Guo fights back

The Chinese have a range of sayings to warn against the dangers of rumour mongering. “Zhen Shen commits murder” (曾参杀人­­) references a story in which a trusting mother comes to believe that her son, a virtuous statesman, has murdered someone after three different people tell her the same lie, for example.

“Three men make a tiger” (三人成虎) is another proverb, warning against instances in which people accept unlikely information as truth if it is repeated many times over.

In the stock market, few tycoons are more experienced at responding to market-moving rumours than Fosun chairman Guo Guangchang. Shanghai’s biggest private-sector conglomerate has needed to react to market speculation regularly in the past, usually through the issuing of stock exchange announcements in a bid to clarify a situation or stop a slide in the prices of its bonds or shares. Something similar has been happening to the investment giant again this month. What’s going on?

Why is Fosun back in the headlines?

Investors responded nervously after the news agency Bloomberg reported on September 13 that regulators including the China Banking and Insurance Regulatory Commission (CBIRC) had instructed the country’s biggest banks and state-owned enterprises to start a round of checks on their exposure to Fosun, whose interests span property, healthcare, finance, tourism and culture-related businesses.

The renewed attention in the investment giant came after reports had circulated on social media that the Beijing branch of Sasac, an agency that oversees about 100 state enterprises (SOEs), had been asking them about their commercial ties to Fosun following a flurry of divestments by Guo’s firm in recent months (more of this later).

Fosun then clarified that Beijing Sasac had been conducting “routine information collection”. Zhu Wenkui, a vice-president of its Hong Kong-listed flagship Fosun International, had also visited bosses at Beijing Sasac on September 14, the investment group confirmed. The topics discussed included how to move forward with mixed ownership reforms at state enterprises, it added.

On the same day, the company insisted in another statement that the CBIRC hadn’t asked commercial lenders to review their financial exposure to Fosun, as confirmed by a number of banks with regular dealings with the company.

A day later Guo appeared on Sina Weibo to announce that Fosun would be suing Bloomberg for its previous report. In the post – his first in nearly six months – he also disclosed that he had just returned to Shanghai after a long business trip abroad (according to Entrepreneur magazine, this was an indirect way of rebutting rumours that Guo had fled the country).

Guo added that he was glad to report that Fosun’s overseas businesses were in much better condition after the Covid-19 pandemic, with some reporting a return to rapid growth.

However, the prices of the group’s bonds and shares had already reacted negatively to the stories of the renewed focus on Fosun’s finances. The market capitalisation of Fosun International in Hong Kong dropped more than a tenth over two days, for example. International rating agencies have also downgraded the group’s creditworthiness as more reports about its financial health made the rounds, including rumours that Fosun was saddled with liabilities of as much as Rmb650 billion ($95 billion).

Sensing skullduggery, Fosun announced that it had reported the situation to public security authorities. “Some people have been defaming Fosun by means of fabrication, concocting scenes and starting and circulating malicious rumors in the name of certain professionals, insiders or even professional institutions. They spread rumours and lies through various channels such as the internet in order to short Fosun’s shares,” it said, warning that it would pursue all potential steps to bring the wrongdoers to justice.

“Guo Guangchang is really angry this time,” claimed the author of an article this week on Prism, an investigative reporting platform run by Tencent.

Fosun has been the target of rumours before?

Previous instances of rumours about Fosun have ranged from stories about the group’s financial health to concerns for Guo’s personal wellbeing.

In December 2015 Fosun’s shareholders were given a scare when Guo was reported as losing contact with the company for a few days. Two of its Hong Kong-listed firms, including Fosun Pharmaceutical, were suspended from trading after their share prices slid south in response. Fosun then confirmed that Guo was assisting the Chinese authorities as part of an investigation. It was never made clear what was happening but Guo reappeared in public a few days later, in time to attend Fosun’s annual year-end meeting.

In July 2017 the muttering was that Guo had gone missing again and was being classed as “unreachable” – a fall-back phrase for situations in which senior businesspeople or high-level officials are under investigation. Just months earlier, the government had triggered a crackdown on the insurance sector, which had been helping to fund an unprecedented boom in international M&A by a buccaneering group of Chinese firms. Financial regulators were unimpressed by the deal-making spree, including senior officials from the central bank, who ordered state lenders to review their loans to the ultra acquisitive group, which included HNA Group, Anbang, Wanda and Fosun.

Guo, who like many Chinese tycoons has described himself as a student of Warren Buffett, grew his business empire from a grounding in the insurance sector, using the cash flows to broaden his reach into other sectors. The strategy brought sustained spending on international assets including Portugal’s biggest bank, high-end property in New York, the Lanvin fashion group, the resort operator Club Med and even Wolverhampton Wanderers, a football team in central England.

But the change in political mood five years ago put purchases like these in peril, triggering a slump in bond and stock prices of the companies that were making them.

The sudden scrutiny from the authorities saw a series of influential figures disappear from the public domain as well. Xiao Jianhua, boss of financial mammoth Tomorrow Group, was grabbed in early 2017 at Hong Kong’s Four Season hotel and ferried back to the mainland (the influential financier was given a 13-year jail term last month). A few months later, Wu Xiaohui, the boss of Anbang was arrested on corruption charges. Xiang Junbo, head of the insurance regulator CIRC, was also sacked.

Fosun was caught up in the ferment and Guo took to his social media accounts again to quash rumours that he was ‘unreachable’ himself. In a memo sent to staff via WeChat (Guo was in Brazil at the time), he called on shareholders to take their own legal action against people casting aspersions against the group.

“While we’re busy working, some people are busy spreading rumours… because the costs of doing so are very low while the financial returns [shorting Fosun’s shares] are very high,” he wrote at the time.

Are the fears about Fosun’s finances accurate?

Speculation about Fosun’s financial condition intensified a few weeks ago, when ratings agency Moody’s downgraded the bonds of Fosun International, the Hong Kong-listed vehicle.

Part of the pressure is coming from the wider sell-off in dollar debt issued by Chinese companies in the offshore bond market, which has been sparked by fears about systemic risks in the property sector.

S&P Global Ratings also downgraded Fosun’s long-term issuer rating to BB- from BB this month, saying that the unfavourable market conditions justified a more negative outlook.

The Shanghai-based firm is in a challenging position because of its reliance on short-term borrowing at a time when private sector companies are finding it harder to source fresh funding in the bond markets, it added.

Fosun rejects the claims that it is more at risk than its peers because it is on the hook for higher levels of borrowing, however. In particular it refutes the stories of Rmb650 billion in company liabilities that are doing the rounds on social media. It says that figure is misleading because it is drawn from the aggregated liabilities of Fosun and all its units, including a number of insurers and banks, which tend to carry large amounts of liabilities – against a larger amounts of assets – on their books.

Fosun International’s interest-bearing debt is actually about Rmb260 billion, it said in a statement, and this figure includes the liabilities of its two listed affiliates Shanghai Yuyuan Mart (a tourism and property firm) and Fosun Pharmaceutical, which are independently responsible for their own debts.

“In other words, the actual debt that is borne by Fosun International is only approximately Rmb100 billion, corresponding to total assets of Rmb270 billion and net asset value (NAV) of around Rmb20 per share. From this perspective, Fosun is not under significant debt repayment pressure,” it insisted.

(Fosun International’s shares were trading far below that at HK$5 in Hong Kong as of this week).

In this context, Fosun seems to be in better shape financially than many feared, especially compared to debt-saddled disasters like China Evergrande, which has been struggling to find the cash to finish hundreds of presold residential projects around the country.

Fosun was also mentioned as a potential participant in the rescue of Hainan Airlines, the crown jewel of HNA Group, another of the deal-making giants that has fallen on dramatically harder times since 2017, although the rescue didn’t materialise.

All the same, with the bond markets largely closed to high-yield issuers, Fosun International will need to find ways of settling upcoming liabilities including an Rmb28 billion bond and Rmb33 billion in bank loans, S&P reckons. That is probably going to mean more asset disposals, with sales of some of its stakes in listed firms in Hong Kong and the A-share markets.

Yet as the article in Prism points out, concerns about Fosun’s financial situation may actually have been fuelled by a flurry of divestments this year, where sales of shares in firms including Fosun Pharmaceutical helped the group to recoup close to Rmb10 billion.

Exchange filings showed that it had also reduced its holdings in China Life Insurance and a couple of baijiu businesses.

Gong Ping, executive president of Fosun International, has insisted the stake sales are part of a continuation of its corporate strategy and should not be taken as signals of financial distress. “However, we noticed that the complex external environment has raised public interest in the disposal of the group’s assets, resulting in a one-sided interpretation,” he acknowledged.

Fosun’s decision to pare back its holdings in its pharma firm – one of its strongest-performing investments – seems to have come as a particular shock to some of its shareholders. Other stakeholders, including the local governments in cities where Fosun holds other assets, might have had questions about the direction of the divestment plan too, as well as the logic behind it, which could have created another of the reasons for the meeting this month between the company and Beijing Sasac.

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