HNA and Fosun were two of the world’s busiest dealmakers in 2017. HNA was at the height of a $40 billion spending spree, gobbling up assets that ranged from a 5% stake in Deutsche Bank to trophy office space in Manhattan. Fosun was going through a frenetic period too, including a takeover of EnglishPremier League football club Wolverhampton Wanderers.
But the manner in which the two were channelling capital from China into foreign markets had Beijing’s leaders worried. In June 2017, the duo were among a handful of acquisitive firms targeted by the state media for endangering China’s financial security with their overseas investment binge. The other offenders – namely Wanda, Suning and Anbang – have all been cut down to size through nationalisations, either partially or entirely. Yet Fosun hasn’t been hamstrung in the same way. In fact, in the past week the Shanghai-based conglomerate – with businesses spanning from pharmaceuticals and travel to retail and insurance– has emerged as a potential white knight purchaser for HNA, Hainan’s debt-ridden aviation group.
What is Fosun trying to buy?
Yuyuan Tourist Mart, a Shanghai-listed unit of Fosun, said last Friday that it is planning to set up a new Rmb40 billion ($6.4 billion) fund to invest in aviation-related projects and corporations.
Yuyuan will contribute Rmb10 billion of the new fund’s capital, with other “strategic investors” making up the rest, it said in a stock exchange circular without disclosing the identities of its potential partners.
The unit stopped short of identifying HNA or its main subsidiary Hainan Airlines as an investment target. However, Yuyuan did specify that it is looking to expand into the aviation sector as it wants to seize opportunities in the newly established free trade port of Hainan province.
Earlier this month, newspaper CBN also reported that Fosun was among a number of suitors planning to take part in an imminent restructuring of HNA. JD.com, Ping An and Air China were also said to be sizing up assets at HNA, whose creditors applied for a reorganisation of the group earlier this year over unpaid debts of more than Rmb200 billion.
Another potential rival – or perhaps another business partner – for Yuyuan’s aviation investment fund could be Juneyao Air.
Set up by private sector firm Juneyao Group in 2005 (co-founder Wang Junyao set up China’s first private charter flight business in 1991, a year before Fosun was established), Juneyao made a similar stock exchange disclosure last month that it would join a consortium that will invest as much as Rmb30 billion in ‘aviation assets’.
There is no confirmation whether Fosun and Juneyao will join hands in coming to HNA’s rescue. But the duo could face rival bids for HNA from state-owned carriers and even the Hainan government, which is reported to be lobbying for another bailout of its hometown firm (see WiC485).
The restructuring story is an intriguing one. HNA still controls some prized assets, especially in Hainan, where the provincial economy is growing strongly, helped by policy support from the central government (see WiC405). Hainan Airlines is seen as a promising candidate for an overhaul, for instance, given the island’s positioning as a duty-free shopping haven (see WiC510).
The share prices of Hainan Airlines and Fosun’s Yuyuan both climbed by their daily limit of 10% on the trading day following Yuyuan’s announcement.
Recapping an epic year in 2017…
Before assessing why it looks to be in a stronger position than HNA, observers might want to look back to 2017 to see what Fosun’s peers did to offend policymakers. At the time senior leaders from Beijing were making the case for a cleaning up of the financial markets following the so-called ‘Great Fall of China’, which saw stocks dive 60% over a two-month period in 2015. Regulators also warned repeatedly against “demons” or “barbarians”, aka financiers and corporates that were deemed responsible for excessive risk-taking and market volatility.
In February 2017, Xiao Jianhua, the boss of powerful financial conglomerate Tomorrow Group, was snatched from the Four Seasons Hotel in Hong Kong by Chinese agents and spirited across the border to the mainland (see WiC354) for an investigation that has yet to conclude.
In April that year, Xiang Junbo, head of the China Insurance Regulatory Commission, was sacked for accepting bribes (see WiC362).
Less than two months later, Wu Xiaohui, chairman of ultra-acquisitive insurer Anbang, was arrested on corruption charges as well.
News then emerged that the Chinese government had ordered a crackdown on cross-border M&A deals by large companies like Wanda and HNA – as well as a clampdown on the loans from state banks that were financing them.
Shortly after that China Economic Weekly, a magazine run by Xinhua, published a detailed look at what had happened. Chinese firms had spent as much as $216 billion on overseas acquisitions in 2016, up 148% on a year earlier, it noted. These outbound investments contributed towards a $1 trillion decline in China’s foreign exchange reserves, it added.
Official policy from the central government is that it encourages Chinese businesses to “go global”. However, citing People’s Bank of China’s vice governor Pan Gongsheng, China Economic Weekly said senior financial regulators were alarmed in 2017 by the growing number of “irrational and abnormal deals” especially in sectors such as real estate, entertainment and football. Many of the problematic purchases were camouflage for a more covert effort to shift assets out of China, the article claimed.
Naming Anbang, Wanda, Suning, HNA and Fosun, the magazine said all the firms were highly leveraged, with their dealmaking clout effectively funded, or guaranteed, by China’s domestic banks or their international branches.
In one extreme case, the central bank’s Pan remarked that an obscure steelmaker had taken over a foreign movie studio. Yet European football was still the regulators’ favourite example in outlining their concerns to the general public. According to China Economic Weekly, Chinese investors took charge of at least 12 foreign football clubs in 2016 and 2017, while investing in more than 20 others. “I think this is a good thing if these takeovers could improve Chinese football,” Pan said at the time. “But many companies, already hugely in debt, have borrowed more money to buy overseas. Some are blatantly trying to move assets offshore.”
China’s forex reserves had dipped below $3 trillion in January 2017, which proved to be a trigger point, as regulators stepped in to stem capital outflows, which Pan reckoned could result in the renminbi’s depreciation and systemic financial risks.
What has happened to HNA and others more recently?
The regulatory crackdown forced the most acquisitive firms into divestment mode. Filings from New York last week showed that Wanda had offloaded almost all of its stake in AMC Entertainment, for instance (the Dalian-founded firm said it was able to recoup double its original $700 million investment in the cinema chain thanks to a recent surge in AMC’s share price). Other assets that have been sold included a 20% stake in Atlético Madrid, another football team. More substantively Wanda sold a large number of its core real estate assets in July 2017 to domestic rivals R&F and Sunac. It has since shifted to an ‘asset-light’ model, selling a major stake in its property management unit to the Zhuhai local government, with a plan to float the company in Hong Kong (see WiC536).
Suning was also partially nationalised last month, selling a controlling stake in its core retail unit to state-owned enterprises backed by the Shenzhen government.
Despite being criticised by regulators, the retailer’s foray into football has looked more successful – on the field, at least. Both its teams – Jiangsu Suning and Inter Milan – won their most recent league championships. But successes on the pitch added little to Suning’s financial strength, however. The debt-laden firm was forced to disband Jiangsu Suning just ahead of the Chinese Super League’s new season last month. And speculation has been swirling for months that it wants to sell Inter Milan as well (the team’s coach Antonio Conte resigned on Wednesday, reportedly over cost-cutting).
Anbang is the worst hit of the former big spenders so far. Its founder Wu Xiaohui was given an 18-year jail sentence and ordered to forfeit Rmb10.5 billion in personal assets (see WiC505). Anbang has since been nationalised and its reincarnation Dajia Insurance is looking to recapitalise by selling down more assets and via introducing strategic investors. The state-owned insurer said this month that it would now focus on the “silver industry” by providing retirement homes for the elderly and associated services. Its preferred destination to restart operations is Hainan.
Also in Hainan, a working group led by officials from the local government was sent into HNA’s offices last year in a bid to untangle its debts. In a significant demotion Chen Feng, the chairman and a co-founder, was ousted from its Communist Party committee in January. Because of the prevailing policy headwinds of “mixed ownership reform”, it remains plausible that private sector firms such as Fosun could be seen as a means of turning around the beleaguered HNA.
So what has Fosun been doing since the mood turned against aggressive overseas M&A?
Back in July 2017 President Xi Jinping headed the National Financial Work Conference (it happens once-in-every-five-years). The two-day meeting ended with instructions to regulators to guard against systemic risks and continue to deleverage the Chinese economy. The Financial Stability and Development Committee was set up to pursue these goals in the same month – reporting directly to the State Council.
Fosun’s boss Guo Guangchang flew back from Paris to Shanghai on July 29 and even before he touched down he had published a personal statement in support of the central authorities’ economic management strategy. In an interview with Xinhua later in the year, he claimed that one of his biggest difficulties in doing deals overseas had been the behaviour of his bigger-spending Chinese rivals (think Anbang and HNA), which had been driving up prices with bids that were hard to justify. This “squandering” was now at an end, Guo added, thanks to the heightened regulatory supervision of the most reckless spenders.
In fact, Fosun had flown close to the sun itself in its buccaneering approach to doing business. In 2015 the company’s shares were jolted by news that Guo had disappeared for a few days in what Fosun described as “assistance with investigations by the judiciary authorities”.
By the second half of 2017 Fosun had fine-tuned its M&A strategy, however, taking it in a more domestic direction. In September of that year it led a consortium that invested Rmb40 billion in a train project in Zhejiang province. The railway was the first public-private partnership for a high-speed line in China and the first to come under the control of private investors (see WiC381). Reading the policy runes carefully, Fosun also began to partner with state-owned enterprises when it went shopping overseas, such as in its Rmb5 billion takeover of French margarine maker St-Hubert in conjunction with Sanyuan Foods; and in a couple of acquisitions in Germany (see WiC377).
In another move with patriotic undertones, Fosun stepped up to the plate again with an offer to acquire an 18% stake in China’s best-known brewery Tsingtao, when Japan’s Asahi said it wanted to exit its investment at the end of 2017.
However, the onset of the pandemic blew a hole in the revenues of Fosun’s extensive portfolio of international travel brands (it owns Club Med, for instance). “We cannot continue to open up frontiers [in the foreign travel sector],” Guo admitted to Nikkei Asia last September. “We will continue to strengthen our foothold in the industry and to grow roots and develop after a certain period.” Yet he had also defended the company’s “globalisation foray” a month earlier, highlighting how a partnership with German pharma firm BioNTech had allowed Fosun to win an exclusive licence to make its Covid-19 vaccine in China.
Its efforts in Hainan, where Guo told newspapers last year that Fosun had invested more than Rmb30 billion in assets including a new Club Med resort in Sanya, may give it an edge in the race for the best of HNA’s aviation unit “Fosun has long seen itself as a Hainan company. I also see myself as a loyal worker for Hainan,” Guo explained.
Of course, the inference is that Fosun has been successful at recovering the favour of Chinese regulators, putting it in political pole position to take part in HNA’s restructuring.
However, Phoenix News cautions that Fosun is still mired in debt itself. The short-term liabilities at its Hong Kong-listed unit Fosun International top Rmb89 billion (with a 70% gearing ratio), for instance. And besides eyeing HNA, Fosun may not have lost its taste for football teams, with speculation that it is planning a takeover of French club Bordeaux.
If true, it could be another signal that a rehabilitated Fosun may have got the go-ahead for a limited return to the once forbidden fields of foreign M&A.
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