Many a time when we are looking at how and where to invest money in Singapore, we will come across companies which seem to related to a group but is separately listed. One good example will be Capitaland Mall Trust and Capitaland Commercial Trust. While they bear the name ‘Capitaland’, they are not the same as Capitaland which is separately listed on SGX. In fact, they are no even subsidiaries and are only associates. As an investor, this matters because you need to know what you are buying into.
What is a subsidiary
A subsidiary is a company that belongs to the parent. This means that the parent holds more than 50% of the stock in the subsidiary. In the event that the parent owns a 100% of the shareholdings, the subsidiary is what we call a wholly owned subsidiary. To provide some context, Keppel Land is a wholly owned subsidiary of Keppel Group.
What is an affiliate
An affiliate is a company which the parent owns less than 50% of. Even though the parent is now the major shareholder, it does possess material control over the affiliate. This might come in the form of choice of senior management.
Difference between subsidiary and associate
For subsidiaries, parent companies have to consolidate their earnings onto their own financial statements. What this means is that when you look at the financials of the parent, these numbers would have already included the full performance of the subsidiary. For example, when you look at keppel’s net income and debt numbers, they have already included the same line items from Keppel Land. This does not happen for associates where income is often categorised as other operating income on the parent’s balance sheet. As for balance sheet items like debt, these will appear on the parent’s consolidated balance sheet on a pro rated basis.
That said, if the subsidiary is not wholly owned, there will be minority interest. This means that part of the earnings do not belong to the parent company and thus will be deducted in the income statement.
Why should investors care?
As an investor, you may be thinking this. If the parent company is to have control over the company anyway, why does it matter if it is a subsidiary or associate. Technically, isn’t it right that as long as the group is profitable it should not matter? Not true.
As an investor, you want to make the most return with the least possible risk. Suppose you have decided that your optimal investment is to have 5 % in the parent and 5% in the subsidiary. When you understand the above, you will know that your investment strategy will lead to more risk that you are prepared for. This is because by being invested in the parent, you are indirectly invested in the subsidiary. Hence your indirect holdings of the subsidiary is in fact more than 5%.