High Leverage And Global Tensions Will Erode Resilience

Key Takeaways

• Rising financing costs, structural complexity, and regulatory headwinds threaten Fosun's revenue growth, earnings quality, and long-term sustainability.
  
• Geopolitical tensions and weaker domestic demand may constrain global diversification and pressure both top-line performance and share valuation.
  
• Diversified global expansion, digital innovation, asset-light transformation, prudent financial management, and strong healthcare growth collectively position the company for sustainable profit and earnings improvement.

Catalysts

Operates in the health, happiness, wealth, and intelligent manufacturing sectors in Mainland China, Portugal, and internationally.

• Heightened global interest rates and persistent credit tightening threaten to drive up Fosun's already substantial financing costs, while the group's reliance on frequent debt refinancing and periodic increases in consolidated interest-bearing debt expose it to greater margin compression and elevated risk of default, which will likely deteriorate net margins and earnings quality over the next several years.
  
• Intensifying geopolitical tensions along with growing regulatory friction between China and major Western economies could severely constrain Fosun's ability to pursue further cross-border investments and impede performance of overseas subsidiaries, leading to stunted revenue growth and undermining the strategy of global revenue diversification that now comprises more than half of group revenue.
  
• The ongoing presence of high leverage and a complex conglomerate structure, combined with asset-heavy operations in some subsidiaries, may force the company into value-destructive asset divestitures and limit cash flow generation, ultimately suppressing long-term revenue growth and reducing the sustainability of earnings improvements seen in recent years.
  
• Sluggish economic growth and weak consumer sentiment in China are weighing on the group's consumer, manufacturing, and jewelry segments, as evidenced by significant year-on-year revenue declines, raising the likelihood of further top-line and bottom-line pressure as domestic demand stagnates and international expansion faces barriers.
  
• Growing competition from more digitally-native or sector-specialized firms threatens Fosun's traditional conglomerate advantages, while the accelerating shift toward ESG-focused investing and increased scrutiny of governance and transparency in complex groups like Fosun could drive up the company's cost of capital and further depress long-term share valuation.

Fosun International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Fosun International compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Fosun International's revenue will grow by 5.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -2.4% today to 1.2% in 3 years time.
• The bearish analysts expect earnings to reach CN¥2.5 billion (and earnings per share of CN¥0.31) by about September 2028, up from CN¥-4.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.9x on those 2028 earnings, up from -9.2x today. This future PE is greater than the current PE for the HK Industrials industry at 9.4x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.89%, as per the Simply Wall St company report.

Fosun International Future Earnings Per Share Growth

Risks

• Fosun's steady globalization and increasing international revenue-now over half of total revenue and expanding rapidly in overseas markets such as insurance, tourism, and pharmaceuticals-could drive greater revenue growth, risk diversification, and higher net margins over the long term.
  
• Sustained and accelerating investment in AI, technology, and digitalization across pharma, tourism, and insurance businesses is improving operational efficiency, cost structure, and creating new high-margin revenue streams, which could materially support long-run earnings growth.
  
• The company's asset-light transformation, evidenced by its shift to management-fee models and strategic divestments of noncore or capital-intensive assets, is leading to improved return on equity, the stabilization of cash flows, and the potential for net margin enhancement as seen in segments such as tourism and property management.
  
• Fosun's commitment to deleveraging, refinancing at lower borrowing costs, and the maintenance of a stable credit outlook (as recognized by S&P) is increasing financial flexibility and lowering risk, supporting sustainable net profits and future dividend capacity.
  
• Robust product pipelines and licensing deals in innovative pharmaceuticals and MedTech, alongside strong R&D capabilities and growing international collaborations, position Fosun's healthcare segment for secular growth in both top-line revenue and profitability, underpinning long-term earnings expansion.

Valuation

• The assumed bearish price target for Fosun International is HK$4.68, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Fosun International's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$6.5, and the most bearish reporting a price target of just HK$4.68.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥212.5 billion, earnings will come to CN¥2.5 billion, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 12.9%.
  
• Given the current share price of HK$5.43, the bearish analyst price target of HK$4.68 is 16.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.