Fosun's Replicable Global Operational Capabilities Poised for Robust Revaluation

On 28 May, Fosun International announced the sale of 99.743% of its subsidiary’s shares in the German private bank, Hauck Aufhäuser Lampe Privatbank AG (HAL), to ABN AMRO Bank for a total consideration of approximately EUR670.3 million. Upon the completion of this transaction, Fosun International will no longer hold shares in HAL, but will fully retain the shares of Hauck & Aufhäuser Fund Services S.A. (HAFS) held by HAL, i.e. retain HAL’s asset servicing business.

Shortly after the announcement, Fosun International’s share price has continued to rise, reflecting the market’s recognition of its ability to restore value growth. However, simply looking at its market value based on the sizable profits from the sale of HAL and the asset-light operating model of the retained HAFS asset servicing business are not enough to fully capture Fosun’s underlying potential.

Based on the transaction consideration of EUR670.3 million, the sale is expected to yield double-digit IRR for Fosun. In 2016, Fosun International acquired HAL (formerly known as H&A). Leveraging Fosun’s in-depth operational management and support for HAL to pursue M&As, HAL was able to fully harness the advantages of Fosun’s globalization strategy to accelerate business upgrades and enhance asset value. In fact, it quite rare for a company to yield such a rate of return over an 8-year time span.

It is worth noting that Fosun, as a holding group, has always been committed to investing in undervalued companies with great potential. By providing long-term capital and supporting their management teams and relevant resources, Fosun helps investee subsidiaries to access resources for growth, developing them into industry leaders. In addition, Fosun orderly invests and divests to unlock the value of its investments.

In fact, great companies usually possess their own replicable business models. Through the HAL transaction, the market should recognize that Fosun has developed a set of standardized, replicable and sustainable core business operational capabilities encompassing “global operations” and “value realization”.

In 2016, Fosun International officially acquired H&A (renamed HAL later). It not only served as a successful implementation of “Combing China’s Growth Momentum with Global Resources” and laid a foundation for Fosun’s globalization strategy, but also marked an important step for Fosun to firmly establish a presence in the high-end wealth management market.

Since the acquisition, Fosun has continued to increase its business scale, expand its business presence, and deploy new technologies and new fields through investments and M&As, so as to drive H&A’s organic growth. Through in-depth operational management, Fosun not only supported H&A’s M&As, but also empowered H&A’s development in the Chinese market, thereby leveraging the fast-growing Chinese market to drive global performance and accelerate H&A’s globalization.

Data shows that when Fosun acquired H&A in 2016, H&A had a total of approximately EUR43.0 billion in assets under administration (including EUR8.0 billion in assets under management (AUM) and EUR35.0 billion in assets under custody (AUC)). After the acquisition, Fosun’s in-depth operational management and support for HAL’s active M&A strategy have been instrumental in advancing H&A’s business development and globalization. In 2021, Fosun supported H&A in acquiring the leading German private bank Bankhaus Lampe KG, enabling a qualitative leap in H&A’s M&A history. After the merger, it was renamed HAL, and the scale effect emerged after integration.

The acquisition also drove HAL’s wealth management business’ AUM to exceed EUR17.0 billion. In 2023, HAL’s revenue was EUR435 million; net profit was RMB83.00 million; assets under administration reached EUR265.213 billion, ranking among the top 10 private banks in Germany. Previously, HAL ranked 20th in the German market.

Overall, HAL’s revenue and market ranking have enhanced significantly since the M&A integration. For private banking, asset management, and custodian businesses, a larger scale and higher ranking make it easier for the bank to qualify the white list of more customers, helping with organic client acquisition. Furthermore, after the M&A integration, the scale effects in IT, risk control, compliance, and other operational projects helped HAL reduce operating costs, optimize cost-income ratio, and enhance profitability. Against the backdrop of accelerating digital transformation in the global financial sector, Fosun assisted HAL in deepening its digital innovation, enabling HAL’s online platform Zeedin to win the “Best Robo Advisory” award in Germany for consecutive years.

Market analysts pointed out that H&A’s series of M&As demonstrated the further upgrading of Fosun’s global financial footprint, reaffirming its globalization capabilities and M&A investment and integration capabilities.

In fact, this is not an “isolated case” within Fosun’s industrial operation system. In 2003, Fosun participated in the restructuring of Nanjing Iron & Steel at a cost of RMB1.65 billion. Through in-depth industrial operations, Fosun helped Nanjing Iron & Steel boost its revenue from RMB6.8 billion to RMB72.5 billion in 2023. Nanjing Iron & Steel’s profit attributable to the parent company also grew from RMB500 million to RMB2.13 billion in 2023, and steel production expanded from 1.69 million tons to 10.3987 million tons.

Over the past 20-plus years, Fosun has actively driven the digital transformation of Nanjing Iron & Steel, advancing the development of its intelligent factories. Fosun also assisted Nanjing Iron & Steel in promoting the development of special steel and expanding energy-saving and environmental protection businesses to facilitate business transformation and upgrade, driving the rapid development of Nanjing Iron & Steel. Thereafter, Fosun was able to realize long-term, stable and substantial investment returns upon its exit. According to market sources, in addition to the transaction consideration of RMB13.58 billion from the sale, Fosun’s pre-tax profit is estimated to exceed RMB15.2 billion, given its initial investment of RMB1.65 billion in 2003 and the dividends received over the 20 years.

It is evident that Fosun has been focusing on long-term investment in growth-oriented companies with promising futures, with the aim of supporting them in achieving long-term strategic goals and business development. Fosun has also demonstrated its ability to strike a balance between investment and divestment, thereby unlocking value and delivering substantial capital returns for shareholders.

Regarding the sale of HAL, this transaction only involves a portion of HAL. Fosun will continue to hold the HAFS asset servicing business, which is an asset-light “cash cow” operation. The retained business is expected to consistently generate tens of millions of euros in annual profits and maintain approximately EUR200.0 billion in AUC. HAFS is one of the ten major asset servicing companies in German-speaking regions that has consistently ranked among the top three independent third-party fund establishment and asset servicing providers in the Luxembourg market, which is a hub for the fund industry in Europe, giving it strong market influence and recognition. The retained business will continue to form good synergies with Fosun’s insurance, asset management, and other financial businesses in Europe. Fosun will also continue to invest in and maintain a close watch on the market opportunities for this business.

In another perspective, Fosun International’s divestment of non-core businesses at good valuations helps enhance the company’s net asset value, while enabling it to pursue more focused and efficient development in the new market environment.

Furthermore, the capital generated from this transaction can be allocated towards Fosun’s core businesses and other higher-growth opportunities. Fosun’s asset investments and divestments are well aligned with its strategy of focusing on core and high-growth businesses. In fact, globalization and innovation have clearly emerged as Fosun’s growth drivers in recent years. Going forward, Fosun will strategically focus on assets with the potential to become market leaders, and assets capable of generating stable income and dividends.

Moreover, streamlining the business helps narrow the discount of the holding company. Taking Danaher Corporation as an example, Danaher is the leader in life sciences and medical diagnostics, successfully realized a sharp turnaround from a downturn by focusing on biotechnology and life sciences, while spinning off low-growth subsidiaries and retaining high-growth subsidiaries.

Similar to Fosun International, Danaher also has an excellent M&A system and a mature management and operation structure, which enhances its business transparency. It also continuously divests non-core businesses to maintain revenue growth momentum. It is expected that as Fosun International focuses more on the “global household consumption sector”, the highlights of its core businesses will continue to emerge, resulting in a rapid restoration of investor confidence.

The Hong Kong stock market has been extremely volatile in recent years. After this round of adjustments, the investment value of Fosun International has gradually become prominent, mainly reflected in three aspects.

First, Fosun possesses global operational capabilities to further increase its growth potential.

The company has not given up on making medium-term investments. In addition to capturing opportunities with good liquidity and profitability, Fosun will focus more on its core shareholding companies, reallocate funds towards upstream and downstream as well as its related businesses. While strengthening the ecosystem of core companies, it can also create longer-term investment returns for shareholders.

Fosun’s successful global operations of HAL and Nanjing Iron & Steel, along with its ability to orderly carry out asset investment and divestment, not only confirms the successful implementation and value realization of past strategies, but also verifies Fosun’s investment capabilities and vision. It also demonstrates Fosun’s ability to identify undervalued assets and deliver strong performance, thereby building world-class, highly profitable enterprises globally. Moreover, Fosun’s industry and geographical champions are constantly evolving, deserving the market's higher growth expectations.

Second, Fosun is able to create certainty in the midst of uncertainty, bringing stable dividend returns to shareholders.

Since its listing, Fosun International has maintained a stable dividend payout record, with 21 dividend payouts to date. This year’s cash dividend was HK$310 million, maintaining a stable payout ratio of 20%. Over the past 17 years since its listing, the cumulative cash dividends have reached HK$25.6 billion.

At the same time, Fosun International demonstrates solid profitability. Both revenue and net profit experienced growth in 2023. Its total revenue was RMB198.2 billion, up 8.6% year-over-year, achieving three consecutive years of continuous growth; profit attributable to owners of the parent was RMB1.38 billion. Its profitability is steadily recovering, outperforming among listed conglomerates. As Fosun’s earnings per share has steadily rebounded, the dividend indicators has continued to improve, demonstrating solid profitability and conveying positive market signals.

Given the recent volatile international landscape and the intensifying worldwide inflation, the stability of investment returns has become a primary concern for investors. In this era of “asset shortage”, companies like Fosun International, with solid fundamentals and a commitment to provide stable dividends, undoubtedly holds greater appeal.

Third, Fosun’s asset quality and credit quality are steadily improving, ushering in a rebound in its share price

As Fosun advances its core business-focused strategy, Fosun’s divestment of non-strategy and non-core assets in 2023, including Nanjing Iron & Steel, Jianlong Shares, Shanghai PANASIA Shipping, ATG, and various real estate assets, generated a consolidated cash inflow of approximately RMB40 billion.

In the face of a complex and volatile global economic situation in recent years, Fosun has taken proactive measures to continuously optimize its capital and asset structure, expand financing channels, and reduce debt, providing a solid foundation for the execution of the company’s core strategies. On 30 May, S&P Global Ratings affirmed Fosun’s stable rating outlook, fully recognizing Fosun’s proactive measures and achievements over the past two years. It is expected that Fosun’s asset quality and credit quality will remain stable, with possible further improvement.

Due to the systemic risks in the Hong Kong stock market, Fosun International’s current market capitalization is around HK$36 billion (equivalent to approximately RMB33.392 billion), while the company holds over RMB70 billion in cash, nearly twice its market capitalization. Its P/B (Price-to-Book Ratio) has reached 0.26x, a low level last seen during the 2015 market crash triggered by Renminbi depreciation and proliferation of “black swan” events. For investors, investing in market-leading companies like Fosun at a historical low P/B range aligns with the principle of “investing in quality companies at reasonable prices.”

Against the backdrop of uncertainties in the global consumer market, based on the company’s accumulated industrial operational capabilities over the years, Fosun is actively seeking high-quality partners and projects for cooperation. The market should remain optimistic about Fosun’s prospects, as its transformation to an asset-light model, stable liquidity, and robust growth will provide strong support to realize a rebound and potential surge in its share price.