S-E Asia’s conglomerates should increase exposure to higher-growth sectors to stay ahead: EY

SOUTH-EAST Asian conglomerates risk underperforming, as their exposure has remained largely concentrated within old-economy sectors since 2001, an EY-Parthenon study found.

It examined 262 publicly listed conglomerates, including 36 in South-east Asian countries such as Singapore, Malaysia, and Thailand.

On Tuesday (Mar 21), the consultancy recommended that South-east Asian companies increase their exposure to emerging sectors such as technology and healthcare. These areas have generated very high returns over the past 10 years.

The study found that 80 per cent of the revenue of these South-east Asian companies came from old-economy sectors such as industrial, energy and consumer goods sectors – which have experienced diminishing returns over the past decade. 

The team also noted that between 2002 and 2011, South-east Asian conglomerates had a 10-year annual average total shareholder return (TSR) of 34 per cent, 20 percentage points ahead of the global average of 14 per cent. 

Between 2012 and 2021, the gap narrowed to four percentage points, as the average TSR for South-east Asian conglomerates in the period fell to 14 per cent. This indicated that these companies have underperformed.

Andre Toh, who leads EY’s Valuation, Modelling & Economics teams for South-east Asia and the wider Asia-Pacific, said: “South-east Asian conglomerates have remained rather ‘loyal’, and chose to focus on sectors that they have been familiar with.”

However, the fast-evolving business landscape means that they should actively identify and invest in newer emerging sectors and markets, while shedding laggards from their balance sheets, he said. 

The EY-Parthenon team also noted that pure-play companies, which focus on one line of business, are now outperforming conglomerates in the region, with the TSR for pure-play companies higher by up to 37 per cent in some sectors.

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Pure-plays have been more agile in capital allocation and operations, enabling them to take advantage of opportunities for topline growth and customer acquisition, EY-Parthenon said.

It cited an example of how one of Malaysia’s glove manufacturers was able to very quickly pivot from producing surgical gloves to examination gloves, which underwent a sharp increase in prices during Covid-19. 

The same company was able to once again shift its focus back to surgical and industrial applications towards the end of the pandemic.

However, some conglomerates such as Singapore-based Sea Limited have managed to stay ahead by building a digital ecosystem to increase productivity and revenue streams, EY-Parthenon said. 

Sea Limited, which is the parent company of e-commerce giant Shopee and game developer Garena, has managed to create network effects and share technology infrastructure within its existing businesses, allowing it to achieve an estimated 162 per cent TSR growth between FY2017 and FY2021. 

Building a digital ecosystem was one of four strategies that the consultancy recommended for these companies to enhance their business performance in the next decade.

The other three strategies were – developing an agile capital-allocation strategy to increase exposure to higher-growth sectors while balancing that with dividend-yielding and lower-risk sectors; integrating sustainability as a long-term group strategy; and moving towards asset-light business models. 

EY’s Toh said: “With the understanding of their unique characteristics, a tailored value-creation approach can help South-east Asia conglomerates to regain dominance over the next decade.”