An informal discussion on the valuation of enterprises by investment institutions (14)

Abstract: Investment institutions in the valuation of enterprises are usually assumed: the enterprise in the next time (at least during the investment period), is a sustainable growth trend. But there are many industries that are not going up all the time, which is cyclical. From the definition

When valuing an enterprise, an investment agency usually assumes that the enterprise will continue to grow in the future (at least during the investment period). But there are many industries that are not going up all the time, which is cyclical. By definition, cyclical industries refer to industries with strong correlations with domestic or international economic fluctuations, in general, the cyclical industry refers to resources, bulk industrial raw materials, such as the typical raw materials (such as steel, coal, etc.), construction machinery, cement, shipbuilding, automobiles, real estate, non-ferrous Metals, petrochemical industry, Agriculture and animal husbandry.

So in this chapter, let's talk about valuing companies in cyclical industries. When a projectile comes out, a parabola appears and we can compare it to the development trend curve of an enterprise. But what if it's not a cannonball but an elastic ball? Imagine the ball bouncing up again after falling, and then falling again and again, how does an investment firm determine the valuation and future development of the enterprise at its corresponding point in time?

A certain month, in a major city of the river in one of the thousands of dead pigs were fished, really just because of "Pig blue ear disease" to cause this phenomenon? There is also a reason, because the market is better in the last year, some local pig farms began to expand the size of the breeding, who knows when the slaughter not only the pig price drop, and the pig can not sell, there is not enough buying.

But if the sale of pork at a discount, will lead to more local market supply surplus, and the future purchase of pork and prices will be greatly reduced, pig farms can not be maintained. But do not sell, every day is consuming costs, and even after a period of time, the situation will not be much better. Can not sell, and cannot reduce prices, and can not be raised, then how to do? Will it be given to the poor? But markets are brutal, and we know that in times of economic crisis, capitalists would rather pour milk into the sea than sell it cheaply to workers or to poor people, as the potential purchasing power of the future declines and prices are harder to recover. So pouring out the milk and throwing the pig Yujiang into a seemingly absurd but rational strategy. There is no essential difference between this and the steel industry's limited-limiting insured.

On the other hand, when the enterprise is in the cyclical growth of the industry, it may be rapid development to the peak. 2000 years or so, the internet bubble, in Europe and the United States and other Asian countries in the stock market, and technology and the emerging Internet-related enterprises share prices rose rapidly, As long as the domain name with a. com site, dare to add a 0 to sell the original price, countless investors put a lot of wealth into the value of overvalued so-called High-tech companies, but these speculative institutions can not make a little profit, wasted a lot of real money.

Once the industry crashes, there will be rapid negative growth, until the bottom of the slump! The dotcom bust wiped out about $5 trillion trillion in technology companies ' market capitalisation between March 2000 and October 2002. A number of technology companies have made large liabilities for their expansion plans, selling their assets and even announcing their liquidation, while the industry has seen a lot of "overcapacity". Therefore, for enterprises in the cyclical industry, how to valuation is a very big problem. Of course, the cyclical impact of the industry on the business is not absolute, there are good and bad, if an enterprise can be very good to carry out cost control, and actively respond to the changes in capacity can also be combined with industry cycle homeopathy strategy to deal with, through the cycle, the enterprise will gain greater growth and competitive advantage. Like state Digital founder share: "Sunny is good weather, rainy day is not it?"

On the specific valuation method, Dr.2 thrown a very controversial brick, for your reference only.

First of all, before the specific calculation, we should refer to the industry status of the enterprise and future changes in the possibility. The status of the industry here is not to say that the bigger the better, the overall assets of large enterprises are too heavy, once there is a huge industry cycle changes, often mobile relatively poor. The best example here is the PV industry. The expansion of the scale can reduce the cost, so Yingli, Suntech, LDK These previous several major enterprises have been desperately expanding production, resulting in the release of production capacity, market surplus too much, the EU and the United States in the double counter, some enterprises almost suffered from extinction.

Mr. Buffett, the investment guru, usually focuses only on businesses over 10 years and carries out continuous analysis based on public information, followed by field research. He built a theory system of the concept of passing through cycle, which formed a unique and steady investment philosophy. Because often born in a cyclical industry, success and failure are opportunities, like you happen to meet the big fish jumped on the shore, people say you are the best fishermen, but also to give you the largest fishing nets to fish, in fact, you just happen to encounter.

Specific valuation operations are two points to determine:

(1) The enterprise passes through at least one cycle, for example, 5-10 years, so in the good and bad, there is profit and loss of the years of operation, using the company's historical financial quarterly data or annual report data, can be calculated a weighted average EBITA (tax and amortization before the profit, so we do not have to consider the tax shield interference), Multiplied by the general average of the industry, a numerical value can be used as a reference center for corporate valuations.

(2) Consider at present the industry in the industry cycle of which point, is the uplink, peak, downlink or trough, and in combination with the above calculation of the Enterprise Valuation Center to make a correction, to get a ballpark estimate. Of course, this is not to say in the industry trough, the enterprise worthless (except bankruptcy), at the peak of the boom, the company can be worth sky-high.

I have roughly simplified the ebita of a cyclical industry enterprise in recent years (Figure 1).

The first year a=2000 million

The second year B=-500 million

The third year C=500 million

Four years D=-300 million

If you see the enterprise seems to have undergone two cycles of industry, now we are in the time point E, we hope that the future development of the enterprise estimates, we can by the A,b,c,d weighted average, the average EBITA about 5 million, the industry's overall valuation multiples of about 8 times times the EBITA, Valuation Center is roughly 40 million, according to the industry's current development trend, reference to historical data, E is located in the enterprise's Valuation Center.

In fact, the stock market has never been rational, the iron and steel industry in the peak of the arrival of the time incredibly can fry to 30 times times PE, but also in that year of the simultaneous release of profits to the peak, the price is really "miserable", that there is also look ah? There are also analysts who are there to fuel the nonsense. When you pay more attention to the industry research reports of some organizations for a long time, you will find that there are too many stupid and contradictory places. For example, you open a few years before the major brokerage of liquor industry research, you will find that full of growth, growth and growth. Open a few years before the online games research newspaper, are the outbreak of growth this year, the next year, the expansion of the huge scale, the prospect of unlimited.

And in fact, with the page tour, hand tour and game machine constantly joined, online games have stopped high growth, this use of Porter "five Force model" in the emergence of competitive alternative products can be easily explained. Of course, there are a lot of analysts because of interest, so the intention is not objective. To stand the test of history is that we must adhere to the bottom line in both business and academia.

Of course, the disadvantage of this approach is obvious, just as there are no two identical leaves in the world, whether cyclical or aperiodic industry, the market is unpredictable, such as how long the cycle, the absolute value of the peak of the boom and so on.

Soros's investment philosophy on the ineffectiveness of markets and the "reflective theory" is well worth reading. In the next chapter I will introduce a method of weighted probability scenario analysis, which is not a valuation method, but an idea of doing things and making decisions.