Buying spinoff companies 1 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Over the years I have learnt that it is not worthwhile buying into shares of subsidiary listings of a holding group, what is known as spinoffs. For example, Chuan Hup Offshore is a spinoff listing from its parent Chuan Hup Group.

I can recall many more examples of such spinoff listings which have languished in mediocrity since their listing, compared to those that have shown excellent price appreciation. For the former, recent examples would be Beng Kuang Marine (from Labroy which has performed brilliantly), Shanghai Asia (from New Toyo), Alantac (from Seksun), Nera Electronics (from Nera Telecommunications), EDMI (from SMB), Eucon (from Europtronic). All these have done poorly since their listing. As for the latter, most can be classified into two groups: very recent listings and government-linked groups. For recent listings, think Pine Agritech (from People's Food), while for government-linked groups, one naturally thinks about companies like SIA Engineering and the listed Sembcorp subsidiaries (Sembcorp Marine, Sembcorp Logistics).

The GLC-linked subsidiary spinoffs should be an exception rather than the rule. The big problem with such spinoff listings is that they are often subject to the greater scheme of things as dictated by their parent holding company. Think about it. If the controlling shareholder holds say, 50% of the parent group, and the parent group in turn holds say, 60% of the subsidiary after the latter's listing, how much of the subsidiary does the controlling shareholder actually own? It's 50% X 60% or only 30%. Under such circumstances, surely the interests of the controlling shareholder are vested more in the parent holding company than in the subsidiary, even though both might be listed. And decisions would clearly be aligned with the parent company's long-term future, rather than the spinoff subsidiary's.

Furthermore, such spinoffs' revenue base tend to be small, a fraction of their parent group's topline. It makes sense for analysts to cover the parent group, rather than its listed subsidiary, unless the latter possesses quite considerable scale and had exciting prospects. But then, consider this possibility again. Would the parent company have diluted its interest in the subsidiary by selling part of it to the public, if it believed that medium-term prospects were good? If an investor insists on buying such spinoffs, he should already have a clear idea that the long-term prospects of the company are so promising as to outweigh the risks deriving from the historical underperformance of such stocks. At least he would be going in with his eyes open and his position firm.