The healthy way to succeed in business
Good opportunity and right strategy have helped conglomerate Fosun seize overseas deals, reports Cai Xiao from Shanghai
Liang Xinjun, chief executive officer of Chinese private conglomerate Fosun Group, has become fitter than he was a year ago after having lost more than 5 kilograms and paying more attention to his health.
“We gained good investment returns in the past 20 years, but, compared with Warren Buffett’s nearly 50 years of good results, we are still far behind,” said Liang. “Keeping fit is essential for investment.”
In the past 20 years, Fosun Group has invested in more than 70 deals, and its annual investment return rate was about 30 percent.
Fosun regards Berkshire Hathaway as a learning model and follows a similar pattern, being an investment group with a core business based on insurance.
“We found three types of opportunities. One is grafting the world’s excellent resources with China’s strong engine, so we take a good look at deals related to consumption upgrading and services,” said Liang, adding there is also potential to help Chinese companies listed abroad to become private and leading companies to integrate their industries.
Fosun has seized the first type of opportunity well. In the first half of this year, Fosun invested in three foreign companies: US high-end women’s knitwear producer St John Knits International Inc with $55 million for 33.3 percent stake, Israel-based cosmetic laser solutions and medical lasers provider Alma Lasers Ltd with $221.6 million for 95 percent stake, as well as a $22.5 million investment in US-based Saladax Biomedical Inc, which focuses on tumor diagnosis, and became its single largest shareholder.
The three big moves were made after their first two successful investments in French resort operator Club Mediterranean SA in 2010 at a cost of 44 million euros ($58.9 million) and Greece-based high-end retailer Folli Follie Group SA in 2011 with an initial investment amount of 84.58 million euros.
“When going abroad to do some M&As, we look for industries in which the Chinese market share will occupy 20 to 30 percent of the global entity in the coming five to 10 years, such as luxury industry, and then we choose the No 1 or No 2 company in these industries, ”said Liang.
Fosun would become their first- or second-largest shareholder and then help these companies improve their business performances in China.
Deals
As an investment conglomerate, Liang said Fosun chooses a limited number of large-scale deals to invest in so that they can decrease the time of decision-making and control risks.
St John is the largest women’s knitwear producer in North America, and its clothing technology is unique in that its garments do not wrinkle. The garments especially appeal to executive women — women in positions of authority.
Fosun’s US team has been in contact with St John since 2009 and the senior executives participated in the deal in 2012. Liang visited St John’s stores and factories in Houston, Los Angeles and New York. And then Fosun Group Chairman Guo Guangchang and President Wang Qunbin also visited the company.
“We are very cautious about decisionmaking because we seek a success rate. We have an investment decision committee made up of seven people and most of them should be present,” he said.
The Chinese market contributed to less than 1 percent of St John’s annual sales, but the average proportion in China should be 29 percent by Liang’s calculation.
“We are capable of helping it develop in China.”
According to him, such measures include opening stores quickly and popularizing St John’s brand in China. Fosun is negotiating with Intime Group and Beijing Enterprises Group Co Ltd to open to stores.
Fosun helped Folli Follie open 76 stores within two years, while the Greek company in the previous eight years only opened the same amount of stores .
Fosun also found a Chinese partner, Eve Group, for bringing in St John. They are considering the pricing strategy as well as a system for running St John in China in the coming three months.
In the United States, the price of every suit is about $1,500. That in current Chinese stores is between 15,000 and 20,000 yuan.
Chinese high-end clothing market is at the early stage of its development. Its growth rate in recent years was between 20 percent and 30 percent, much higher than that of the overall Chinese clothing market. Its annual compound growth of the high-end clothing market would be 33 percent in the coming three years, according to a report by Minsheng Securities Co.
Chanel, Dior, Burberry, Prada, Giorgio Armani and a few local brands such as Ne Tiger occupy the Chinese super high-end clothing market. Popular high-end brands in China include local brands Ports, Lancy and Marisfrolg.
During the progress of upgrading consumption, local high-end clothing companies have seized on an empty marketplace and developed fast. While foreign super high-end companies target the super rich and powerful, local high-end ones focus on the Chinese elite aged 25 to 45, who seek big brands as well as acceptable prices.
The Chinese high-end clothing market is still fragmented so companies with strong design and operational capabilities will stand out, said the report.
Fosun Group purchased a 95 percent stake in Israelbased Alma Lasers Ltd for $221.6 million in May.
Alma Lasers manufactures laser, lightbased, radio frequency and ultrasound products with integrated product portfolios for aesthetic and medical applications.
Fosun Chairman Guo and President Wang visited Israel-based Alma Lasers when there was a terrorist attack in that region. They visited Alma’s co-founder Dr Ziv Karni, who is a scientist with a lifelong interest in studying wavelengths.
Alma Lasers has a 15 percent share of the global market for high-end aesthetic devices with annual revenues of nearly $100 million.
Liang said beauty consumption in the European market has been cut a lot since the financial crisis, but the demand is very high in China.
“We believe the Chinese market share will take up more than 22 percent of Alma’s global revenue,” he said.
“We have a strong distribution capacity in China to help Alma.”
Fosun invested in Hong Kong-listed Sinopharm Group Co Ltd in 2006 and became its second-largest shareholder. The company is the main suppliers of 70 percent of hospitals in China.
Fosun also reached strategic cooperation with Chindex International Inc, a leading independent US provider of Western healthcare products and services in China in 2010. It acquired lots of sales experience in Chinese hospitals.
General hospitals, special hospitals and beauty shops with medical qualifications will all be Alma’s target distribution areas when entering the Chinese market. Household products will also be targeted.
Liang said they also showed confidence in Alma’s leading position in the world and strong innovation capabilities.
The third investment by Fosun in the first half of the year was investing $22.5 million in US-based Saladax Biomedical, which develops and commercializes novel diagnostic trials for the practical delivery of personalized medicine.
The proprietary line of MyCare trials improves the efficacy of existing drugs through optimized dosage.
Saladax’s initial focus is oncology, with a portfolio of 13 chemotherapy drug dose management trials in various stages of development.
Liang said in this way, patients can avoid using unnecessary medicine and their pain can be largely reduced. Furthermore, medical fees can be cut.
“We feel confident in explaining the technology and application of Saladax to the Chinese government and winning their support,” said Liang, adding that the application will be introduced to both private and public hospitals in China.
The Chinese medical service market is of great potential. The revenue of hospitals totaled 1.25 trillion yuan ($205 billion) in 2011, according to a report of the BCG Consulting Group in June.
Public hospitals used to occupy the dominant position, but private ones have developed fast in recent years, with their average annual growth rate reaching 16 percent between 2008 and 2011.
According to the Chinese government’s plan, the service value of private hospitals in China will account for 20 percent in 2015 of that of all hospitals in China. With policy encouragement, the medical service sector has attracted private equity investors, listed pharmaceutical enterprises, industry capital and foreign and local medical groups.
The detailed sectors full of investment opportunities include high-end healthcare, private special clinic chains and private comprehensive hospitals as well as the restructuring of public hospitals.
Investing in medical equipment in China is also of great potential. The value of the Chinese medical equipment market is only about 15 percent of the Chinese pharmaceutical market, while the average ratio in the world is about 40 percent.
More on target
“In the second half of this year, sectors of wealth management and luxury goods will be Fosun’s focus and they have such deals in storage,” said Liang.
Liang said although cultural differences can be a challenge when seeking investment opportunities around the world, they have discovered ways to overcome it.
“Fosun seeks to be a kind shareholder in that we do not want to win the control of the companies,” he said.
“For management teams, we will make them enjoy the benefits from the companies’ development. We also care for local staff and guarantee their employment.”
Zhan Chunxin, chairman and CEO of the Chinese construction machinery manufacturer Zoomlion Heavy Industry Science & Technology Co Ltd, said Chinese companies should have localization work after acquiring a company abroad.
“Zoomlion has not dispatched a single Chinese employee to work at the Italian company Compagnia Italiana Forme Acciaio SpA,” said Zhan.
CIFA is a concrete machinery manufacturer that was acquired by Zoomlion in 2008. At the time it was the world’s thirdlargest concrete machinery manufacturer.
CIFA’s profit has grown more than 50 percent in the first half of this year compared with the same period six years ago, according to Zhan.
“Tolerance and inclusiveness, sharing both risks and rewards, taking responsibility for employees and the future of the company, can be fundamental rules making the acquisition a success,“according to Zhan.
Alan Wang, a partner at international law firm Freshfields Bruckhaus Deringer based in Beijing and Shanghai, told China Daily that when Chinese companies go abroad for a deal with bidders from other countries, a long period of waiting for receiving approvals from Chinese government authorities can be a real challenge to their success.
But Wang said some companies such as Fosun Group that have accomplished several successful stories show it can be smoother and quicker to get government approval while the Chinese government is also taking steps to simplify the outbound approval process.
Wang added that Chinese enterprises should understand the local laws and market practice in deal negotiations and be prepared to follow them.
“For instance, although signing a memorandum of understanding does not mean reaching a formal contract, Chinese enterprises should still take the MOU negotiation seriously. Whatever has been agreed in the MOU should be respected so as to ensure contractual negotiations and that good long-term business relations are preserved,” said Wang.