Conglomerates in Southeast Asia have historically outperformed their global counterparts in total shareholder returns (TSR) but this outperformance has since been eroding, according to a recent EY-Parthenon report, “Defining a winning strategy for Southeast Asia’s conglomerates”, which studied 262 publicly-listed conglomerates globally, including 36 in Southeast Asia.

Southeast Asian conglomerates have outperformed global counterparts in TSR but the gap has been shrinking. The ten-year annual average TSR between 2002 and 2011 of conglomerates in the region was a staggering 34 per cent, compared to only 14 per cent for those in the rest of the world. Between 2012 and 2022, however, the figure fell to 14 per cent.

“The gap in TSR is a clear indicator of the underperformance of conglomerates,” said Sriram Changali, EY Asean Value Creation Leader. “Having said that, a deeper study of companies revealed that some were able to consistently outperform their peers. Hence, there are opportunities for conglomerates in Southeast Asia to better understand their attributes and strengths and enhance their performance.”

Regional conglomerates face many challenges. Inherent advantages such as easy access to capital, strong government relations, and early exposure to high-growth sectors are rapidly fading. The fields of industry, energy, and consumer products are no longer as profitable as before, thereby affecting the overall business performance of Southeast Asian conglomerates.

However, they did not engage in material reallocation exercises or expand their focus to other sectors. In fact, the report reveals that they have very limited exposure to emerging sectors such as healthcare or technology, media, and telecommunications, which have generated very high profits over the past decade.

“Southeast Asian conglomerates have remained rather ‘loyal’ and chosen to focus on sectors they have been familiar with,” said Andre Toh, EY Asean and Asia-Pacific Valuation, Modeling & Economics Leader. “Hence, we are seeing that the sector revenue contribution of conglomerates in Southeast Asia has remained rather consistent since 2003.”

“Yet, with the fast-evolving business landscape, where sectors that may have performed well previously no longer bring the same returns in the future, conglomerates in Southeast Asia 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 them regain dominance over the next decade.”

The EY-Parthenon study proposes four strategic pillars that Southeast Asian conglomerates can focus on to help them achieve success:

• Develop an agile capital allocation strategy to future-proof their portfolio and increase exposure to higher-growth sectors such as technology and healthcare while balancing that with exposure to dividend-yielding, lower-risk, and capital-heavy sectors.
• Build a digital ecosystem to drive productivity and new revenue streams and start investing in venture-building capabilities.
• Build a mindset of creating long-term value by integrating sustainability as a long-term group strategy embedded in each business of the conglomerate.
• Move towards asset-light business models and improve valuation multiples by shifting towards the deployment of third-party capital.