Looking to High-Value Investment

December 31, 2011

Liang Xinjun is a co-founder of Fosun International Limited, where he serves as Executive Vice Chairman of the Board and Chief Executive Officer. 

Liang Xinjun is a co-founder of Fosun International Limited, where he serves as Executive Vice Chairman of the Board and Chief Executive Officer. He is a member of the Eleventh Shanghai Committee of Chinese People’s Political Consultative Conference, among many other government positions, and is a four time “Outstanding Entrepreneur of China’s Science and Technology Private Enterprise” award recipient. He earned his executive MBA in 2007 from Cheung Kong Graduate School of Business (CKGSB). Most recently, Fosun Intl. made headlines for investing in the Greek retail group Folli Follie.

What are your initial reflections about this year’s investment opportunities?

During the second half of the year, the world’s investors, capital markets and industries took a tumble, but now all the value investors in the world have a great opportunity on their hands. Furthermore, I don’t think this opportunity will disappear before the end of the second-half of the year, it could even continue to next year, or the year after next.

What should value investors be doing right now?

In terms of value investing, investors need to consider the long-term trends of an industry and wait for opportunities. For example, if you want to invest in banking in China, then you should study which period of banking has been fruitful, and buy when people are dumping their shares into the markets and prices are falling. Only then can this be called value investing. If you are bragging about being a value investor when prices are rising, you are not actually a value investor.

How has Fosun done this year?

I’ve been relatively satisfied with this year’s investments. Firstly, performance was good. Industrial profits in the first half of this year were about 1.7 billion yuan. Many people know investment profits come quickly, but where do investment funds come from? These need to be accumulated. It’s important to have a foundation of industrial profits. Secondly, investments in the first half of 2011 were good, with more than 2.2 billion yuan in profits.

How would you compare China’s investment environment to that of the West?

Who are today’s high-growth firms? Most would say, biotechnology, biomaterials, emissions reducers, environmental protection, telecommunications, etc. In China, this is not true. For Europe and the United States, it took 30 to 40 years to transition their industries. But in China, industries change incredibly quickly, eight to 10 years is a cycle. It seems that in one lifetime you can experience four different economic cycles.

Where should investors be looking?

I think four industries are high-value. Firstly, high-end consumption. This includes creating home-grown brands, with increasing added-value. Secondly, financial services, even though right now they are at an all-time low. Thirdly, energy resources, as long as China is supporting its manufacturing sector this big country will need energy resources. Fourthly, industrial upgrading. There aren’t that many people involved in this. Industrial upgrading is not research and branding. It’s improving logistics technology, inventory technology, capital flow, facilitating of flow of labor.

What challenges does China’s economy face in the near future?

Firstly, can China really sustain high growth in domestic demand? Can China’s system ensure that people’s incomes continue to increase, or cultivate a large middle class? From a macroeconomic perspective, this requires clear adjustments of institutional mechanisms. For example, last year national income grew 29 percent, business income increased 23.8 percent, but citizens only saw a 13 percent increase in their incomes, which shrinks to 7.6 percent after factoring in CPI. You also can’t ignore wealth redistribution reforms. The second challenge is that the inflation problem is still a credit problem. Currency evaporation is a very important reason for inflation in China. In the past 33 years the value of the yuan has diminished by 24 percent.

The third challenge is the growth of China’s small- and medium-sized enterprises (SMEs). China’s economy right now to some extent is linked to the health of SMEs, because they account for 50 to 60 percent of reserves and employment, 80 to 90 percent of incremental employment. Fifty percent of people in all of China rely on SMEs for wages or newly-created jobs. Thus, government policies need to emphasize SMEs. The fourth challenge is upgrading. But this upgrading can’t only happen in technology or home-grown brands, it needs to consider the supply chain. Also, we must allow Chinese manufacturing industries to shift resources, so they aren’t limited to developing in China.

What’s ahead for capital markets, given the recent crises in the United States and Europe?

As for what’s ahead for capital markets, Europe, the United States and China are not the same. The next two to three years of capital markets won’t be that bright for Europe and the United States, but from an investor’s perspective, this is a very good opportunity. Private enterprises previously couldn’t get the best resources because of government controls. Now they can get them, and this is a good time for optimizing asset allocation. The key is whether entrepreneurs have enough courage to do it.

Interview originally conducted in Chinese.

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