valuation-model

name valuation-model description Valuation methodology — absolute valuation with DCF / DDM / SOTP, relative valuation with PE-Band / PB-ROE / EV-EBITDA, sensitivity analysis, and valuation-trap detection. category analysis Valuation Methodology Overview Systematic corporate valuation framework covering absolute valuation ( DCF / DDM / SOTP ) and relative valuation ( PE / PB / EV-EBITDA ), including sensitivity-analysis methods and a checklist for identifying valuation traps. Absolute Valuation Methods 1. DCF (Discounted Cash Flow) Core formulas : Enterprise value = Σ FCF_t / (1+WACC)^t + TV / (1+WACC)^n Equity value = enterprise value - net debt Per-share value = equity value / total shares outstanding Detailed steps : Step 1: Forecast free cash flow (usually 5 years) FCFF = EBIT × (1-tax rate) + depreciation & amortization - capex - increase in working capital Simplified version: FCFF ≈ operating cash flow - capex Year Revenue (100m RMB) EBIT (100m RMB) FCFF (100m RMB) Growth 2026E 120 24 18 +15% 2027E 138 28 21 +15% 2028E 155 31 24 +12% 2029E 170 34 26 +10% 2030E 182 36 28 +7% Step 2: Calculate WACC WACC = E/(D+E) × Ke + D/(D+E) × Kd × (1-T) Ke (cost of equity) = Rf + β × (Rm - Rf) - Rf: 10-year government bond yield (about 2.5% for China A-shares) - β: industry average or company beta (1.0-1.5) - Rm-Rf: equity risk premium (about 5-7% for China A-shares) Kd: cost of debt (loan rate, about 4-5%) T: income tax rate (25%) Reference WACC ranges for China A-shares : Industry WACC Range Reference β Consumer 8-10% 0.8-1.0 Technology 10-13% 1.2-1.5 Financials 7-9% 1.0-1.2 Cyclicals 9-12% 1.0-1.4 Utilities 6-8% 0.5-0.8 Step 3: Terminal Value Perpetual-growth method: TV = FCF_n × (1+g) / (WACC - g) - g: perpetual growth rate (usually 2-3%, should not exceed GDP growth) Exit-multiple method: TV = EBITDA_n × EV/EBITDA multiple - Reference the industry average or historical median Step 4: Sensitivity Analysis ### DCF Sensitivity Analysis (per-share value, RMB) | WACC \ g | 2.0% | 2.5% | 3.0% | |----------|------|------|------| | 9.0% | 32.5 | 35.8 | 40.2 | | 9.5% | 28.3 | 30.8 | 34.0 | | 10.0% | 24.8 | 26.7 | 29.1 | | 10.5% | 22.0 | 23.5 | 25.3 | | 11.0% | 19.6 | 20.8 | 22.2 | 2. DDM (Dividend Discount Model) Applicable to : high-dividend stocks (banks, utilities, mature consumer companies). Two-stage DDM: P = Σ D_t / (1+Ke)^t + D_n × (1+g) / [(Ke-g) × (1+Ke)^n] Gordon model (single stage): P = D_1 / (Ke - g) Applicability checklist : Has paid dividends continuously for more than 3 years Stable payout ratio (>30%) Strong earnings predictability Usually not suitable for high-growth stocks (no dividends / low payout) 3. SOTP (Sum of the Parts) Applicable to : diversified conglomerates. Group value = Σ valuation of each business segment + net cash - holding-company discount Example (a group company): | Segment | Revenue (100m RMB) | Valuation Method | Valuation (100m RMB) | |------|---------|---------|---------| | Baijiu | 80 | 30x PE | 600 | | Real estate | 50 | 0.6x PB | 120 | | Financials | 30 | 1.0x PB | 200 | | Total | | | 920 | | Holding-company discount | | -15% | -138 | | Group valuation | | | 782 | Relative Valuation Methods 1. PE Band Historical PE percentile analysis: - Take the past 5 years of PE_TTM time series - Compute the 10% / 25% / 50% / 75% / 90% percentiles - Judge overvaluation / undervaluation from the current PE percentile | Percentile | PE | Implied Price | Interpretation | |------|-----|---------|------| | 90% | 35x | 52.5 | Severely overvalued | | 75% | 28x | 42.0 | Rich | | 50% | 22x | 33.0 | Fair | | 25% | 16x | 24.0 | Cheap | | 10% | 12x | 18.0 | Severely undervalued | | Current | 18x | 27.0 | Cheap (30th percentile) | 2. PB-ROE Matrix Theoretical relationship: PB = (ROE - g) / (Ke - g) Practical use: plot companies in the industry on a PB vs ROE scatter chart | Quadrant | PB | ROE | Interpretation | |------|-----|-----|------| | Lower right | Low PB | High ROE | Undervalued (best buy zone) | | Upper right | High PB | High ROE | Fair (quality premium) | | Lower left | Low PB | Low ROE | Value trap or distressed turnaround | | Upper left | High PB | Low ROE | Overvalued (avoid) | 3. EV/EBITDA EV = market cap + net debt (interest-bearing debt - cash) EBITDA = operating profit + depreciation + amortization Advantages: - Removes capital-structure differences (vs PE) - Removes depreciation-policy differences - Suitable for asset-heavy industries (telecom / energy / infrastructure) Reference EV/EBITDA ranges by China A-share industry: | Industry | Median | Undervalued | Overvalued | |------|--------|------|------| | Consumer | 15-20x | <12x | >25x | | Technology | 12-18x | <10x | >22x | | Energy | 6-10x | <5x | >12x | | Utilities | 8-12x | <6x | >15x | Valuation-Trap Detection Top 10 Valuation Traps # Trap Detection Method Typical Example 1 Low-PE cyclical at the peak PE is lowest when earnings are highest and about to fall Coal at 5x PE in 2021 was the top 2 High-PE growth can be justified PEG < 1 means the growth rate supports the valuation 30x PE + 40% growth = PEG 0.75 3 Low-PB value destruction Sustained ROE < Ke means shareholder value is being destroyed Long-term loss-making asset-heavy company 4 Goodwill bomb Goodwill / net assets >30% implies impairment risk Underperforming acquisition after paying a high premium 5 Accounts-receivable trap Rising receivables / revenue ratio = poor revenue quality Government receivables + high customer concentration 6 Capitalization trap Capitalizing R&D / interest flatters profit PE doubles after true expensing 7 One-off gains Large gap between recurring net profit and reported net profit Asset sales / government subsidies boost earnings 8 Share dilution Stock options / convertible bonds reduce EPS PE should be based on diluted EPS 9 Related-party transactions Buy cheap from related parties / sell high to them Profit shifted outside the listed entity 10 FX swings High overseas-revenue share means large currency sensitivity RMB appreciation erodes exporter profits Analysis Framework Valuation-Method Selection Decision Tree What type of company is it? ├── Mature and stable (consumer / utilities / banks) │ ├── High dividend -> DDM │ └── Low dividend -> DCF + PE Band ├── High growth (tech / pharma / new energy) │ └── DCF (high-growth phase) + PEG + PS ├── Cyclical (coal / steel / nonferrous) │ └── PB + EV/EBITDA (avoid PE) ├── Diversified conglomerate │ └── SOTP └── Loss-making company └── PS (price-to-sales) + EV/Sales Cross-Validation Use at least 2 valuation methods and take the middle value: 1. DCF -> intrinsic value 2. Comparable PE -> market pricing 3. If the difference >30% -> check whether assumptions are reasonable Output Format ## Valuation Analysis: [Company Name / Code] ### Valuation Summary | Method | Per-Share Value | Weight | Notes | |------|---------|------|------| | DCF | ¥32.5 | 50% | WACC=10%, g=2.5% | | Comparable PE | ¥28.0 | 30% | Industry average 22x, EPS=1.27 | | PB-ROE | ¥30.0 | 20% | Fair PB=2.5x | | **Composite Target Price** | **¥30.8** | | Current price 25.0, upside +23% | ### Sensitivity Analysis [WACC vs growth-rate matrix] ### Valuation-Trap Check - [x] Is PE a falsely low cyclical peak? -> No - [x] Goodwill / net asset ratio -> 12%, safe - [x] Receivables / revenue trend -> Stable, not deteriorating - [ ] Gap in recurring net profit -> 15% difference, subsidy dependence worth attention ### Investment Rating: Buy Target price ¥30.8, current price ¥25.0, upside 23% Notes DCF is highly sensitive to assumptions : a 1% change in WACC can move valuation by 20%+, so sensitivity analysis is mandatory Comparable companies must truly be comparable : same industry + same scale + same stage; do not apply leader PE multiples to small companies China A-share valuation system is unique : shell value / liquidity premium / policy premium mean US-equity standards cannot be copied directly Valuation is not a target price : markets can remain irrational for a long time, and valuation is an anchor, not a trading signal Special handling for cyclicals : use normalized earnings (mid-cycle earnings), not current earnings Not suitable for cryptocurrencies : traditional valuation frameworks do not apply to BTC / ETH; use on-chain metrics instead (see onchain-analysis )