When analysing a stock, most of us only look at Group level figures. The Group level consists of the parent company and its other subsidiaries. This is opposed to the Company level figures which only represent the parent company. Are the company level figures important?
I do not yet have a conclusive answer, but these are some of my thoughts.
First and foremost, why is the state of the parent company even a possible consideration? After all, shareholders are entitled to the economic benefits of the Group. However, it should be noted that shareholders only have a direct interest in the parent company. Any economic benefit from the subsidiaries has to first flow through the parent company before it reaches shareholders. Ultimately, it is the parent company which pays out dividends. If the parent company is the brain, then the subsidiaries will be the limbs and the Group, the body.
I would think that more often than not, the brain and limbs function cohesively – which is why it is almost always sufficient to be only looking at Group figures. But in the words of Mark Twain, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
From what I can gather, I believe that differences in Group structure can be reflected in the Company level figures.
The most common structure is one where the parent company has its own operations, in addition to its subsidiaries’ operations.
Using the truncated Balance Sheet statement of AP Oil as an example, we can see that the parent company often holds some assets, including operating assets like PPE. The numbers under the Company level is usually lower than the Group level’s – that is pretty intuitive. More importantly, the differences between the Group and Company level figures give an indication of the asset/debt structure of the Group.
In the case of StarHub, we can see that all of the Group’s borrowings are equal to the Company level borrowings. This implies that all of the Group’s debt is parked under the Parent company. While such information might not be useful for a buy-and-hold investor, I believe that it will be useful if the stock happens to be a special situations play. For example, suppose that all of StarHub’s debt is instead parked under the subsidiaries. In the event of bankruptcy liquidation, the assets of the parent company can be fully distributed to equity holders as they are unencumbered by any debt obligations. Assuming that there is insufficient asset in the subsidiaries to cover the debt obligations, creditors will get nothing from the liquidation. The fortunes of creditors and equity holders will be reversed if the debt was parked under the parent company. I believe this concept is equally valid for spin-offs and divestments.
Next, we have investment holding companies balance sheets.
Using Haw Par Corporation, I believe it is logical to say that ‘Investment in subsidiaries’ constitute the majority of asset value (excluding cash) for investment holding companies. We can see that the Company has no PPE and inventories, which supports the argument that it has no operations of its own. More interestingly, the Company holds 86.7% of the Group’s cash. Window dressing aside, this implies that the operations of the Group as a whole actually require very little cash for its operations. This is a plus point to some investors.
Compare this to the infamous Kingboard Copper.
We can see that Kingboard Copper is a shell investment holding company with no cash and no assets. Remember that it is the parent company which pays dividends (from cash). A company with no cash will not be able to pay dividends. However, as balance sheets provide only a snapshot at a particular moment in time, it is still possible for the parent company to be holding cash at interim periods and paying dividends. Therefore, the fact that the parent company has no cash cannot conclusively tell an investor of a company’s inability to pay dividends, but it may be a strong indicator. Kingboard does not pay any dividend despite its cash hoard.
The HKD873.9mn in ‘Due from a subsidiary’ is also highly suspect. Effectively, we have a shell parent company which lent (or dare I say channelled?) money to the subsidiaries.
The significance of Company level accounts is a rather unfamiliar topic to me as I have yet to come across any writing on such a subject. My understanding of this subject is far from complete and I would love to hear any other thoughts that you may have.