became the first first-in-class pharmaceutical company among its peers to achieve profitability through product sales.

In terms of operations, Fosun International focuses on organization evolution and global resource integration. By leveraging regional advantages, it establishes a profound industrial presence and localized operations to continuously benefit its industries and brands.

For example, in the tourism sector, Fosun Tourism Group (FTG) has achieved remarkable growth through its unique asset-light operating model, global presence and global operations. FTG’s subsidiary Club Med, which operates 67 resorts worldwide, achieved a record-high business volume of RMB8.89 billion in the first half of 2024, representing a year-on-year increase of 10.3%. Its business in the Europe, Middle East and Africa (EMEA) region and the Americas continued to grow, while its business in Asia-Pacific region recovered significantly. In May 2024, Club Med signed an agreement in Oman for the launch of its first resort in the Middle East.

Notably, there are very few domestic tourism companies that adopt an asset-light operating model and are equipped with global operational capabilities, making FTG a benchmark for the development of China’s tourism industry. In addition, Fosun International continues to drive innovation and optimization in the consumption and insurance sectors, making positive impact on China’s economic growth and industrial upgrades.

As Fosun International enhances its focus on its “products + operations”, its globalization capabilities are gradually bearing fruit, while its innovation capabilities are further developing. This approach has effectively strengthened its advantages in core industries such as tourism, consumption, pharmaceuticals, and insurance, garnering market optimism.

S&P affirms Fosun International’s “stable” rating outlook, noting that creditworthiness remains steady
Recently, Fosun International received further recognition in the international rating agencies. On 21 October, S&P released a report acknowledging Fosun’s successful asset divestment and debt reduction efforts, assigning it a stable rating outlook.

Specifically, S&P acknowledges the improvement of Fosun’s liability structure, noting that bank loans now account for 73% of the holding company’s debts, up from 46% in mid-2022. Fosun International completed a USD888 million offshore syndicate in September 2024, reflecting an increase in both bank participation and size compared to the syndicate due in May. S&P regards this as a clear evidence of recovery in offshore bank refinancing channels.

The smooth access to financing channels reflects the confidence of domestic and international financial institutions in Fosun’s financial position and business strategy. This not only reduces Fosun’s reliance on public market financing but also allows for better support of liquidity management and greater flexibility to manage the pace of future asset divestment. S&P expects Fosun’s asset recycling could continue to drive further debt reduction.

The positive evaluation from S&P affirms Fosun International’s strong execution of its globalization and innovation capabilities. Over the past two years, the remarkable improvement in its balance sheet and enhanced financial resilience have been evident. Additionally, this endorsement reinforces the company’s investment value.

Overall, as the outlook for the Chinese economy improves, especially with the implementation of key policy initiatives, the Hong Kong stock market holds significant growth potential. Thanks to its global presence, integrated innovation, and asset-light operating strategy, Fosun International is enhancing performance certainty and strengthening its financial resilience against risks. As its global operations continue to expand, industry-leading advantages strengthen, and the benefits of technology innovation accelerate, Fosun is poised to capitalize on the next wave of growth in the Hong Kong stock market.

On 28 August 2024, Fosun International (HKG: 0656) announced its 2024 interim results. During the reporting period, its revenue continued to grow, reaching RMB97.84 billion. Industrial operation profit maintained growth, reaching RMB3.47 billion, and profit attributable to owners of the parent was RMB720 million.

Guo Guangchang, Chairman of Fosun International, said at the results presentation on the morning of 29 August, “In the first half of the year, although the macro environment remained challenging, we resolutely executed our strategy of focusing on core businesses, developing industry-leading companies and products in the industries where we have formed advantages. Such strategy has been proven effective in general. Looking ahead, we will remain focus on innovation and globalization, while focusing on asset-light operations, driving long-term development with competitive core strengths.”

Since the beginning of 2024, the domestic economic recovery has been rocky and the international market has remained volatile, which has brought challenges to Chinese companies including Fosun. Fosun steadfastly pushed forward its strategic focus, driving development with core strengths, achieving quality and efficiency improvement in core industries, and maintaining a solid asset base.

Analysts believe that, based on Fosun’s interim results, Fosun’s focus on the core industries in the household consumption sector and its proactive approach to driving innovation and globalization have further reinforced its business foundation, resulting in predictable stable profits. Additionally, over the past two years, Fosun has actively pursued asset-light operations, optimized asset portfolio, and continued to reduce leverage. These efforts have resulted in abundant cash reserves and a stronger financial cushion, which are expected to prompt the market to reassess Fosun’s value.

Staying ahead in globalization and innovation, reinforcing business foundation to develop industry-leading companies and products      

In the first half of the year, Fosun’s four core subsidiaries, namely Fosun Pharma, Yuyuan, Fosun Insurance Portugal, and Fosun Tourism Group (“FTG”), achieved total revenue of RMB72.17 billion, accounting for 74% of the Group’s total revenue. Fosun’s strategy of focusing on core businesses has shown increasing benefits, with its advantages in core industries such as pharmaceuticals, tourism, consumption, and insurance continue to be strengthened.

With years of effort in the aforementioned sectors, Fosun has developed a number of industry-leading companies and products.

For example, in the first half of this year, Fosun Pharma, which ranks second among the top 100 pharmaceutical companies in China, was selected as one of top 20 global pharmaceutical companies in terms of pipeline scale for the third consecutive year. Shanghai Henlius is the first Chinese profitable innovative biopharmaceutical company listed in Hong Kong, with multiple independently developed monoclonal antibody biosimilars that are driving the rapid development of China’s biopharmaceutical industry. Its first blockbuster product, HANLIKANG, is the first domestic biosimilar approved for marketing. Fosun Insurance Portugal holds the largest market share in the Portuguese insurance market and ranks among the leaders in the insurance sector across Portuguese-speaking regions globally. Easun Technology, in the intelligent manufacturing segment, is a global leading automation and digitalization company.

In addition, in the Happiness business segment, Club Med, a subsidiary of FTG, is the global leader that offers exquisite “all-inclusive” holidays. Atlantis Sanya is the leading integrated high-end tourism destination in China, helping to usher Hainan tourism into the 3.0 era. Laomiao Gold, a subsidiary of Yuyuan, is a China time-honored brand and a nationally renowned jewelry brand. These industry-leading companies and products have helped Fosun consolidate its leading position in related sectors.

For Fosun, steady and profitable growth is driven by two factors: innovation and globalization.

Amid the current domestic economic “involution”, “going global” has become a “must-do” for businesses. Fosun, which began its globalization journey as early as 2007, has become one of the benchmark global companies rooted in China. It has also established a profound industrial presence in more than 35 countries and regions worldwide.

During its 17-year globalization journey, Fosun has achieved many successful projects and faced various challenges. Most importantly, this experience has allowed Fosun to develop globalization capabilities that rare among domestic companies. In addition, it has allowed Fosun to connect different markets, industries, and resources globally, achieving global presence, operations and development, while continuously enhancing its global operation capabilities.

This is further illustrated by the following data, the Group’s overseas revenue for the first half of 2024 reached RMB45.87 billion, representing a year-on-year increase of 4%, and accounting for 47% of total revenue. Nearly half of the revenue came from overseas, which is rare among Chinese companies.

More importantly, Fosun has actively driven the empowerment and synergy of its corporate ecosystem in the course of globalization. Its domestic and overseas member companies have made significant progress in global research and development (R&D), business expansion, operations, and investment and financing.

For example, HANQUYOU, independently developed by Fosun’s subsidiary Shanghai Henlius, received marketing approval from the United States (U.S.) Food and Drug Administration (FDA), making it a “Chinese” monoclonal antibody biosimilar approved in China, the European Union (EU), and the U.S. HANLIKANG, China’s first biosimilar, received marketing approval from the Peruvian General Directorate of Medicines, Supplies and Drugs (DIGEMID) in Peru, making it the third self-developed drug of Shanghai Henlius to be approved for overseas marketing after HANQUYOU and HANSIZHUANG.

Moreover, Club Med, a subsidiary of FTG that operates 67 resorts worldwide, achieved a record-high business volume of RMB8.89 billion in the first half of 2024, representing a year-on-year increase of 10.3%. Club Med’s business in the Europe, Middle East and Africa (EMEA) region and the Americas continued to grow, and its business in Asia-Pacific region recovered significantly. In May 2024, Club Med signed an agreement in Oman for the launch of its first resort in the Middle East.

Fosun Insurance Portugal, which began its operations in Portugal, has been actively expanding into overseas markets. In the first half of 2024, it achieved business growth domestically and internationally. The contribution from overseas markets further increased, with international business recording premiums of EUR885 million, accounting for over 30% of the total premiums; the net profit of international business was approximately EUR51 million, accounting for over 40%.

Easun Technology, a global leading automation and digitalization company under Fosun, has also been advancing its overseas expansion. In the first half of 2024, it achieved new overseas orders of RMB3.99 billion, with a significant increase in orders from the U.S. market, reaching RMB750 million, more than doubling year-on-year.

Innovation is also a core competence that Fosun has accumulated over a long period of time and has always adhered to. During the reporting period, Fosun invested a total of RMB3.5 billion to deepen its technological and innovation capabilities. Its integrated innovation model under a global vision has become more mature, resulting in a number of ground-breaking achievements that are steadily generating profits and driving Fosun’s growth.

In terms of innovative drug R&D, Fosun Pharma has 4 products with a total of 9 indications were approved for marketing; 4 products with a total of 9 indications had entered the pre-launch approval stage/key clinical stage; and 9 products (by indication) have been approved to conduct clinical trials. Shanghai Henlius’ independently developed and manufactured innovative biologics continue to make breakthroughs. The world’s first anti-PD-1 monoclonal antibody for the first-line treatment of small cell lung cancer (SCLC), HANSIZHUANG, has been approved for 4 indications, benefiting over 75,000 patients. It has also been out-licensed to over 70 countries and regions, including the U.S., Europe, Southeast Asia, the Middle East, and North Africa. In addition, the new indication for SUKEXIN, a new generation of oral thrombopoietin receptor agonist (TPO-RA), has been approved by the National Medical Products Administration (NMPA).

New progress has also been made in the deployment of cutting-edge medical devices and innovative therapies. In June 2024, Intuitive Fosun Headquarters Industrial Base was inaugurated in Shanghai. It is the largest integrated R&D, production and training base of Intuitive Surgical in the Asia-Pacific region, significantly accelerating the localization of the da Vinci surgical robot. Intuitive Fosun’s Ion robotic bronchoscopy was approved by the NMPA in March this year and was launched in July 2024.

“Asset-light operations” taking shape, poised for revaluation

Benefitting from the strong support in its business operations, Fosun’s financials have also continued to improve. During the reporting period, Fosun continuously optimized its asset portfolio, continuously reduced leverage, and maintained a sound financial position. As of 30 June 2024, the Group’s adjusted total debt-to-capital ratio was 50.2%, maintaining a downward trend since 2020. Adjusted NAV was HK$17.4 per share, indicating that Fosun International’s current share price is significantly undervalued.

Meanwhile, Fosun has actively strengthened its financial cushion and maintained ample cash reserves. As of 30 June 2024, Fosun International’s cash and bank balances and term deposits reached RMB109.55 billion, representing an increase of RMB17.1 billion compared to the end of 2023. In the 17 years since its listing, Fosun has accumulatively paid out HK$25.6 billion in dividends, with the dividend payout ratio gradually increasing to over 20% in the past five years.

In June 2024, the international rating agency S&P fully recognized the effectiveness of Fosun’s financial strategy and affirmed its rating outlook as “stable”.

While achieving stable profits through ongoing innovation and globalization, Fosun has also responded to the new market environment by streamlining its business. It has progressively exited some non-core industries and has actively advanced its asset-light strategy, which is now taking shape.

In May 2024, Fosun sold all of its 99.74% stake in the German private bank HAL, which attracted market attention. After the completion of the transaction, Fosun will no longer hold any shares in HAL, but will retain the HAFS asset servicing business, managing approximately EUR100 billion in assets in an asset-light operation model.

In the tourism sector, Fosun’s asset-light operation model has achieved remarkable results, with IPs such as Club Med, Atlantis Sanya, and Taicang Alps becoming benchmarks in the domestic tourism industry. In the first half of 2024, 85% of Club Med resorts adopted a leasing and management model, with the proportion of self-owned resorts declining to 15%.

In April 2024, the AMAZE Snow Mountain Camp, FTG’s new IP in Lijiang Club Med Resort, quickly became a hit after its opening, driving significant occupancy increases at the nearby Club Med Lijiang Resort and Joy Holiday Hotel Lijiang.

In June 2024, FTG joined hands with the Taicang Municipal Government to build the phase II of Taicang Alps Resort, a one-stop ice and snow-themed urban tourist destination. The phase II project, with a total investment of over RMB5 billion, is funded by the Taicang Municipal Government and operated and managed by FTG. The successful operation of the Alps Snow Live has provided confidence and momentum for the phase II project, which is expected to set several world records in ski resorts.

Fosun has also joined hands with partners to set up a number of industry funds to drive the future of advantageous industries. In March 2024, leveraging its leading advantages in biomedicine, Fosun Pharma joined hands with Shenzhen Guidance Fund and seven other investors to jointly establish a RMB5.0 billion biomedical industry fund, with all proceeds to be invested in biomedical, cells, genes, etc. Shanghai Fujian Equity Investment Fund Management, a subsidiary of Fosun Pharma, was selected through public selection process in Shenzhen to exclusively manage this fund. In April this year, the Shenzhen Municipal Government and Fosun signed a strategic cooperation framework agreement, both parties will further strengthen cooperation in areas such as biomedicine, cultural and sports tourism, and fashionable consumption.

In addition, Fosun Capital, together with Wuhan Innovation Investment and Wuhan Fund, established a RMB3.0 billion industry fund with an initial scale of RMB1.1 billion in April 2024. This is the first batch of market-oriented fund invested by Hubei Province since the establishment of the RMB20.0 billion government guidance fund, mainly focusing on the four major sectors of new generation information technology, dual carbon, intelligent manufacturing, and consumption.

Given the current market environment, it is expected that Fosun will continue to focus on asset-light operations, continuously expand its “circle of friends”, strengthen in-depth cooperation with all parties, and achieve win-win results through complementing each other’s advantages.

Market analysts believe that Fosun has achieved sustained and stable profits leveraging its core strategies of innovation and globalization. In addition, by exiting non-core assets, pursuing asset-light operations, and continuously reducing debt, Fosun has maintained robust financial health, paving the way for a potential market revaluation.

Guo Guangchang believes that in the future, investors will place greater emphasis on the growth of core industries and the stability of cash flow. “One-off asset sales are only short-term solutions. The growth of core businesses is crucial for a company to achieve stable profits.” Fosun aims to build a consumer group centered on core industries, ensuring more predictable business development and profits. At both the group level and within each business unit, Fosun is committed to creating value for its customers and investors that is manageable in terms of risk and promotes steady growth.

Fosun International (HKG: 0656) continues to focus on its core industries and optimize operational capabilities, resulting in increased earnings certainty, stable cash flow improvement, and continuous dividend growth. It is expected that Fosun’s valuation set for gradual recovery.” On 5 August, Fosun International Securities released a research report, providing an in-depth analysis of Fosun International’s investment value from four aspects: core subsidiaries’ performance, globalization and industrial operational capabilities, balance sheet recovery, and dividend expectations. The report issues a “Buy” rating on Fosun International with a target price of HKD13 per share.

The research report points out that after more than 30 years of development, Fosun International has successfully implemented its “investment + operation” strategy. Through globalized and diversified mergers and acquisitions and industry operations, Fosun has formed four major business segments: Health, Happiness (Consumption), Wealth (Finance and Insurance), and Intelligent Manufacturing. In 2019, Fosun positioned itself as an “innovation-driven consumer group”. In early 2020, it proposed a focused strategy, shifting its focus to profound industry operations, accelerating the divestment of non-core assets, and improving financial indicators to effectively focus on its core businesses and strengthen its asset-light operation capabilities.

The report further analyzes from a medium-to-long-term perspective, suggesting that four key drivers will support Fosun International’s significant value recovery.

Firstly, the performance and valuation of Fosun’s core subsidiaries are expected to gradually improve. Fosun International owns high-quality global assets in the pharmaceutical, consumption and financial sectors. Its core subsidiaries continue to deepen their industry operations and steadily increase their market share in their respective sectors. In 2023, the four core subsidiaries, Fosun Pharma, Yuyuan, Fosun Tourism Group, and Fosun Insurance Portugal, contributed a total revenue ratio of 72%, ranking among the top players in their respective industries. They maintained stable revenue and profit growth overall and continued to pay dividends. Since the pandemic, some subsidiaries have been affected by the uncertain macroeconomic environment and weak Hong Kong stock market sentiment. At the same time, short-term profits have been dragged down by the divestment of some investment projects during the market downturn, resulting in their stock prices under pressure. However, after the listed subsidiaries optimize their operations, the significant recovery of their valuations helps boost Fosun International’s valuation. Meanwhile, some subsidiaries’ optimization in capital structure will also help improve valuations. For example, in June 2024, Fosun Pharma announced its plan to privatize its subsidiary Shanghai Henlius through an absorption merger.

Secondly, Fosun’s strong globalization and industrial operational capabilities increase earnings stability and profit growth potential. Fosun International has outstanding globalization capabilities, continuously optimized industrial operational capabilities, and the ability to cooperate with parties who possess abundant resources. It has extensive successful experience in industrial mergers and acquisitions, asset divestment, and an effective organizational management mechanism to ensure execution. The comprehensive competitiveness led by globalization and industrial operational capabilities enables Fosun to grasp the direction of macroeconomic policies, make timely strategic and tactical adjustments to ensure overall operational stability, and enhance operations and performance in core industries, thereby increasing profit growth potential and opportunities for exceeding expectations. Fosun International’s overseas business contributes nearly half of its revenue, demonstrating its profound global operational capabilities, expansion and growth potential, as well as its strong capability to hedge against macro and regional risks. For example, Shanghai Henlius, a holding subsidiary of Fosun Pharma, has received US approval for its independently developed biosimilar HANQUYOU, becoming the Chinese monoclonal antibody biosimilar approved in China, the EU, and the US. Moreover, it has been approved for marketing in over 40 countries and regions. After Fosun’s acquisition, Club Med quickly turned losses into profits and became a leading brand of global resorts. Yuyuan’s Laomiao gold jewelry brand has maintained its market share among the top three in China’s gold jewelry industry since 2019, thanks to its strong new product iteration and differentiated marketing capabilities in recent years.

Thirdly, continuous debt reduction and significant balance sheet recovery support valuation improvement. Since 2021, Fosun International has continuously optimized its capital and asset structure, reduced its debt scale, continuously improved its financial indicators, and significantly reduced its leverage ratio. In May 2023, S&P Global revised Fosun’s rating outlook from “negative” to “stable”. In May 2024, S&P reaffirmed Fosun’s “stable” rating, recognizing the improvement in its balance sheet. Currently, the yield on Fosun International’s offshore bonds maturing between 2025 and 2027 is in a good range of 8.5% to 9.5%, but its stock valuation has fallen to a historical low. It is expected that factors such as rating agency upgrades and steady overall revenue growth will gradually be recognized by equity investors, increasing the opportunity for valuation improvement.

Fourthly, the effective implementation of the focused strategy brings opportunities for exceeding expectations in dividend increases. Fosun International’s core assets are concentrated in leading growth and value-oriented companies in their respective industries. It focuses on supporting core enterprises to achieve long-term strategic goals, driving industry development, complementing industries through mergers and acquisitions, and achieving value realization through timely and balanced investment and divestment, thus creating excess capital returns for shareholders. However, the market continues to overlook the room for improvement in Fosun’s revenues and profitability. At the same time, Fosun optimizes the operations of its subsidiaries through internationalization and ecosystem empowerment, continuously building top-tier business segments, maintaining steady growth in core businesses, and increasing dividends in some mature businesses. In addition to providing investors with stable dividends while optimizing performance, based on the previous dividend payout ratio of 20%, Fosun has the ability to further increase the dividend payout ratio, presenting shareholders with the opportunity for dividend returns to exceed expectations in the future.

The research report also points out that Fosun International was still negatively affected by the macro environment in the first half of 2024, and profits in the short-term are expected to be under pressure. However, the focus on industry operations has led to a gradual improvement in operating conditions and optimization of core asset performance. Leading indicators of Fosun’s improving performance are poised to become positive catalysts for the stock price.

The research report forecasts Fosun International’s revenue growth rate in 2024/25/26 to be 9.4%, 9.6%, and 8.6% respectively, and its profit attributable to owner of the parent to grow by 46.6%, 81.9%, and 55.0% respectively. Based on the sum-of-the-parts (SOTP) valuation method, the target price is set at HKD13 per share, corresponding to 0.7x 2024e P/B, issuing a “Buy” rating on Fosun International.