While conglomerates in Southeast Asia (SEA) have been historically outperforming their global peers in total shareholder returns (TSR), this gap has been eroding, according to a recent EY-Parthenon study.
The study, dated March 21, studied 262 publicly-listed conglomerates around the world, including 36 in SEA.
Between 2002 and 2011, the study found that the 10-year annual average TSR for conglomerates in SEA came in at 34% in contrast to the rest of the world’s average TSR of 14%.
The 20 percentage point difference fell to three percentage points between 2012 and 2021. During this period, conglomerates in SEA’s 10-year annual average TSR fell to 14% compared to their global counterparts’ TSR of 10%.
In the study, the historically high returns seen in the SEA conglomerates were attributed to the “inherent advantages” they had in the 2000s. Such advantages include easy access to capital, strong government relations and early exposure to high-growth sectors like energy, commodities, and industrials in the region. Nevertheless, the benefits derived from these advantages are quickly diminishing.
Within the report, it was found that SEA conglomerates have traditionally focused on industrials, energy, and consumer products since 2001, which performed well until the last decade. However, these sectors have experienced diminishing returns, resulting in decreased business performance over the past decade. Despite this, conglomerates have not shifted their focus to emerging sectors, such as healthcare or technology, media and telecommunications (TMT), which have generated high returns in the past decade.
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Furthermore, SEA conglomerates are facing increased competition from pure-plays and startups with innovative business models. Over the last decade, pure-plays have generated better returns than conglomerates in both traditional and emerging sectors, with some sectors seeing pure-plays outperform conglomerates by up to 37% in TSR.
Compared to their global peers, conglomerates in SEA were found to be less diversified, with the top three sectors they operate in representing some 90% of the total revenues, compared to 75% for global conglomerates.
A higher proportion of SEA conglomerates were also family-owned, at 75%, compared to 50% of their global peers.
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Other differences include SEA conglomerates having fewer portfolio companies, controlling about 50 portfolio companies compared to the global conglomerates that operate nearly 175 portfolio companies.
They also have an average revenue of US$4.5 billion ($6.01 billion), compared to over US$50 billion for global conglomerates covered in this study.
Finally, SEA conglomerates have a smaller footprint, operating in less than 10 countries, compared with over 60 countries on average for their global counterparts.
“SEA conglomerates have remained rather ‘loyal’ and chose to focus on sectors that they have been familiar with. Hence, we are seeing that the sector revenue contribution of conglomerates in SEA remained rather consistent since 2003,” says Andre Toh, EY Asean and Asia-Pacific valuation, modelling & economics leader.
“Yet, with the fast-evolving business landscape where sectors that may have performed well previously no longer bring the same returns in future, conglomerates in SEA need to have a flexible and well-defined capital allocation strategy. They should actively identify and invest in newer emerging sectors and markets, which helps them future proof their portfolio, while shedding laggards from their balance sheets. With the understanding of their unique characteristics, a tailored value creation approach can help SEA conglomerates to regain dominance over the next decade,” he adds.
Further to the study, EY-Parthenon has proposed four recommendations for SEA conglomerates to focus on to help them achieve success.
They are: developing an agile capital allocation strategy, building a digital ecosystem and start investing in venture-building capabilities, integrating sustainability as a long-term group strategy, and moving toward asset-light business models to improve valuation multiples through the deployment of third-party capital.
