No folly to buy Folli

Warren Buffett put his investment strategy this way in his 1996 letter to shareholders: “We continue to make more money when snoring than when active… Inactivity strikes us as intelligent behaviour.”

Guo Guangchang subscribes to the same theory. “When we’re thinking about investing in a company, we won’t watch its stock’s short-term fluctuation,” he said in a recent interview with the Financial Times. “We feel that a company’s long-term value is the more important factor.” For long term read “at least five years, 10 years or even 20 years.”

The founder of Fosun now hopes that this strategy will help propel the Chinese conglomerate into the same league as Buffett’s Berkshire Hathaway.

Guo recently told China Entrepreneur that he expects that Fosun, with close to $15 billion of assets in a range of sectors, will grow that 10 times to $150 billion (within a decade). To help put that in perspective, Buffett’s Berkshire Hathaway had a portfolio valued at $52.6 billion at the end of December 2010.

Wishful thinking? Maybe. But don’t bet against Guo. Few would have believed 20 years ago that a small company selling a testing kit for hepatitis would become China’s largest private conglomerate today (see WiC38).

Critics say Fosun’s success is based on Guo’s ability to spot opportunities. Like many successful entrepreneurs in China, he made his first fortune in the property market, founding Shanghai Forte in 1994. Forte remains one of the largest property developers in the country, focusing on high-end commercial and residential development.

Guo then turned his attention to metals and mining. In 2001, Fosun spent $42 million on a 30% share in Tangshan Jianlong Steel, later to become one of China’s larger private steel companies.

Two years later, Fosun bought a controlling stake in state-owned Nanjing Iron and Steel for $199 million. The Nanjing and Tangshan firms later set up a steelmaker in Ningbo, named Ningbo Jianlong Iron and Steel.

But the government – worried about excess investment, particularly in low-grade steel – started to intervene. In 2005 Ningbo Jianlong Iron and Steel was required to merge with state-controlled firm, Hangzhou Steel.

Guo was undeterred. In 2006, he invested in Zhaojin Mining, now one of the country’s largest smelters of gold. In 2007, he also bought a 60% stake in Hainan Mining, for $215 million. The company is a major iron ore supplier to large steelmakers.

Then Fosun changed tack again. Riding on growth in domestic consumption, Fosun started to invest in consumer brands and the healthcare market, buying stakes in Tongjitang, a traditional Chinese medicine company, and Yuyuan Tourism Mart, a retailer renowned for managing department stores and entertainment outlets in Shanghai.

Today, pharmaceuticals, metals and mining, and property account for about 75% of Fosun’s total assets. Last year the company recorded revenues of Rmb44 billion ($6.8 billion) and the Hurun Rich List named Guo as China’s 43rd-richest person with a personal fortune of $2.6 billion.

Although Fosun prides itself on being privately-owned, Guo boasts some heavyweight connections in the government. He is also a policy adviser to the Shanghai government and a member of the National People’s Congress.

Perhaps this explains why Fosun is often the top choice for US private equity firms looking to develop joint ventures in China. Last year Fosun joined Carlyle Group to establish a $100 million China-based fund. And earlier this year, Prudential Financial also committed $500 million to a buyout fund run by Fosun.

Analysts say a tie-up with Fosun can help foreign private equity firms navigate the country’s regulatory hurdles.

“Fosun has major investments in several very successful listings. The market perception is that it has the Midas touch,” says Francis Lun, general manager of Fulbright Securities.

Guo sees further successes ahead. He anticipates that China will retain its workshop-of-the-world status for another 15 years, he told China Entrepreneur, and thus thinks investors can count on continued Chinese demand for commodities.

But he is even more bullish about Chinese consumption – reckoning its pace of growth will quicken. Strong consumer brands will thrive, Guo thinks.

To that end, Fosun recently spent $120.7 million for 9.5% of the jewellery retailer Folli Follie, a Greek retail group with 90 stores in China. The deal also comes about a year after Fosun grabbed headlines for acquiring a 7% stake in holiday resort operator Club Med, the first time that a quoted Chinese company had purchased a direct holding in a listed French firm (see WiC70).

“Folli Follie’s concept of ‘affordable luxury’ will be a perfect match for the growing consumption demands in China,” Guo told the China Daily. “We will make good use of our local resources and network to help it explore more business opportunities and reach more customers in China who can afford luxury products.”

Guo also made clear that the latest deals are indicative of Fosun’s wider investment ambitions.

The idea, Guo told the FT, is to invest in companies that Fosun can help to expand in China, and that align with its pre-existing expertise. Fosun’s strategy: “Linking China’s growth momentum and the world’s resources to create a strong combination.”

Of course, not all of the potential overseas investment targets may be keen to receive Fosun’s attention. “We hope others can understand that the development of China and the acquisition conduct by Chinese companies are not threats,” soothes Guo. “We want to strengthen cooperation and collaboration with businesses around the world to introduce more brands into the Chinese market”.

Also potentially helpful: Fosun says it plans to take a hands-off approach when it comes to handling its portfolio. Like Buffett, Guo says it will leave management of its overseas investments to the companies themselves. “We respect their right to manage,” he insists.

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