Letter To Shareholders

Dear distinguished shareholders of Fosun,

 

As of the end of the Reporting Period, the total assets of the Group reached RMB638.88 billion, which increased by 20% year-on-year. During the Reporting Period, the revenue of the Group increased by 24.2% compared with 2017 to RMB109.35 billion. Profit attributable to owners of the parent increased by 1.9% year-on-year to RMB13.41 billion, marking the seventh consecutive year of growth and reaching a new record high. Despite the global market volatility and challenging economic environment in 2018, Fosun’s good performance is a reflection of our business model resilience and strategy, adhering to the complementary twin-growth drivers of “Industry Operations + Industrial Investment”. We are confident that the organic growth in Fosun’s various businesses and their synergies with investments will enable Fosun to maintain steady and sound development through different industry cycles and remain resilient to capital market movements.

 

We are incredibly grateful to have our shareholders’ long-term trust and support throughout these years that has allowed us to pursue our ambitions and achieved today’s success. I am pleased to announce that the Board has recommended our dividend this year to be increased to HKD0.37 per share, which means a payout ratio of 20% and a dividend yield of 3.25%[1]. This will allow us to share the fruits of our business growth with our shareholders.

 

Looking ahead, Fosun, as a globalized company rooted in China, will continue to focus on long-term development with “Industry Operations + Industrial Investment” as our growth drivers. We remain oriented towards the demands of families worldwide for “health, happiness and wealth” products and services, with a view to building a global ecosystem that brings happiness to everyone.

 

  1. Speeding up the establishment of a global happiness ecosystem centered around families

 

One of the major organizational changes for Fosun in 2018 was the establishment of several industrial groups. Yuyuan, for instance, completed its major asset reorganization, while FTG and Babytree were successfully listed in Hong Kong. At the same time, Fosun’s various business segments, such as fashion, sports, technology and innovation, have been evolving into various industrial groups. In the future, all these industrial groups will focus on integrating businesses across their whole value chains while remaining centered on family needs. They will continue to refine their products and enhance their brand strengths so as to provide customers with better products and services.

 

At recent meetings, we have emphasised on three keywords - “Product Competitiveness, Brand Strength and Industrial Group”. While Fosun’s industrial groups already have clear positioning, what should be elaborated here is our understanding of product competitiveness and brand strength.

 

We believe there’s no secret to a business’s success, as success is achieved through the relentless pursuit of product competitiveness. Besides satisfying needs and solving problems, products that are competitive will also earn recognition from customers and therefore become classic and popular products. For example, after Yuyuan’s acquisition of Songhelou, Songhelou’s Suzhou-style soup noodles which was once renowned in Jiang Nan, has been revived recently. Since the opening of its first noodles shop, it has become very popular among customers.

 

Brand strength is another crucial aspect of business that takes a long time, from 1 to N, to build up. We believe a company with strong brand strength can still attract market attention even if its products do not. Consumers will wait for better products to be launched. For example, LANVIN is a French high-end fashion brand with a history of 130 years. Over the past four years, while LANVIN’s business has struggled, many loyal customers and followers still have high expectations for the new season’s products. Today, LANVIN has appointed a new chief executive officer (“CEO”) and a new creative director. The latest women’s collection produced by LANVIN is a real delight. As LANVIN strives to revive the brand and unlock its value, it has also created a new business model that enables it to better meet customers’ current demand for luxuries.

 

We believe by having stronger product competitiveness with powerful brand influence, we can create more outstanding industrial groups. As a holding company, the Company will connect and empower each of its industrial groups with its mid-office, one equipped with smart technologies and its own professionalization capability. This will enable Fosun to build a global ecosystem that brings happiness to families worldwide.

 

We are pleased to see some successful cases during the development of our business ecosystems. In the health services ecosystem, Fosun United Health Insurance works with Fosun’s pharmaceutical business and medical & health services. This enables the Group to provide customers improved health services ranging from consultation to diagnosis and treatments, and it also expands the customer base for its medical services business. Meanwhile, insurers are able to effectively increase the efficiency of their claims management. Fosun has thus formed a closed-loop mode of operation that encompasses healthcare and insurance for health management.

 

This is what the Company has been aspiring to do at the group level. Instead of being merely a sum of parts, Fosun’s business ecosystem aims to create a multiplier effect through synergies between various industries. In a nutshell, Fosun combines all the strengths and fruits of innovation for its health, happiness and wealth ecosystems to provide comprehensive, one-stop solutions for customers.

 

  1. Accelerating development of mid-office through smart technologies and upgrading industries with Big Data and artificial intelligence (“AI”)

 

The key to boosting the development of the above-mentioned business ecosystems lies in a strong mid-office equipped with smart technologies and advanced information technology. Such a mid-office combining Big Data and AI can enhance both the efficiency and connectivity of Fosun’s ecosystem of businesses. As proud as we are of our progress and our innovation, I know Fosun cannot yet be regarded as a pioneer in this area. Yet we have a strong determination to build a mid-office equipped with smart technologies, and we have strong capabilities to formulate and execute our plan. I believe our passion for pioneering will drive the Group to explore more and match our peers.

 

In 2018, Fosun Cloud was launched successfully, and has started to empower several dozen companies within Fosun’s ecosystem providing cloud computing and various smart technologies. Meanwhile, we also rolled out several smart management sub-systems, such as intelligent finance and HR platforms and other online platforms to enhance the efficiency of management and operation of both the mid- and back offices. In addition, Onelinkplus, a centralized purchasing platform, has been developed to enhance Fosun’s procurement and supply chain management capabilities.

 

To fully connect the membership systems within Fosun’s ecosystems, we have been linking up our businesses through the Youle Customer Loyalty Program (“youlè”). One year after its launch, youlè has incorporated the customer membership systems of the Group’s 15 portfolio companies while its functions and services have been upgraded.

 

At the same time, Fosun has been pressing ahead with the upgrading of all its businesses with the help of Big Data and AI technology. For example, Fosun’s self-incubated Fonova is helping its businesses such as tourism, culture, commerce and retail to digitalize and intelligentize their operations with smart technologies such as Big Data and AI. In the field of “health”, Fosun has also developed some specific programs, such as the Xingqiao Program, which allow application of Big Data analytics to its health businesses. With diversified products and services under Fosun’s various business sectors, we are able to integrate the businesses and form a closed-loop health ecosystem.

 

  1. Industry Operations + Industrial Investment

 

As I have always said, investment is in Fosun’s genes, and is a very important component of our business strategy. However, investment is not our ultimate goal, rather, it should serve to complement the development of our industrial businesses. Investment has to serve a purpose which, for Fosun, is to enable its industrial businesses to develop effectively and efficiently. Let’s take Fosun’s health business as an example. Fosun would not have been able to create a globally recognized pharmaceutical company without inorganic investments. Fosun Pharma’s business now covers the whole healthcare value chain, with a solid industrial foundation particularly in pharmaceuticals manufacturing and research and development (“R&D”), medical services, medical devices, medical diagnostics, and pharmaceuticals distribution and retail. Fosun Pharma leads the industry in innovation and R&D.

 

We aren’t so bold as to claim it’s the only way to success, but it’s Fosun’s distinctive development model of “Industry Operations + Industrial Investment”, under which we make bold and wise investments, yet all our investments should complement our industrial development.

 

For this reason, we can say that Fosun judges the quality of its investments by two criteria. On one hand, we have to assess the intrinsic value of the projects as pure investments; and on the other hand, we need to assess the value that can be generated from synergies between the prospective investment and Fosun’s existing businesses. After this consideration, we will evaluate the ability to integrate the invested projects within Fosun’s existing ecosystem. These are critical factors within our investment decision making process.

 

In short, let me share with you our fundamental investment decision-making approach. First, prospective investment targets will have to be businesses that fit in well with Fosun’s existing businesses and are oriented towards family demands for health, happiness and wealth-related products and services. Second, Fosun will consider taking controlling stakes in such investments. Third, Fosun will focus on the beginning and end of an industry life cycle when it searches for investment targets, such as projects at the forefront of their technological field or projects that can help companies eliminate development bottlenecks.

 

Here, I would also like to share with you the importance of improving the operational capabilities of our portfolio companies through empowerment. The projects or portfolio companies that most need to be empowered often face obvious problems, but they also have distinct features and strengths. Fosun can draw on its in-depth knowledge and rich experience in various industries, and make use of its advantages to make up for the disadvantages of our portfolio companies and help them solve their problems. This is how Fosun can create value as a unique business partner. In the fashion industry, for instance, Fosun has accumulated considerable experience and built up a talent pool in recent years which enabled it to revive companies or brands through turnaround strategies. In 2018, for example, Fosun assisted its portfolio company Caruso, the high-end Italian menswear brand, to achieve significant improvements in its operations through various proactive initiatives, including reshaping its strategy and product mix, optimizing its cost structure, rationalizing its network of retail stores, and pressing ahead with overseas development plans. Meanwhile, the process of revitalizing Caruso has also added to Fosun’s experience in the fashion industry. This serves as an example of how Fosun’s industrial operations and investment reinforce each other.

 

Indeed, it’s not easy to work it out, but we are working to build something that matters to our customers, and we believe only if we can improve our portfolio companies’ competitiveness through empowerment, Fosun’s strategy of “Industry Operations + Industrial Investment” can be well executed. This is also our way forward.

 

  1. Driving business development with technology and innovation

 

The pace of technological progress is now faster than ever. Industries are increasingly eager to apply the latest technologies to enhance their competitiveness, and Fosun believes in driving business development through technology and innovation. In 2018, Fosun increased its investment in technology and innovation, R&D, investment and incubation.

 

Fosun’s technology and innovation initiatives are aimed at meeting the needs of its businesses in their specific situations. We are committed to developing applied technologies in a smart and efficient way, and we already have many achievements in this endeavor.

 

A good example is Shanghai Henlius, which was founded by Dr. Liu Shigao and Dr. Jiang Weidong from Fosun Pharma a decade ago. In February 2019, “Rituximab Injection” (Hanlikang®) researched by Shanghai Henlius received approval from National Medical Products Administration, which is the country’s first biosimilar to receive permission for marketing, mainly used in the treatment of non-Hodgkin’s lymphoma. The successful R&D of this new drug is a testament to the rewards of persistence.

 

In the area of Internet-enabled industries, Fosun’s profound industrial experience gives it distinct advantages to all the businesses in its ecosystems. Fosun’s various industrial groups have taken the initiative in upgrading products produced through traditional manufacturing and in enhancing their supply chains with Big Data and AI. For instance, Nanjing Iron & Steel adopted a business model of “JIT+C2M” (combining “just-in-time manufacturing” and the “customer-to-maker” business model) to transform its traditional steel production several years ago. The move has enabled Nanjing Iron & Steel not only to provide customized products for downstream users, but also to carry out centralized and efficient production, optimize resource allocation and greatly boost supply chain efficiency. The production line of Nanjing Iron & Steel has been highly automated, and its steelmaking robots have also been deeply integrated into its operations.

 

Leveraging the development of Big Data and AI, Fosun has also entered such AI-related fields such as computer vision and knowledge mapping in the field of healthcare. Through integration, it has formed a closed-loop ecosystem of such businesses as medical services, medical devices, and diagnostic reagents. It has also achieved multi-field, multi-dimensional AI-assisted image reading platforms for radiology, pathology, clinical laboratory, respiratory, orthopedics and the treatment of cardiovascular diseases. For instance, Aitrox, which was independently incubated by Fosun, has launched four products, namely Proxai, Pannotation, Placks and Pyxis. Today, Proxai has been applied in more than a hundred hospitals, and Pyxis has developed to an automated intelligent microscope. All these products constitute a closed-loop system of “hardware + software + AI” for different business purposes.

 

Fosun’s persistent efforts to increase its investment in innovative R&D are aimed at long-term growth rather than short-term gains. We believe the pursuit of innovation can square the circle, we believe the simple truth – no great success (product) was ever achieved (produced) without trial and failure. Fosun will continue to coordinate its resources and actively cooperate with other companies and talents worldwide in innovation, R&D.

 

  1. Making stable yet bold progress for sustainable growth and continuing to reinforce our financial strength

 

I always believe running a business is like treading on thin ice or fighting your way up a cliff. It requires us to take each step cautiously. That’s why we stress the importance of both an optimized asset structure and a strong balance sheet to drive Fosun’s steady growth.

 

In the past few years, Fosun has paid particular attention to the Group’s financial strength and performance. As of 31 December 2018, the total debt to total capital ratio was 53.7%, which was maintained at a safe and comfortable level, and the overall average cost of debt of 2018 was 4.97%.

 

Rating agencies have also taken notice of Fosun’s optimized financial leverage. In January 2018, Moody’s upgraded Fosun’s credit rating to Ba2 and gave it a stable outlook.

 

In 2018, Fosun formed global strategic partnerships with a number of financial institutions, including HSBC, Natixis, New China Life Insurance, Shanghai Pudong Development Bank and China Minsheng Bank.

Meanwhile, Fosun’s core assets continued to tap the capital market. In 2018, Babytree and FTG, two of Fosun’s core member companies, were successfully listed in Hong Kong; and Yuyuan also completed its asset reorganization. These moves have enhanced the transparency of Fosun’s businesses and made its valuation easier. It also offers a convenient way for the public to better understand Fosun’s strategy and business endeavors. In the future, Fosun will encourage more of its member companies to tap the capital market so as to unlock their value and increase the transparency of Fosun.

 

  1. Valuing talents and teams as the most precious assets

 

Since its establishment, talents and teams have always been Fosun’s most valued assets. Fosun aspires to be a platform for entrepreneurs and creates opportunities for those with ambitions and dreams. This is why Fosun has adopted a partnership model[2] and formed partner mechanisms at different levels. Although partnership might not necessarily be the best mechanism in the contemporary business world, I personally think the partnership model fits for Fosun. Through the partner mechanisms, employees of Fosun can themselves become real entrepreneurs.

The entrepreneurial spirit means always being vigilant, venturing out of your comfort zone, and constantly improving yourself through learning. In a fast-changing world of rapid technological innovation, we must always maintain full energy, keep abreast of the times and forge ahead.

 

At present, Fosun has more than 50 global partners from all walks of life and regions, who are all entrepreneurs in various industries or professionals at Fosun. Some of them are young people who were born in the 1980s. Fosun has always attached importance to nurturing young people. Fosun believes that recruiting young talents for higher levels of management allows the team to become more energetic and more competitive. In the future, Fosun’s global partners will start from the “top-level design” to further rationalize the organizational structure and share their intelligence. They will fully participate in the globalization of Fosun’s businesses, and actively cooperate with Fosun in building its business ecosystems.

 

  1. Being a responsible global citizen

 

Since its establishment, Fosun has been adhering to its core cultural values of “Selfimprovement, Teamwork, Performance and Contribution to Society”. Founders of Fosun grew up in the countryside, and China’s reform and opening-up policy allowed us to go to colleges and change our destinies. For the past 40 years, we have been deeply grateful to the reform and opening up policy and would like to give back to society.

 

In 2018, Fosun started the “Rural Doctors” campaign to alleviate poverty through healthcare. The campaign has been in operation for only a year, yet it is being conducted in 37 poverty-stricken counties in 12 Chinese provinces, municipalities and autonomous regions. We understand that problems in the healthcare system at the grass-roots level in rural areas are some of the main reasons why poverty persists, and so we will forge ahead the “Rural Doctors” campaign, with our campaign slogan of “Reaching the Last Mile”, in order to alleviate poverty. At the annual meeting of the Yabuli China Entrepreneurs Forum, which ended at the beginning of 2019, the “Rural Doctors” charity campaign was supported by a number of Chinese entrepreneurs.

As of 2018, Artesun® (Artesunate for injection), an innovative drug to which Fosun Pharma has completely independent intellectual property rights, had saved more than 20 million sufferers of severe malaria worldwide, especially children in African countries.

 

The Protechting Start-ups Acceleration Program initiated by Fosun and Fidelidade, has been successfully held for three consecutive years. Protechting 3.0 received applications of 235 youth entrepreneurial projects from 33 countries in 2018, winning three international awards for its performance in fulfilling social responsibility.

 

As a global company rooted in China, Fosun is determined to be a responsible global citizen that strives to contribute to the fields of health, happiness and wealth, with a view to creating more opportunities for sustainable development all over the world.

 

In the past year, for Fosun and myself, we learnt and believed that “Going Back to the Basics” or “Going Back to the Nature of Business” can undoubtedly strengthen our foundation. More fundamentally, we believe only if we can focus on enhancing our product competitiveness and brand influence, a strong industrial group and a global ecosystem can be established.

 

In 2019, Fosun needs to stay composed, resilient to external factors and focused on our strategy. We also need to remain focused on creating quality products, building brand strength and servicing the needs of our customers in order to bring health, happiness and wealth to the world’s one billion families. This is how we will build Fosun’s global happiness ecosystem in 2019 and beyond.

 

Looking forward to 2019, I am confident about the future.

 

Last but not least, I would like to extend my sincere gratitude to our distinguished shareholders and all the people who have supported and helped Fosun.

 

I wish all of you a happy Year of the Pig!

 

Guo Guangchang

26 March 2019

[1] Calculated based on the share price as of 31 December 2018, subject to approval at the annual general meeting of the Company.

[2]  It is different from the legal concept of “partner” in partnership enterprises.