Tue Nov 20, 2012 5:33am EST
Nov 20 -
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Summary analysis -- Fosun International Ltd. ---------------------- 20-Nov-2012
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CREDIT RATING: BB+/Negative/-- Country: China
Primary SIC: Steel foundries,
nec
Mult. CUSIP6: 35037R
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Credit Rating History:
Local currency Foreign currency
26-Apr-2011 BB+/-- BB+/--
20-Nov-2005 --/-- NR/--
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Rationale
The rating on Fosun International Ltd. reflects the China-based conglomerate's evolving business structure, concentrated investments in cyclical and volatile industries, and its weak consolidated financial performance. Fosun's high-growth strategy and aggressive investment appetite also constrain the rating. The company's growing and increasingly diversified asset portfolio, its experienced management, "adequate" liquidity as defined in our criteria, and good financial flexibility support the ratings. We assess Fosun's business risk profile as "satisfactory" and its financial risk profile as "aggressive."
Fosun's credit profile will remain closely tied to volatile and cyclical businesses. We expect the company's business performance in cyclical segments to remain weak. The group's property, steel, and mining operations together account for nearly 70% of its total assets. We expect weak demand and volatile prices in the steel industry, policy headwinds in the property sector, and a slowing economy to weigh on cash flows.
The profitability of Fosun's steel business has significantly eroded due to slipping product prices and inventory write-down. Nanjing Iron and Steel Co. Ltd. (NISC, not rated), Fosun's subsidiary and its key investment in the steel sector, recorded a net loss of about Chinese renminbi (RMB) 508 million for the first nine months of 2012. We have a negative view on the Chinese steel industry. Although we expect a moderate recovery in demand and prices in 2013, NISC's operating margins are unlikely to come back to 2011 levels next year.
Our view on the Chinese property industry remains negative, although it's less negative now than it was six to 12 months earlier. Housing prices have continued to recover in recent months and sales volume has also picked up. In this context, we expect Shanghai Forte Land Co. Ltd. (not rated), Fosun's 99%-owned property development subsidiary, to generate property sales of about RMB10 billion in 2012, slightly higher than in 2011.
In our view, Fosun's consolidated financial performance is likely to be weak in 2012 due mainly to the underperformance of its steel segment. The company is still transitioning to an investment holding company and has a strong growth appetite. Fosun's leverage, as measured by the ratio of total debt to capital, remains high. The company's sizable capital expenditure, land acquisitions, investment plans, and concentrated debt maturities could weigh on its leverage and cash flow coverage in the next 12 months.
We expect Fosun's leverage to moderate to slightly over 50% in 2012 from above 55% in 2011. This follows the Hong Kong dollar (HK$) 3.96 billion IPO of Fosun's pharmaceuticals subsidiary Shanghai Fosun Pharmaceutical (Group) Co. Ltd. (not rated) in Hong Kong in October 2012. In addition, Fosun is planning an IPO for its mining subsidiary Hainan Mining Co. Ltd. in China. If the IPO plans succeed, Fosun's equity base should increase and its leverage should decrease. In addition, the Fosun management has demonstrated flexibility to scale back capital expenditure and investment plans in 2012.
We expect Fosun's financial flexibility to remain strong at the holding company level. The company continues to increase its investments in the consumption and financial services sectors. Its execution in investment and asset divestment is satisfactory, in our view. Fosun has a high liquid assets base and we believe this offers the company the flexibility to exit. For example, a group of private-equity investors has offered to take Focus Media Holding Ltd., in which Fosun holds a 17.18% stake, private for a value of US$3.66 billion. If the proposal is successful and Fosun chooses to exit, the company would generate more than US$600 million in cash. The company has established a record of generating good returns from investments and realizing value from disposals as its asset portfolio has become more diversified.
Liquidity
Fosun's liquidity is adequate. We believe the company has adequate sources of liquidity to cover its needs in the next 12 months. Our assessment of Fosun's liquidity profile incorporates the following expectations and assumptions:
-- We expect the company's sources of liquidity, including cash and available credit facilities, to exceed its uses by 1.2x or more in the next 12 months.
-- We expect net sources to remain positive, even if EBITDA declines more than 15%.
-- Compliance with the ratio of offshore liquid asset to offshore debt could survive a 30% drop in equity prices of Fosun's financial assets.
-- The company's sources of liquidity include: RMB22.3 billion in cash and equivalents (including short-term investments with a 25% discount as of Dec. 31, 2011), about RMB4.5 billion in funds from operations, net divestment proceeds of about RMB3.4 billion, and available banking facilities.
-- Liquidity uses include about RMB5 billion in working capital, RMB6.5 billion in projected capital expenditure and acquisitions, RMB23.5 billion in debt that matures within the next 12 months, and RMB1.5 billion in projected dividend payments.
We note that the headroom for some EBITDA-based covenants is limited. Nevertheless, we believe the company has the flexibility to work out possible covenant breaches with its lenders, given its solid banking relationships and good cash holdings.
Outlook
The negative outlook reflects our expectation that the operating conditions for Fosun's key subsidiaries will remain challenging over the next 12 months although the steel industry could recover moderately in 2013 as the Chinese economy stabilizes. In addition, we believe the company's financial leverage and cash flow coverage could remain weak in the period.
We may lower the rating if Fosun continues to expand without controlling its leverage, such that its ratio of total debt to total capital remains above 55% in the next 12 months. We could also lower the rating if the company's exposure to volatile businesses increases and its currently very strong financial flexibility deteriorates substantially (including its cash dividend coverage at the holding company level).
We could revise the outlook to stable if Fosun's business performance in cyclical segments stabilizes and the company improves its leverage by raising equity, such that the ratio of total debt to total capital is less than 55% for a sustained period.
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