Sunday, May 04, 2008

Hongguo - Valuation


I did up several analysis to determine a ballpark range of which the price of Hongguo can be expected to appreciate in the coming years. The first one which I did was the constant ROE analysis, with projected EPS shown below.

As the name suggests, I assumed that the ROE for Hongguo is constant at 22.19%, which is the 5 year average value from 2003 to 2007. I also assumed that the payout ratio (dividends per earnings) is 25%. Sparing you the details, I get an EPS of SGD $1.50 in year 2018, ten years from now. The table above shall be the guide in which the yearly results of Hongguo will be checked against. I’ll be looking out for the EPS for subsequent reports, to ensure that Hongguo is performing within my expectations.

I also checked the projected EPS against the actual EPS, shown below

It’s not amazing that the projected and actual are around the same, since my model is based on historical results (2003 to 2007). It’s more important to look forward to 2008 quarterly results to see if the projection yearly EPS can be hit.

I tabulated the historical PE for Hongguo since their IPO in June 2003 below. Based on the closing price and earnings for that particular year in question, the lowest PE ratio for Hongguo is 5.5 and the highest is 26.3.

This is what I did:

1. Projected EPS for 2018 is RMB $1.50
2. Currency exchange of 1 RMB to 0.2 SGD
3. Highest PE of 26.3
4. Lowest PE of 5.5
5. Dividend payout ratio of 25% to earnings

Projected price for Hongguo in 2018 range from $1.65 to $7.89

Based on a price of $0.540, we can expect a return of 11.8% to 30.8% pa compounded for 10 years. Since dividends are paid out, we can also get a total dividend per share of $0.67 in ten years time, more than the original purchase price of $0.540.

As a rough guide, PE for Belle is currently around 31 times, Prime success around 23 times and Hongguo is around 10 times.

Let’s calculate our total returns (including dividends),

Total expected earnings (including dividends) in 2018 = 1.65 + 0.67 = $2.32
Based on a price of $0.540 gives us a return of 15.7% compounded annually over a period of 10 years, pretty good for me.