Discount Cash Flow – Want Want 151.HK

This article calculates the fair value using Discount Cash Flow model.

Reuters give the below growth Rate for Want Want. I think it is too optimistic. I have entered different combinations of growth rate and discount rate to the model. The fair value varies considerably. Which is why it is difficult to calculate the fair value.

Today’s closing price is approx 3.49 to give this fair value, the growth rate needs to be 18% – 10%.

LT Growth Rate (%) from Reuters

High Est – 32.81%

Low Est – 26%

http://stocks.us.reuters.com/stocks/estimates.asp?symbol=0151.HK&WTmodLOC=R3-Estimates-1-Estimates

Fair Value using different figures

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Growth Rate	1-5yr	6-10yr	Discount Rate	Fair Value
	18%	15%	9%	4.11
	18%	15%	8%	4.85
	18%	15%	10%	3.54
	32%	10%	9%	5.91
	26%	10%	9%	4.74
	15%	10%	9%	3.09
	18%	10%	9%	3.49

Discount Cash Flow spreadsheet

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FocusInvestor.com: The Focused Few
Initial Cash Flow:	$1,379,000,000
Years:	1-5	6-10
Growth Rate:	18%	15%
Terminal Growth Rate:	1%		Discount Rate:	9%
Shares Outstanding:	13,252,700,000		Margin of Safety:	30%
Debt Level:	$246,000,000
Year	Flows	Growth	Value
1	1,627,220,000	18%	$1,492,862,385
2	1,920,119,600	18%	$1,616,126,252
3	2,265,741,128	18%	$1,749,567,869
4	2,673,574,531	18%	$1,894,027,601
5	3,154,817,947	18%	$2,050,415,202
6	3,628,040,639	15%	$2,163,282,093
7	4,172,246,734	15%	$2,282,361,842
8	4,798,083,745	15%	$2,407,996,438
9	5,517,796,306	15%	$2,540,546,701
10	6,345,465,752	15%	$2,680,393,309
Terminal Year	$6,408,920,410
PV of Year 1-10 Cash Flows:			$20,877,579,693
Terminal Value:			$33,839,965,520
Total PV of Cash Flows:			$54,717,545,213
Number of Shares:			13,252,700,000
Intrinsic Value (IV):			$4.11
Margin of Safety IV:			$2.88
What Percentage of IV comes from			62%
the Terminal Value:

Reference – This very useful spreadsheet is download from www.focusinvestor.com

I have my own spreadsheet which produce similar figure but this one takes into account of debt which is better.

Want Want vs Coca Cola

Want Want’s PE is 32 vs Coca Cola 20.

Want Want LT Growth Rate (%) forcast is between 26%-32.81% / annum. Operating Margin is 18.94.

Coca Cola LT Growth Rate (%) forcast is 8%-12% / annum. Operating Margin is 25.

Want Want has higher PE because of its higher earning growth forcast, because it is in China. However its long earning history record is not readily available. Therefore forcast is not reliable. Coca Cola’s growth rate of 8-12% is moderate but is based on many years of past record and is very reliable.

When I was in China during the Beijing Olympic torch relay I notice Coca Cola has a huge advertising compagne for the Olympic. In fact it is the leading advertiser during the torch relay. Want Want does not have such advertisement compagne. In a Chinese supermarket, Coca Cola are staked up occupying a lot of space and sales. Want Want’s shelf space is very small.

Coca Cola is huge in China and will do much better than Want Want. I am not sure Want Want deserve the high PE. Having said that China is only one of many countries Coca Cola operates in.

Warren Buffet owns much of Coca Cola, Kraft, Johnson & Johnson and Wrigley. I can’t help to notice that all these companies are huge and leaders in China in their respective products.

A comparisum of Want Want vs First Tractor the Graham way

Benjamin Graham is the father of value investment. He is also the teacher of Warren Buffet. Anyone who think they are a value investor is lying to himself if he has not read the book ‘The Intelligent Investor’ and ‘Securities Analysis’. You can google free ebook from the internet.

This article analyse Want Want vs First Tractor as shown on Chapter 13 ‘A Comparison of Four Listed Companies’ from ‘The Intelligent Investor’. You will appreciate the analysis from this article if you read the book first.

Benjamin usually looks at earning history and divident history of a company for the last 7-10 years which I don’t have. However we can still look at the following; Want Want is value $HK46 Billion vs $HK10 Billion, Sales of both companies are similar, Want Want has 4x the size of First Tractor but generate similar business. Net income of Want Want is 5x that of First Tractor. This is reiterated in the earning/book value 8% for First Tractor and 26% for Want Want. Want Want has a very small book value $0.42/share Want Want vs $3.25 First Tractor. Although five years earning history cannot be taken seriously, Want Want’s earning appears to be growing at a slower rate.

Want Want has a higher profit margin and earning/book value and is rewarded with a higher PE ratio when compare with First Tractor. One thing to note is that First Tractor has a very low Price/book value.

Conclusion

Graham would never buy anything with PE over 30. He prefers to buy it under 11. That does not mean Want Want is not going to do well. Based on my Discount Cash Flow analysis in the next article, the current PE reflects earning growth of 20% per annum. It might be possible. But it is certainly not cheap. First Tractor appears cheap but it is not managed efficiently. Graham would probably won’t think it is a great buy either.

History repeats that stock price usually overshoot. In Want Want’s case, share price might reach $4.20 before stabilising and will perhaps fall down to $3.8 level.

	First Tractor 2008 38.HK	Want Want China 151.HK
Price May 20, 2008	3.8	3.48
Number of shares common	845,900,000	13,252,700,000
Market value of common	$3,214,420,000	$46,119,396,000
Debt	$673,900,000	$246,000,000
Total capitalization at market	$9,916,000,000	$45,854,400,000
Book value per share	$3.25	$0.42
Sales	$6,775,000,000	$8,427,958,000
Net income	$237,804,000	$1,356,185,600
Earned per share 2007	$0.24	0.107
Earned per share 2006	$0.09	0.077
Earned per share 2005	-$0.06	0.666
Earned per share 2004	$0.01	0.44
Earned per share 2003	$0.02
Current divident rate
Ratios
Price/earnings	15.59	32.25
Price/book value	1.17	8.25
Divident yield	0.84	2.05
Net/sales
Earnings/book value	8%	26%
Current assets/liabilities
Working capital/debt
Interest earned
Growth in pershare earnings

Want Want 151.HK update 20 May 2008

Since my last update about a month ago Want Want is rising steadly. The prime factor for the rise is price depressed during IPO by bad market sentiment. I will write an article on the fair value based on Discount Cash Flow analysis. Another article to look at its value using method described in Benjamin Graham’s book ‘Intelligent Investor’.

One can argue that the rise is due to the general market rise and the Taiwan effect since Ma got elected. Want Want would not rise if the market was very bad. During the past one month, Want Want did not follow the market correction. Today Ma is swear to become the president and Taiwan related stock e.g. Uni-President begins to sell off but not Want Want.