Conglomerates significantly underperformed pure plays in Southeast Asia over the last decade, according to the 5th edition of Bain & Company’s Southeast Asia Conglomerates report.
It said that from 2013 to 2022, conglomerates’ average annualized total shareholder return (TSR) was 4 percent, a 24-percentage point decline from 2003-2012, the first decade tracked by Bain.
Pure plays’ 2013-2022 average annualized TSR was 11 percent or 9 percentage points lower than the 2003-2012 period. Pure plays also outperformed conglomerates on revenue growth, margins and multiples.
“When the region was less developed, it was easier for conglomerates to prosper, thanks to their size and privileged access to opportunities, capital, and talent. However, we observed that this privilege started diminishing in the middle of the last decade, and the performance gap between pure plays and conglomerates has widened ever since,” said Jean-Pierre Felenbok, a Singapore-based advisory partner at Bain & Company.
“Accounting for 17 percent of the region’s market cap and 30 percent of capital expenditure, Southeast Asia needs its conglomerates to grow and create value,” Felenbok said.
The report highlighted that the conglomerate premium eroded first and fastest in developed markets such as Singapore, Malaysia, and Thailand, confirming a correlation between market maturity and conglomerate performance.
Conglomerates struggled to adapt to the lower-growth environment, a result of global macroeconomic conditions which started in 2014. They were slower to expand margins or exercise cost discipline to offset revenue losses, and their price-earnings multiples contracted.
The report said that in contrast, young and nimble pure plays were able to attract investors, government support and talent by developing strong leadership positions in attractive sectors.
Pure plays responded more quickly in the downturn, maintaining revenues, and lowering costs and, consequently, achieved higher TSR than conglomerates.
“However, a subset of conglomerates known as ‘all-weather stars’ have consistently outperformed their peers and achieved top-quartile status for TSR growth across all economic cycles over the past 20 years. Even in lower-growth environments, these conglomerates increased revenue, defended their margins, and expanded multiples,” said Till Vestring, a Bain & Company advisory partner based in Singapore.