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.