Henderson Land Development Company Limited Financial statement analysis & Valuation Instructor: Mr. James Mrs. Lin Ming Chin Group 14 : 團得明 - 9716253 丁氏秋懷 - 9716238 辭明泰 - 9716241 Department Of Finance Chao Yang 3/5/2012

Section 5 Valuation

5.4 : Discounted Cash Flow Model Step 1 :Calculate NOPLAT from 2006 – 2010 Step 2 : Make assumptions before forecasting NOPLAT from 2011 - 2015 as assumption of: The growth rate of net sales The gross profit margin The Operating expense rate The rate of change in depreciation expense The Income Tax rate The Reinvestment rate Step 3 : Based on step 2, forecast NOPLAT (2011 - 2015) Step 4 : Calculate WACC from 2006 - 2010 Step 5 : Estimate β using the daily data. Step 6 : Discounted Free Cash Flow

STEP 1:CALCULATE NOPLAT(06-10) Year 2006 2007 2008 2009 2010 Net Sales (a) 6,773,000 8,356,000 13,492,000 14,695,000 7,092,000 Cost of Goods Sold (b) 3,084,000 3,647,000 7,343,000 6,834,000 3,843,000 Gross Profit (g) 3,689,000 4,709,000 6,149,000 7,861,000 3,249,000 Operating Expense (c) 1,188,000 1,742,000 2,903,000 2,166,000 Depreciation Expense (d) 122,000 115,000 171,000 281,000 175,000 EBIT = (a)-(b)-(c)-(d) 2,379,000 2,852,000 3,075,000 4,677,000 908,000 Income Tax 1,592,000 698,000 1,410,000 1,703,000 701,000 NOPLAT = EBIT - Income Tax 787,000 2,154,000 1,665,000 2,974,000 207,000 EBIT = Net Sales – Cost of Goods Sold – Operating Expense – Depreciation Expense

STEP 2.1: ASSUME GROWTH RATE OF NET SALES (2011-2015) Calculate the Growth Rate of Net Sales Forecast the Net Sales from 2011-2015 based on your assumption Year 2006 2007 2008 2009 2010 Net Sales 6,773,000 8,356,000 13,492,000 14,695,000 7,092,000 Sales Growth Rate   23.37% 61.46% 8.9% -51.74% Year 2011(e) 2012(e) 2013(e) 2014(e) 2015(e) Net Sales 7,836,660 9,051,342 10,997,380 13,801,712 17,873,220 Sales Growth Rate 10.5% 15,5% 21.5% 25.5% 29.5%

STEP 2.2: GROSS PROFIT MARGIN (2011-2015) Calculate Gross Profit Margin from 2006-2010 Forecast Gross Profit Margin from 2011-2015 based on your assumption: Year 2006 2007 2008 2009 2010 Gross Profit (g) 3,689,000 4,709,000 6,149,000 7,861,000 3,249,000 Net Sales (a) 6,773,000 8,356,000 13,492,000 14,695,000 7,092,000 Gross Profit Margin = (g)÷(a) 54.5% 56.4% 45.6% 53.5% 45.8% Year 2011(e) 2012(e) 2013(e) 2014(e) 2015(e) Gross Profit (g) 4,012,370 4,570,928 5,421,708 6,914,658 8,579,146 Net Sales (a) 7,836,660 9,051,342 10,997,380 13,801,712 17,873,220 Gross Profit Margin = (g)÷(a) 51.2% 50.5% 49.3% 50.1% 48%

STEP 2.3: OPERATING EXPENSE RATE (2011-2015) Calculate the Operating Expense Rate from 2006-2010 Forecast the Operating Expense Rate from 2011-2015 based on your assumption Year 2006 2007 2008 2009 2010 Operating Expense (n) 1,188,000 1,742,000 2,903,000 2,166,000 Net Sales (a) 6,773,000 8,356,000 13,492,000 14,695,000 7,092,000 Operating Expense Rate = (n) : (a) 17.5% 20.8% 21.5% 19.8% 30.5% Year 2011(e) 2012(e) 2013(e) 2014(e) 2015(e) Operating Expense (n) 1,724,065 2,072,757 2,562,390 3,326,213 4,468,305 Net Sales (a) 7,836,660 9,051,342 10,997,380 13,801,712 17,873,220 Operating Expense Rate = (n) : (a) 22% 22.9% 23.3% 24.1% 25%

STEP 2.4: RATE OF CHANGE IN DEPRECIATION EXPENSE(2011-2015) Calculate the Rate of Change in Depreciation Expense Forecast Depreciation Expense from 2011-2015 based on your assumption Year 2006 2007 2008 2009 2010 Depreciation Expense 122,000 115,000 171,000 281,000 175,000 Rate of Change   -5.7% 48.7% 64.3% -37.7% Year 2011(e) 2012(e) 2013(e) 2014(e) 2015(e) Depreciation Expense 205,450 253,114 317,658 406,602 539,154 Rate of Change 17.4% 23.2% 25.5% 28% 32.6%

STEP 2.5: INCOME TAX RATE (2011-2015) Calculate the Income Tax Rate Forecast the Income Tax Rate from 2011-2015 based on assumption. Year 2006 2007 2008 2009 2010 Income Tax 1,592,000 698,000 1,410,000 1,703,000 701,000 Income before Tax 15,141,000 10,516,000 16,883,000 17,168,000 16,521,000 Income Tax Rate (t) = Income Tax ÷ Income before tax 10.5% 6.6% 8.4% 10% 4.2% Year 2011(e) 2012(e) 2013(e) 2014(e) 2015(e) Income Tax Rate 8% 10.2% 12.8% 15% 17.6%

STEP 2.6: REINVESTMENT RATE (2011-2015) Calculate the Reinvestment Rate Forecast the Reinvestment Rate from 2011-2015 based on assumption. Reinvestment Rate = (Net Income + Depreciation Expense – Cash Dividend) ÷ (Fix Assets + Long Term Investment + Net Working Capital). Net Working Capital = Current Assets – Current Liabilities. Year 2006 2007 2008 2009 2010 Reinvestment Rate 10.3% 6.3% 8.1% 7% 7.8%  Year 2011(e) 2012(e) 2013(e) 2014(e) 2015(e) Reinvestment Rate 7.9% 9% 10.5% 13% 14.6% 

STEP 3:FORECAST NOPLAT(11-15) Year 2011(e) 2012(e) 2013(e) 2014(e) 2015(e) Net Sales (a) 7,836,660 9,051,342 10,997,380 13,801,712 17,873,220 Cost of Goods Sold (b) 3,374,290 4,480,414 5,575,672 6,887,054 9,294,074 Gross Profit (g) 4,012,370 4,570,928 5,421,708 6,914,658 8,579,146 Operating Expense (c) 1,724,065 2,072,757 2,562,390 3,326,213 4,468,305 Depreciation Expense (d) 205,450 253,114 317,658 406,602 539,154 EBIT = (a)-(b)-(c)-(d) 2,082,855 2,245,057 2,541,660 3,181,843 3,571,687 Income Tax Rate (t) 8% 10.2% 12.8% 15% 17.6% Income Tax = EBIT * (t) 166,628 228,996 325,332 477,276 628,617 NOPLAT = EBIT - Income Tax 1,916,227 2,016,061 2,189,328 2,704,567 2,943,070 .

STEP 4+5 : CALCULATE WACC (2011-2015) Definition：WACC = E/A*Ks + D/A*Kd*(1-t) Ks = Rf + β * ( Rm – Rf ) ＜Security Market Line, SML＞ E : Total Equity A : Total Asset D : Total Debt Ks : Return of Common Equity Rm : Return of Market Portfolio Rf : Risk-free Rate β : estimated from SML Kd : Cost of Debt (Kd can be approximated by Total Interest Expense / Total Debt in each year.) t : Income Tax Rate E/A ：Total Equity / Total Asset D/A : Total Debt / Total Asset

Year 2006 2007 2008 2009 2010 β 1.009 Rm 0.02 -0.05 -0.12 -0.03 -0.07 Rf 4.96 5.02 1.93 0.16 0.18 Rm – Rf [-4.94] [-5.07] [-2.05] [-0.19] [-0.25] Ks 9.94 10.14 4 0.35 0.43 Kd 0.012 0.018 0.001 0.011 0.003 E 103,370,000 112,180,000 137,380,000 165,401,000 175,697,000 D 22,553,000 20,717,000 37,498,000 29,015,000 54,615,000 A 125,923,000 132,897,000 174,878,000 194,416,000 230,312,000 E/A 0.82 0.84 0.79 0.85 0.76 D/A 0.21 0.15 0.24 T 10.5% 6.6% 8.4% 10% 4.2% WACC 8.15 8.52 3.16 0.3 0.33

Because (Rm – Rf) is the risk premium, (Rm – Rf) should be positive based on concept. But from 2007 to 2010, Rm is negative, then (Rm – Rf) is negative, leading to a controversial result. A solution to this problem is to calculate absolute of (Rm-Rf) from 2006 to 2010. Then use the average results to calculate WACC. Base on data of WACC we calculate average WACC from 2006 – 2010 = 4.092

STEP 6:DISCOUNTED CASH FLOW Definition: 1. Investment Expenditure = (NOPALT + Depreciation Expense) × Reinvestment Rate 2. FCF = NOPLAT + Depreciation Expense – Investment Expenditure Year 2011(e) 2012(e) 2013(e) 2014(e) 2015(e) NOPLAT (h) 1,916,227 2,016,061 2,189,328 2,704,567 2,943,070 Depreciation Expense (d) 205,450 253,114 317,658 406,602 539,154 Investment Expenditure (k) =   {(h) + (d)}× Reinvestment Rate 167,612 204,226 263,234 404,452 508,405 FCF=(h) + (d) - (k) 1,954,065 2,154,949 2,243,752 2,706,717 2,973,819 WACC 5.65% FCF Discounted Value =FCF/(1+wacc) =383,752 =FCF/(1+wacc)^2 =83,111 =FCF/(1+wacc)^3 =16,995 =FCF/(1+wacc)^4 =4,026 =FCF/(1+wacc)^5 =869

Result from Discounted Cash Flow Total FCF Discounted Value 488,753 Outstanding Share 2,161,202,000 Value per share USD 0.23

Conclusion: We calculate 2011 sales growth rate = 5 years average sales growth rate during 2006-2010.After that we forecast sales growth rate in the future ( from 2012 to 2015 ) base on our assumption. We assume similarly with Gross Profit Margin , Operating Expense rate, Depreciation Expense, Income Tax rate and Reinvestment Rate of our company. Under Discounted Cash Flow Model, our reasonable price is 0.23 USD, compared with stock price in stock exchange, this price is very low === cannot use this method to evaluate corporation valuation.

Thanks for your attention Group 14 Thanks for your attention