Fosun: Berkshire on its mind

Premium Insurance aside, the differences between the two companies are glaring

AUGUST 31, 2017

Chinese investment group Fosun compares itself to Berkshire Hathaway. But Warren Buffett’s business has never been the target of a crackdown on flight capital. Nor has it ever needed to deny its chairman had gone missing. Fosun is more volatile, too. The shares jumped 8 per cent after the group reported a 34 per cent increase in half-year profits to Rmb5.9bn ($900m).

Instead, the comparison depends on insurance. Both groups expanded into insurance after first operating in other sectors. Fosun controls Portugal’s largest insurance group and Berkshire owns Geico. The balance of insurance premiums and payouts for claims is a cheap source of investment capital. As a ratio of total assets, Fosun’s funds from this source are indeed higher than Berkshire’s.

Insurance aside, differences are glaring. Berkshire’s debt carries a high investment grade rating from Moody’s, while Fosun’s debt is deemed speculative. The latter’s net new borrowing over the past five years exceeds the total of the cash spent on investments. Warren Buffett has covered his investments with operating cash flows in all of the past seven years except the most recent one.

Fosun has lost money on operations in the past two full fiscal years and its operating cash flows are erratic. Earnings were from profitable asset and investment sales.

Analysts were impressed with Fosun’s financial results, all the same. According to Moody’s, the group has enough cash flow to cover 1.7 times debt maturing in the next 12 months. Citi highlights that its ratio of net debt to equity declined to less than half from 60 per cent at the end of last year. The stock is ahead of Berkshire shares, having nearly tripled in US dollar terms over five years.

It takes longer than that to qualify as an investment guru. So far, Fosun has only shown a lucky hand in making leveraged investments. Warren Buffett is most respected for prudence. It is this quality in the Sage of Omaha that Fosun would do well to imitate.