Since the beginning of this year, the Chinese multinational conglomerate holding company Fosun International, which was once a benchmark enterprise of private capital, has lost its former limelight. In the face of high debt, Fosun has begun to intensively sell its assets.
Guo Guangchang, chairman of Fosun Group, has successively reduced the holdings in Hainan Mining, Tsingtao Brewery, Zhongshan Public Utilities, and Shandong Taihe Water Treatment Technologies. Entering September, the reduction of assets has further accelerated. From the announcement disclosed in September, the total amount of assets sold by Fosun will exceed RMB 9 billion, and Fosun Pharma, as a core member, has also been included in the reduction plan. On September 1, Shanghai Yuyuan Tourist Mart announced that it planned to reduce its holdings of all or part of its 23.34% shares in Zhaojin Mining, and it is expected to cash out about RMB 4.1 billion. On September 2, Yuyuan issued another announcement that it planned to sell 13% of the shares of Jinhui Liquor. The total transaction price is expected to be RMB 1.937 billion. On the same day, Fosun Pharma announced that its controlling shareholder, Fosun Hi-Tech, plans to reduce its 3% holdings of the company's A shares, and is expected to return about RMB 3.2 billion. It is worth noting that Fosun Pharma's current share price is at a low level, and it is obviously not cost-effective to reduce its holdings at this time. It can be seen that the urgency of Fosun Pharma's need for capital return reflects the seriousness of its debt risk.
However, Fosun is still far from being able to be in a safe position. According to the financial report, by the end of 2021, Fosun International's assets increased to RMB 806.372 billion, with total liabilities of RMB 603.158 billion and an asset-liability ratio of 74.8%. In the first half of this year, Fosun International's asset-liability ratio further rose to 76.635%, with book cash and cash equivalents of RMB 117.113 billion, while the company's short-term borrowings soared to RMB 123.692 billion. In addition to the holding company level, Fosun Pharma and Yuyuan, the core members of Fosun, are facing debt repayment pressure. Since June this year, the international rating agency Moody's has repeatedly downgraded the Fosun group.
Guo Guangchang started with the medicine business. Thanks to his unique investment vision and capital operation ability, in addition to investment and mergers and acquisitions in the pharmaceutical industry, he has also been involved in multiple fields such as manufacturing, finance, cultural tourism, and real estate, building a huge and complicated landscape for Fosun. The success of Fosun in the capital market and commerce at one point was regarded as a typical example of the diversified development of Chinese private capital. However, a diversified group quickly established with high leverage would eventually face the difficulty to overcome the obstacle of "high leverage". It would also encounter a precarious situation after the change in the general environment, forcing it to sell its assets. Similar to the diversification of Fosun, some Chinese real estate companies that are currently facing difficulties have also tried diversification strategies in the process of rapid development. Yet, in the downward cycle of the real estate market, the diversified operations that were once highly anticipated by these companies had to be reduced before any clear results could be obtained. Eventually, these companies have to re-focus on their main business.
In the opinion of the researchers at ANBOUND, diversification, as a strategic choice for companies to disperse risks, has a certain role in market stability. That being said, it is not completely risk-free. Not putting all the eggs in one basket can certainly avoid some industry risks, as well as the company's own internal risks. In addition, this can overcome the impact of business and industry cycles. However, in the face of overall market risks, it is actually impossible for companies to effectively diversify risk. Under the circumstance that the competitiveness of the main business is dispersed, these companies will be burdened by the diversified business in the downward cycle of the market. Whether it is diversified development or focusing on the main business, the key is that the enterprise needs to be competitive in the market. If diversification fails to enhance the competitiveness of the company, it is only diversification in name and could cause the company to sink in the face of storms.
ANBOUND's researchers have also pointed out that China's economy is in the downward trend of a long-term slowdown. Hence, it is not only necessary for the country's policymakers to consider short-term factors such as the COVID-19 outbreaks and the conflict between Russia and Ukraine, but also the impact of long-term factors such as deglobalization, U.S.-China geopolitical competition, and climate change. Not long ago, Ren Zhengfei, the founder of Huawei, is reported to remark that, "with survival the main principle, marginal businesses will be shrunken and closed, and the chill will be felt by everyone", according to Reuters. Huawei has now shifted its focus from pursuing scale to ensuring profits and cash flow as the global economy enters a long period of recession. This is not only to deal with the survival dilemma caused by the U.S. sanctions, but more importantly, it is also because of the realization that the overall development environment has changed, and the company's development strategy must be adjusted accordingly.
Whether it is a company or a country, it is unavoidable for economic cycles to emerge in the process of development. Businesses not only need to consider the cyclicality of their own development and of the industry, but also how to deal with the overall changes. As far as Chinese companies are concerned, in the tide of rapid economic development after the reform and opening up, they have not substantially experienced business and economic cycles, and lack experience in dealing with those. Some companies believe that relying on diversification can cope with overall and cyclical trend changes, but in the face of reality, they bear the bitter consequences. At present, various risk factors such as geopolitical risk, supply chain risk, and cyclical risk have a significantly greater impact on enterprises and industries. For large companies that have developed to a certain stage, it is necessary for them to pay attention to the local risks of the enterprise, the industry, and the region, but also to the overall systemic risks. The systemic risks brought about by cyclical changes cannot be avoided by a diversification strategy, and companies might opt to shrink to survive the downturn cycle. As Ren Zhengfei has said, profit and cash flow, as the foundation of a company's survival, become particularly important at this time.
Final analysis conclusion:
In the continuous upward cycle, whether it is diversification or focusing on the main business, the key is the pace of development. Once there is a reversal of a major cycle, companies will face the issue of survival. This would be the time to consider how to maintain the company's own competitiveness, and how to survive the impact of the downward cycle.
