Date
17 October 2018
China's Fosun has found that it has burnt its fingers by investing in Athens-listed Folli Follie, which has been accused of falsifying its financial information. Photo: Bloomberg
China's Fosun has found that it has burnt its fingers by investing in Athens-listed Folli Follie, which has been accused of falsifying its financial information. Photo: Bloomberg

Fosun learns a bitter lesson from Folli Follie fraud

Fosun International (00656.HK) founder Guo Guangchang discovered recently that he had stumbled badly on his investments in Greek luxury jewelry and handbag maker Folli Follie.

Earlier this month, Greece’s securities regulator slapped a 4 million euro fine on Folli Follie and nine individuals, citing manipulation of financial information.

Fosun acquired 9.5 percent stake in Folli Follie for 84.59 million euro back in May 2011. In 2014, the Chinese group boosted the stake further to 13.9 percent.

The deal was said to be inspired by a shopping trip Guo made with his wife in Hong Kong in 2010. His wife was amazed by the affordable price and quality of Folli Follie’s handbags. Guo then thought this might be a good investment lead and started to look into the company.

Guo’s investment strategy is to buy companies that will benefit from China’s economic growth. Folli Follie meets this criterion as mainland customers would desire more luxury goods as they get richer.

The idea was that Fosun can use its local knowledge to help the Greek company expand its reach in the mainland market.

Folli Follie did perform well for a while. The Greek retailer reported overall sales revenue of 1.42 billion euro for last year, up 78 percent from the 2012 level. Asia-Pacific revenue rose to 928 million euro, accounting for 65 percent of the total sales.

Folli Follie once hit a market value of 1.3 billion euro at the beginning of this year, with share price reaching 20 euro. That marks a sharp rise from 13 euro Fosun paid in 2011.

It appeared to be a successful deal. And Fosun has been using Folli Follie as a example to showcase the success of its strategy.

Suddenly in May, US hedge fund QCM said Folli Follie chain may only have half the number of outlets as outlined in its last annual report. QCM also questioned Folli Follie’s sales figures, profit and cash reserve numbers.

The report prompted a selloff of Folli Follie shares. Fosun boosted its stake to 16.4 percent in response to demonstrate its confidence in the Greek retailer.

It’s estimated that Fosun has made a total investment of over HK$1.5 billion in the firm.

Folli Follie denied the accusations but failed to provide any solid evidence. Its share price plunged 70 percent within two weeks to 4.8 euro.

The Greek securities regulator stepped in. On May 24, it ordered the company to suspend trading.

After three months of investigation, the regulator recently announced that senior managers of Folli Follie could not provide evidence to confirm the company indeed has 24.5 million euros cash reserves as reported in the 2017 financial statements.

It looks like it will be a long while before Folli Follie can resume trading.

Guo apparently did a poor job in due diligence when betting heavily on the Greece-based firm.

The irony is Folli Follie claimed to have a point of sale in the Terminal 3 of Hongqiao airport in Shanghai, but there is actually no terminal 3 there, and Guo’s company is based in Shanghai.

This article appeared in the Hong Kong Economic Journal on Aug 10

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC

Hong Kong Economic Journal columnist

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