Equity Research
清科集团 研究部 刘琦
A Leading Integrated Service Provider
in Venture Capital and Private Equity Industry in China
Structure
International Accounting Standard
International Accounting Standard
Case study one:
The fraud of Enron company
International Accounting Standard
Case study two:
ZOOMLION
Country Analysis
Short term: focus on the stage in the business cycle
Long term: focus shift to expectation of sustainable economic growth measure by GDP
Country Analysis
Phases of business cycle:
Country Analysis
Newclassical growth theory:
Assumes diminishing marginal productivity of capital (fit for developing country)
Example: infrastructural investment such as road, electrical power etc.
Difference of the two growth theories: :
Endogenous growth theory :
Assumes that marginal productivity of capital does not necessary fall as more capital is employed. (fit for developed country)
Example: investment in R&D, software company
Industry Analysis
Industry Analysis Model:
:
Industry classification
External factor review
Demand analysis
Supply analysis
Profitability analysis
International competition and market review
Industry Analysis
Industry classification-life cycle of industry :
Industry Analysis
Industry classification-by the effect of business cycle:
Growth industry: (above the GDP)
experience accelerating sales and high profit margin during all phase of the business cycle
example: biotechnology industry, new energy industry
Deal example: Temasek Holdings invested in Ying li Green Energy Holding Company Limited
Review: business cycle
Industry Analysis
Industry classification-by the effect of business cycle:
Defensive industry:(be independent of the business cycle)
Much less cyclical than the overall market because the demand for their product tend to be relative independent of the business cycle.
Example: Food & Beverage , Education
Deal example: Carlyle Asia fund invested in New World Education Group
Cyclical industry: (Vary directly with the business cycle)
the product demand tends to increase during the expansion phase and drop off significantly during the recessionary phase.
Example: Engineering , Machinery Manufacturing
Deal Example: Hony Capital invested in Zoomlion
Industry Analysis
External factors：
Technology
Government
Social changes
Demography
Foreign influences
Industry Analysis
Porter’s five competitive forces
Generic competitive strategies
Competitive strategy: Two Method
Industry Analysis
Porter’s five competitive forces
Generic competitive strategies
Porter’s five competitive forces
Industry Analysis
Case study: A magazine 《school fellow》
Industry Analysis
Cost leadership:
Cost focus:
Differentiation:
Differentiation focus:
Generic competitive strategies
Industry Analysis
Cost leadership:
Cost focus:
Differentiation:
Differentiation focus:
Generic competitive strategies
Equity analysis
Equity analysis
Financial ratio analysis
Dupont model
Equity analysis
Price multiples:
P/E Ratio:
Advantages:
Disadvantages:
Equity analysis
Price multiples:
P/B Ratio
Advantages:
Disadvantages:
Equity analysis
Price multiples:
P/S Ratio:
Disadvantages:
Equity analysis
Other relative financial ratios
P/CF ratio
EV/EBITDA ratio
Dividend Yield(D/P)
Other Justified multiples
Justified P/E, Justified P/B , justified P/B, Justified P/S etc.
Equity analysis
Method of comparables:
We must compare a stock’s price multiple to a benchmark of the multiple using the following steps
Equity analysis
Frequently used P/E benchmark includes:
Equity analysis
Equity analysis
Absolute models: DDM , FCFE, FCFF, RI
DDM model Including
Gordon constant growth model
Two-stage growth model
H-model
Three-stage growth model
Equity analysis
Gordon constant growth model: calculation
Equity analysis
Free Cash Flow Valuation : For the company, Cash is the king !
Free cash flow to Firm :
Cash flow into the firm in the form o f revenues as it sells its product, and cash flow out as it pays its cash operating expense(. ,salaries and taxes).the firm takes the cash that’s left over and makes short-term net investments in working capital(.,inventory and receivables) and long-term investment in property, plant and equipment. The cash that remain is available to pay out to the firm’s investor: bondholders and common shareholders. That pile of remaining cash is called Free cash flow to Firm.
Free cash flow to Equity:
the cash available to common shareholders after funding capital requirement, working capital needs, and debt financing requirement
Equity analysis
Free Cash Flow
Equity analysis
Free cash flow to Firm
Free cash flow to Equity
Equity analysis
Free cash flow
Thank You
Q&A
