Are State-Owned Firms Necessarily Better Investments?

It’s not uncommon at all to have the impression that state-owned firms are considered safer investments as they have the strong backing of the government. But is that view really true? Before we explore that, let’s first find out what exactly is a state-owned enterprise (SOE).

In general, a company is considered “state-owned” when the government owns a partial stake in the corporate entity using a holding company. It is difficult to determine specifically what level of state ownership would qualify an entity to be considered as “state-owned” but for the purposes of my discussion, I would consider a company to be a SOE if the government (or sovereign wealth funds) owns at least 10% of it through a holding company or subsidiary.

The following table shows a comparison of the market returns and earnings per share (EPS) growth for a number of SOEs. They include both China- and Singapore-SOEs.

For the former group, we have Tianjin Zhongxin Pharmaceutical (SGX: T14), Cosco Corporation (Singapore) Limited (SGX: F83), China Merchants Holdings (Pacific) Ltd (SGX: C22), and China Aviation Oil Singapore Corp Ltd (SGX: G92). As for the latter bunch, we have Singapore Technologies Engineering Ltd (SGX: S63), Singapore Telecommunications Limited (SGX: Z74), and DBS Group Holdings Ltd (SGX: D05)

Company Cumulative growth in EPS over 5 years Share price returns over 5 years
Tianjin Zhongxin Pharmaceuticals 62.8% 137.7%
Cosco -43.6% -38.3%
China Merchants 102.0% 131.7%
China Aviation Oil 90.0% -13.5%
ST Engineering 29.4% 36.9%
SingTel 1.0% 72.9%
DBS 89.4% 59.0%

Source: S&P Capital IQ (dates involved are from 26 November 2009 to 26 November 2014; share price returns include effects of reinvested dividends)

An overview seems to reflect that, like for non-SOE companies, the share price returns for even SOEs largely depends on the business performance of the company itself. When there’s healthy earnings growth, good returns tend to happen. Conversely, when the business has done poorly (like what has happened with Cosco), then shareholders might have to face losses.

Of course there are some exceptions to the rule – China Aviation Oil, which trades physical jet fuel in the Asia Pacific region, is a glaring example. Despite healthy growth in earnings, the company’s share price has likely been under pressure due to volatile oil prices in recent times.

A Fool’s take

State-owned enterprises are not necessarily safer investments because ultimately, their share price returns are still governed by their business performance. And as you can see in the table, being a SOE does not mean that a business can perform well (Cosco is one example).

There’s another point to note about SOEs: Governments sometimes choose to take a large stake in a firm for reasons other than wanting to earn a return on the investment.

Therefore, it is important that investors still perform the necessary due diligence on a company even if it’s partially owned by the State. Do not follow blindly just because you think you have the backing of governments and that they cannot be wrong.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.