Question No 1
There are number of changes took place in 1990’s especially in 1992 by the MOFTEC. These changes initially started by the government in 1990 for economic development through different policy implementations with the help of different model of the market keeping in the socialist core framework. The main and core changes was related to decentralization and liberalization related to production, management, allocation of resources and pricing. These changes brought the positive effect on the economic development. In 1992 MOFTEC brought huge reforms in foreign trade. These reforms were related to import and export of foodstuff items in which regional food stuffs was imported and then exported to only those companies who were operated in Guangdong. In the regional firms Nanpo was one of them which was granted liberalization in their financial structure and operations. By bringing number of changes in 1992 through MOFTEC companies were permitted to retain maximum profit. Before that companies were not allowed to retain the maximum profit for their own use. These changes enables companies specially related to foods items to grow not by their self but industry as whole as well. The management of the companies after bringing these changes got freedom to take decision for the development of their businesses.
Companies were allowed to finance their business organization according to their own requirements.
Question No 2
Before IPO Nanpo was mainly doing its business related to food items. The core operation of the business of the company to export food items on daily basis to Hong Kong. The Nanpo was the sole authority who was exporting foods items or products to Hong Kong from Guangdong. This authority was given by the Chinese government. The Nanpo was also making the market related to food stuff of Guandong. As Nanpo was one of the largest business operations in the region during that tenure. Nanpo imported number of foods items from different countries ( Vietnam, Canada, Australia) in order to retain its market share by fulfilling’s the requirement of region. Apart from the food items Nanpo imported nonfood items as well. Having vast experience of Hong Kong market, Nanpo had used it for generating the revenue for their company by sharing their experience related to Hong Kong market to different state owned companies in Guangdong.Nanpo had worked as marketing agent for the different brands in the Hong Kong related to foods items and products. Thus Nanpo had used their all the available resource quit well for generating revenue for the company.
Question No 3
The major growth of the company started from 1991 and remain to 1994. The turnover of the company was uplifted in 1994 with 1.5 billion dollars to 1.8 billion dollars in 1993 and around 1.2 billion dollars in first six months of 1994. Though in 1991 the overall margin of the company in 1991 was lower but in 1992 when reforms took place, the margin of the company increases from 0.1 % to 0.6 % in 1992, 1.5 % in 1993 and 2.7 % in 1994. Increase in the overall margin shows that reforms had brought huge impact on the growth of the company. Though over all margin of the company is lower due to its nature of business. But due to liberalization in decision and financial decision making company had managed to gain rapidly during the 1991 to 1994. According to nature of business operation of the Nanpo, it heavily rely on the current assets along with the tangible assets. As the major portion of the assets of the company rely on the current assets similarly current liabilities of the company also higher as for liabilities of the company is concerned on the balance sheet. Nanpo has not invested higher amount in the fixed assets of the company up to 1993 but later increased their investment into fixed assets around 8 %. The current assets of the company in 1994 jumped to 170 % in first six month comparatively to 1993. This huge jumped into current assets was due to higher sales or turnover in the first six month of 1994.
| Current Assets | Jun-94 | Dec-93 | Change |
| Debtors, prepayments and deposits | 378,257 | 159,488 | 237% |
| Amount due from related parties | 151,271 | 22,517 | 672% |
| Cash at bank and in hand | 72,927 | 44,151 | 165% |
| Listed inventory, at cost (net) | 0 | 2,597 | 0 |
| Unlisted inventory, at cost | 0 | 124,811 | 0 |
| 602,455 | 353,564 | 170% |
The amount due from related parties in first six month of 1994 was jumped to 672 % which was turned in to huge amount. On the other hand cash flow of the company in the first six month was also very higher corporately to year ended 1993. The overall current assets of the company showed that in first months of 1994 company has shown remarkable growth since the liberalization in financial and management decision making. The overall change in Debtors in 137 %, amount due from related parties is 572 % and cash at bank and in hand is 65 % and overall current assets are 70 % more than the year ended 1993.
On the other hand current liabilities of the company in comparatively to first six months of 1994 to year needed 1993 was also higher. This increase in the current liabilities was result due to higher stock purchased for converting into sales in the first six month of 1994. But as for bank loan and overdraft is concerned, it fell down to 74 % comparatively to 1993.
| Current Liabilities | Jun-94 | Dec-93 | Change |
| Bank loans and overdrafts | 119,419 | 162,295 | 74% |
| Trade creditors and accruals | 391,543 | 120,270 | 326% |
| Dividend payable | 34,877 | 11,500 | 303% |
| Taxation | 12,328 | 6,465 | 191% |
| 558,167 | 300,530 | 186% |
Question No 4
The market value of the company was estimated 452 million dollars along with 56.5 million dollars forecasted revenue after tax in the upcoming year. The price to earnings of the company is 8 times. (Price to earning = 452/56.5 = 8).
Question No 5
The analysis which I did on the provided data shows that companies related to food items are much better for comparable which are related to Nanpo as for market risk and profitability is concerned. I considered companies which are China foods, four seas for comparable, that is due to Nanpo agreed upon. The turnover of China foods is also very close to company as well. On the basis of these factors and the data the comparable is concluded.
Question No 6
The terminal value is considered very important when forecasting is more than five years, the terminal value is around 130 percent of the NPV. It is only because of the initial cash flow is negative due to higher require amount related to its expansion and working capital required to start. In later years it become stabilized.
Question No 7
The valuation done by the Mr. Yang’s showed that there is a lower equity value as compared to my valuation. The main reason behind this is weighted average cost of capital (WACC). The WACC is assumes higher due to which valuation shows lower equity value. It is general phenomena that when WACC is higher than investors perceives that it has higher risk associated with it. As the beta of the company is also more than one (1.4) which means that stock price of the company will react more than it market trends which could be positive and negative as well.
As for my assumptions are concerned, I considered lower beta or average beta, which I believe that as Nanpo is new to enter or get registration on the stock exchange. But on the other hand there are number of similar Chinese companies listed on the Hong Kong stock exchange market. As Hong Kong Stock exchange market is good platform for the red chip companies and being Nanpo red Chip Company will also get the benefits being listed company. So having all these factors in mind I think it’s best for Nanpo as the food stuff comparable of which has lower beta than one. Historically as for multiples is concerned, Hong Kong stock exchange has higher P/Es. In the recent past the price to earning was higher than 10 and expecting further increasing trends. So having the higher price to earning Nanpo can get the investors’ interest and IPO could be over subscribe.
Question No 8
As for CLP holdings is concerned, it is an established company with higher turnover or revenue generation but overall growth is slow. It is quite good for the Nanpo to get the good rate of growth under the already established holding company. There are number of reason which are in the favor to work under the CLP is that at any time there could be ups and down due to financial, legal or economical and these ups and down can be met under the CLP quit easily by the Nanpo. Along with that the synergies can be achieved by acquisition which help to grow good margins by the Nanpo. As for riskiness of debts are concerned, it can be covered up to maximum level by CLP. As for drawback of this acquisition is concerned, there should be limitation of decision making by the Nanpo original owners. The decision making authority after acquisition will be the holding company. There are some matters needed to be clarified as for initial valuation range is concerned. Along with that the vision after acquisition must be clarified. As the acquisition offer is offered by the well-established and renowned company I believe company should delay the IPO and come up with a solid solution after discussion with CLP.
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