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

2. Section 5
Valuation

3. 5.4 : Discounted Cash Flow Model
Step 1 :Calculate NOPLAT from 2006 – 2010
Step 2 : Make assumptions before forecasting NOPLAT from 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 ( )
Step 4 : Calculate WACC from
Step 5 : Estimate β using the daily data.
Step 6 : Discounted Free Cash Flow

4. 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

5. STEP 2.1: ASSUME GROWTH RATE OF NET SALES (2011-2015)
Calculate the Growth Rate of Net Sales
Forecast the Net Sales from 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%

6. STEP 2.2: GROSS PROFIT MARGIN (2011-2015)
Calculate Gross Profit Margin from
Forecast Gross Profit Margin from 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%

7. STEP 2.3: OPERATING EXPENSE RATE (2011-2015)
Calculate the Operating Expense Rate from
Forecast the Operating Expense Rate from 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%

8. STEP 2.4: RATE OF CHANGE IN DEPRECIATION EXPENSE(2011-2015)
Calculate the Rate of Change in Depreciation Expense
Forecast Depreciation Expense from 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%

9. STEP 2.5: INCOME TAX RATE (2011-2015)
Calculate the Income Tax Rate
Forecast the Income Tax Rate from 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%

10. STEP 2.6: REINVESTMENT RATE (2011-2015)
Calculate the Reinvestment Rate
Forecast the Reinvestment Rate from 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% 

11. 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 .

12. 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

13. 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

14. 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 Then use the average results to calculate WACC.
Base on data of WACC we calculate average WACC from 2006 – 2010 = 4.092

15. 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

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

17. Conclusion:
We calculate 2011 sales growth rate = 5 years average sales growth rate during 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.

18. Thanks for your attention
Group 14
Thanks for your attention