‘Bet on Chinese state-owned conglomerates’, says Boston Consulting Group
Firm found state-run entities’ total shareholder returns over a 10-year period beat their western and Japanese counterparts
Boston Consulting Group, one of the world’s top business advisory and consulting groups, is tipping state-owned multi-business conglomerates as solid, future long-term bets.
Based on a study of 380 listed Chinese conglomerates, or their listed subsidiaries, the firm found state-owned conglomerates’ total shareholder returns (TSR) over a ten-year period (2006-15) actually beat their western and Japanese counterparts.
TSR combines share price appreciation and dividends paid to show the total return to shareholders expressed as an annualised percentage.
BCG measured relative TSR, that divides benchmark returns, to measure how stocks outperform or underperform the overall market.
The result is that Chinese conglomerates’ relative TSR registered a median 3.4 per cent, beating the US’s 0.6, the UK’s 3, and Japan’s -1.7 per cent, which BCG attributed to China’s overall strong economic growth and corporate revenue expansion in the past decade.
BCG then examined how performance varies across different ownership. And contrary to public perception, state-owned conglomerates generally outperformed private ones, it said.
In particular, relative TSR of multi-business state-owned conglomerates – such as Cofco Group, China Merchants Group and China Resources – beat all other types, whether over five-year or ten-year terms.
The second-best performing type was single-business private conglomerates, the likes of Lenovo and Tencent, with a median relative TSR of 10.6 per cent, over a ten-year period.
“A great advantage of state-owned conglomerates is their talent pool. Their top leaders can flexibly spot new growth engines and assign their top people to different businesses, while keep a relatively hands-off approach,” said Victor Chen, a principal at BCG, and an author of the report.
The advantage is compounded by state firms’ top management systems, where leaders during their three or five stints at a group can consider multiple businesses in a holistic manner, and have a better grasp of state policy priorities, while leaving specific operations to lower management, in contrast to private conglomerates where leaders tend to micro-manage specific businesses, according to BCG.
Multi-business private conglomerates’ low TSR, added BCG, was because they were often lured into seemingly promising, but unfamiliar sectors.
For example, a private company starting as an industrial manufacturer, may dive into financial services, but the problem, according to Chen, is the business logic required for an industrial sales-led business such as manufacturing is totally different from an operational-focused business, such as financial services, which manufacturers proved bad at.
Ying Luo,a partner and managing director at BCG, said many private Chinese firms’ rapid expansion came at the expense of profitability. Profits were also eaten away by interest payments incurred by debt-fueled growth.
She said closer analysis showed Chinese conglomerates’ five-year TSR was primarily driven by sales expansion, while profit growth and dividend payments contributed little. This problem will become increasingly salient, she added, as China’s economic growth slows.