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Investment solution(原创)  

2008-12-05 12:44:57|  分类: 英语论文 thesis |  标签: |举报 |字号 订阅

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Investment solution

 For the stocks of ShangHai Auto(SAIC) and DongFeng Auto(FAW)

 

John Liu   (ox tendon 牛筋  )                                   15844011

 Contents:

 ·        Executive Summary

 ·        Introduction

 ·        Financial analysis

 ·        Recent years industrial & enterprises’ business changes

 ·        SWOT Analysis: ShangHai Auto versus DongFeng Auto

 ·        Recent years (Y2001-Y2004) enterprises’ stock trend

 ·        Recent years Financial KPI (Y2001 – Y2003, & Jan.- Sep. Y2004)

 ·        Stock price evaluation & risk analysis

 ·        Conclusion and recommendations

 ·        Bibliography / References

 

·        Appendix

 

 l    Executive summary

 

The Automobile industry is the one of the  fastest growing one in China. Its sales aggravate of cars  rocketed from less than 2 million units in Y1999, to 4.4 million units in Y2003.

   the Automobile is booming because of the following two factors:

 The Central Government is supporting the growth of the automobile industry, thereby; it is likely to stimulate the development of other industries. for example, the government encourages privates to purchase the car loaning from the bank.

China’s steady and sustainable growth in the recent years provides big opportunities to the Auto industry., especially, advocating  exploitation of the western region in china gather a great amount of investment on transportation construction. Apparently, it greatly benefits the increase of sales of the car

   As a consequence of the booming economy the social structure changes dramatically. in the coastal areas, deposits of the individual and family were steep ascended. The masses of consumers affording to buy the car have appeared and the car entering the family has become prevalence. private citizens are able to buy their own cars. However, in the past, only the government agency or the organizations can own the car.

 Nowadays all the  renowned Car Brands are seeking to establish a foothold to expand their business in China. However, according to china’s policy, they have to invest with local partners via a Joint Venture (JV).

 l    Introduction 

  This study is undertaken to advise our esteemed client who has US $ 500,000 to invest in the Shanghai Stock Exchange in China. We got an advice that the investor prefers to take some risk for higher returns. Based on investor’s preference. My proposal of portfolio tends to a little bit of venture. We will concentrate on these two stocks of financial and SWOT analysis

 Here I choose Automobile stocks listed in China’s Shanghai Stock Exchange Market for the analysis of portfolio, then make a decision to invest the most valuable stock. The top two public listed Automobile stocks are ShangHai Auto (SAIC), and DongFeng Auto (FAW).

 Investigating the Market, Finance and analyzing the SWOT on the two stocks, as well as comparing their performance, I made the final recommendation on ShangHai Auto for our client’s investment, as it offers better value and wealth creating opportunities in the future

 Financial analysis

 ·        Recent Industrial & Enterprises’ business changes

 o       Industrial analysis

 Synthesizing the whole Automobile industrial, the sales and profit growth in Y2003 was excellent. Sales increased by 35.2% and profits went up 65.4%.. However, the profitability in Y2004 was not good.

With the strong economy and huge infrastructure investments, trucks and bus sales is a highly key segment to the automobile industry, accounting for 55% of the total 4.4 million vehicle sales in Y2003.

 The biggest change was derived from cars sales, up to 83% versus Y2002.

 

 Y1992-Y2003 Automobile volume output trend

Cars / Bus / Trucks Sales from Y2000 – Y2003

   

 o       Situation of year 2004

    From the below charts, growth rate in Y2004 basically maintains rising trend, the production and sales volume reach up to 24% and 20% respectively during the first half of year.

            In Y2004, the profit growth rate during the first half of year dropped to 17% compared with Y2003 (65%). The industrial average of capital yield rate is around 26%.

 


 

 

 

 

 

 

 

 

 

 

 o       Enterprise business / competition analysis

 

Both ShangHai Auto and DongFeng Auto compete involving in all segments (cars/bus/trucks),  ShangHai Auto  doubled the market share than DongFeng, and growing rate are five times the DongFeng Auto.   ShangHai Auto’s strength’s is in the car segment, while DongFeng has better product construct with more developing platforms/opportunities in future.

 

    The data for the two key players are listed as below:

 

a) Table 1#: Market Share %

1st half year

Enterprise name       Y2003           for Y2004  

ShangHai Auto.   17.94%  18.42%

DongFeng Auto.  10.64%    9.85%

 

 

b) Table 2#: Volume Growth rate (comparing with same period of last year)

 

1st half year

Enterprise name       Y2003           for Y2004

 

ShangHai Auto.   47.23%  33.99%

DongFeng Auto.  13.03%    6.77%

 

 

c) Table 3#: Product Segments  %

 

1st half year for Y2004   (Verses Y2003 in brackets)

 

Enterprise name            Car                       Bus         Truck

                              Y03                     Y03                         Y03

ShangHai Auto.   76%  (77%)    19%  (17%)             5%  (6%)

DongFeng Auto.  46%  (46%)    10%  (10%)           44%  (44%)

 

   Currently, local automobile enterprises have no the entire advanced technology/capability to produce a complete Automobile, and the consideration of the car brand is indispensable, they prefer to produce vehicles by means of the method of joint-venture with the foreign famous automobile company, the source of profit are mainly from the manufacturing accessories/spare parts; and providing services to the customers

 

    ShangHai Auto had a joint venture with Volkswagen producing cars since 1985, and set up another joint venture with General Motors for cars in 1997.  these two JVs now are in the “mature stage” and have generated huge benefit for their shareholders. Two years later, ShangHai Auto continues to develop its third vehicle joint venture with Volvo targeting on luxury bus.

 

in contrast, since 1992 DongFeng co-operate with Citroen, and subsequently restructured this joint venture with PSA-Peugeot-Citroen group to produce two brands of car in 2002. In this year DongFeng also set up its second joint venture with Hyundai-KIA for producing cars. In Y2003, DongFeng respectively established its third & fourth project of joint venture with Nissan & Honda for car production. Right now, DongFeng is negotiating with Renault for a trucks joint venture project.

 

·        SWOT Analysis

 

ShangHai Auto

Strengths:

l        Very profitable project--Shanghai GM and Shanghai VW.

l        Lean production system—customized car manufacturing system

l        New R & D and testing center in Shanghai

l        Good quality

l        Concentrating much more energy and capital on car production

Weaknesses:

l        Less variety of the car models.

l        Slow decision-making.

l        Too much inventory.

Opportunities:

l        Entering into the new segments of the market.

Threats:

l        Losing the market shares.

 

DongFeng Auto

Strengths:

l        More variety of the car models.

l        Appropriate pricing strategy.

l        Better market segmentation.

l        Stronger sales network.

 

Weaknesses:

l        Higher production costs.

l        Poor relationship with the suppliers.

l        Lack of in house R & D capacity.

l        Lower quality performance.

 

Opportunities:

l        New joint venture with TOYOTA to improve the production management system.

 

Threats:

l        More and more competitors.

 

·        Recent years (Y2001-Y2004) Stock Trend

 

     These two stocks’ market performance was better than the average of market. During the past three years ShangHai Auto has kept this momentum up till now, but DongFeng fell below average level of market since mid Y2004’, as it uncompleted capital & product restructuring. The growth rate of ShangHai Auto has exceeded DongFeng’s since the beginning of Y2003, although its successful investment on joint venture in car category, it still declined quickly from mid of Y2004.  lack of new growth opportunities is the major reason. .

 

 

 

SHANGHAI STOCK EXCHANGE MARKET (_SSEA)

 

DongFeng Automobile (600006.SS)

Vs.

ShangHai Automotive (600104.SS)

 

 

 

 

 

 

 

DongFeng

600006.SS

ShangHai

600104.SS

Dec. 17, 2004

Price

$ 3.56

Y03’

EPS

$0.63

PR Ratio

(Y03’)

5.81

Dec. 17, 2004

Price

$ 5.44

Y03’

EPS

$0.602

PR Ratio

(Y03’)

9.15

52 weeks

Price Range

$3.56 - $6.75

Y03’

Dividend

$0.20

Yield

(Y03’)

5.62

52 weeks

Price Range

$5.4 - $12.78

Y03’

Dividend

$0.15

Yield

(Y03’)

2.76

Y04’

Jan.- Sep

EPS

0.19

Y04’

Estimated

EPS

$0.25

PR Ratio

(Y04’ estimated)

 

   14.24

Y04’

Jan.- Sep

EPS

0.55

Y04’

Estimated

EPS

$0.60

PR Ratio

(Y04’ estimated)

 

   9.07

Y04’

Jan. - Sep

Dividend

N/A

Y04’

Estimated

Dividend

   $0.20

Yield

(Y04’ estimated)

 

5.62%

Y04’

Jan. - Sep

Dividend

N/A

Y04’

Estimated

Dividend

   $0.20

Yield

(Y04’ estimated)

 

2.76%

 

 

 

·        Recent years Financial KEY PERFORMANCE INDEX

      (Y2001 – Y2003, & Jan.- Sep. Y2004)

 


From the financial KPI, ShangHai Auto has kept it “profit level per share” with its exceptional investment returns from joint ventures in car production. DongFeng Auto’s dropped from $0.63 per share to $0.19 per share due to poor “operational gross profit ratio” affected by the drop in market price of their product. with the better “free cash flow” and “financial leverage (net assets ratio)”, DongFeng is capable of ascending faster and has more new development opportunities.

 

 


 

 

 

·        Stock price evaluation & risk analysis

 

1)      Evaluating stock value by “Constant growth” model method:-

 

                  Price = dividend / (required return rate – dividend growth rate)

 

a) Determine the investors’ required return rate for the two companies. From the       above, we know the current stock price, dividend, and dividend growth rate, thus we could calculate the required return rate of investment from investors’ point of view.

 

i)       Required return rate of ShangHai = 0.15/ 5.44+17%=19.8%

ii)       Required return rate of DongFeng = 0.1/3.56+26%=28.8%

 

            These two return rates are reasonable since the average industrial capital yield rate is        26%, and the rates of net assets vs. total assets for the ShangHai Auto.and DongFeng     Auto. are 81% and 56% respectively.

 

b) Identify the stock value.

Stock value = Dividend 1/ (1+required return rate) + Dividend 2 / (1+required return rate)^2 +Dividend 3 /(1+ required return rate)^3 + stock price 3 /(1+ required return rate)^3.   So the figures for these two companies are:

 

iii)     Stock value of ShangHai  = 0.36 / (1+19.8%) + 0.15 / (1+19.8%)^2 + 0.15 / (1+19.8%)^3 + 5.44 / (1+19.8%)^3

i.       = 3.66

 

iv)     Stock value of DongFeng = 0.2 / (1+28.8%) + 0.2 / (1+28.8%)^2 + 0.1 / (1+28.8%)^3 + 3.56/ (1+28.8%)^3

i.       = 1.99

 

 

Comparing the stock value and the stock price, we got that the ratios of stock price vs. stock value are respectively 149% and 179% for ShangHai and DongFeng. That means ShangHai is more worth to be purchased than DongFeng.

 

 

2)      Evaluating stock value by “Book Value” method

 

a)      From the data provided above, we know that the book value for ShangHai and DongFeng are 3.43 dollars 2.11 dollars per share respectively.  comparing the book value with the current stock price, we also obtain the same conclusion that ShangHai deserves to be invested by the investors

 

3)  Evaluating stock value by “Price Earning Ratios” method

 

a)      The figures showed that P/E ratio (Y2004 estimated earning) for ShangHai and DongFeng are 9.07 and 14.24 respectively. That implies that ShangHai is the best alternatives. but DongFeng is expected to grow quickly and it’s stock price will be higher in the  future. What we select is still relied on the risk ratio and capability of bearing risk.

 

4)      Risk evaluation

 

a)      Both stocks are in the low to middle risk level. viewing robust economic environment, healthy automobile industrial situation and future development trend in China. Current status will be more suitable for ShangHai.

 

b)      It was revealed that their Debt ratios (Debt/total assets) are respectively 44% and 29%, obviously, DongFeng is higher risk than ShangHai, and both are in appropriate risk level. But DongFeng’s potential profitability could be better if the utilization of assets could be fully released.

 

c)      Both of them have same risk in business development. Recently, DongFeng realized its issue of product and business structure; hence it strengthened its weakest car product category covering a range of lower class car to high class and started several joint venture companies with four famous foreign companies. In addition, it enhanced its key business in truck production co-operating with Renault. The situation is different from ShangHai Auto, which just concentrated on car product category and aggressively pursue maintaining its leading position of the market it paid less attention to the segmentation of the bus and truck.

 

d)      In management style, capability and extent of culture integration, DongFeng has more risk than ShangHai. DongFeng’s management is good at strategic management and ShangHai specializes in operations management. DongFeng has more risk than ShangHai in culture integration. DongFeng’s foreign partners come from France and Japan, who have more different national characters & historical relationship.gaps with Chinese, as well as with more enterprise cultural background. It seems the gaps crossing culture for ShangHai is narrower than DongFeng .

 

 

 

·       Conclusion & Recommendation

 

Through evaluation, we made a conclusion as several points.

 

1.)    ShangHai’s risk is lower than DongFeng although the risks for both of DongFeng & ShangHai are in middle level.

 

2.)    The market share and these two years’ volume growth rate are 18% and 33-47% for ShangHai, which is a superior stock compared with DongFeng’s 9.85% and 6-13% respectively.

 

3.)    The growth of ShangHai’s stock price in recent half of year is still higher than the average of the stock market level, reflecting the shareholders’ confidence in ShangHai shares, but DongFeng’s stock price was dramatically tumbled below the average of the market level in the same period.

 

4.)    DongFeng’s dividend per share is $0.19 for 1-3 quarter in Y2004. That is far less than ShangHai’s $0.55, and DongFeng’s net assets per share in book and ShangHai’s are respectively $2.11 and $3.43.

 

5.)     From above stock price evaluation methods, we conclude that the variance between stock price and the stock value for ShangHai is less than DongFeng’s. in other words, ShangHai’s stock price is valuable than DongFeng’s.

 

Base on above, I recommond our client invest on ShangHai Auto Shares which will potentially create more wealth with less risk compared to investing in DongFeng shares.

 

 

 

 

 ·       Bibliography & Reference

 

1.      Douglas R. Emery & John D. Finnerty, Y1998, Corporate Financial Management, China People University Publishing & Prentice Hall.

 

2.      China Association Of Automobile Manufacturers, WWW.CAAM.ORG.CN / HYTJ / ZSTX / 24.htm, Dec. 28th, Y2004.

 

3.      Wang Bao Hua & China Association Of Automobile Manufacturers, WWW.CAAM.ORG.CN / HYTJ / ZSTX / 49.htm, Dec. 28th, Y2004.

 

4.      Unknown author, ShangHai security newspaper, Jan. 8th, Y2004.

 

5.      Unknown author, Security Time, April 21st, Y2004.

 

6.      Yahoo-China, www.yahoo.com.cn /finance

 

7.      China Merchants Bank, www.info.jrj.com.cn / finance

 

·        Appendix

 

1.      DongFeng Y2000-Y2003 annual report & financial detailed data   (http://share.jrj.com.cn/cominfo/ndbg.asp?or_gpdm=600006)

 

2.      ShangHai Y200-Y2003 annual report & financial detailed data (http://share.jrj.com.cn/cominfo/ndbg.asp?or_gpdm=600104)

 

 

3.      DongFeng 3rd quarterly simplification report (Y2004) (http://share.jrj.com.cn/cominfo/jdbg.asp?or_gpdm=600006)

 ShangHai 2nd quarterly simplification report (Y2004)

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