SIMBA PT8 Group

Case Study Case Study

Corporate FinanceCorporate Finance

Group 5Group 5

MBA PT8MBA PT8

2008-72008-7

SIMBA PT8 Group

Case Study 1

Corporate Finance – Case StudyCorporate Finance – Case Study

Tsingtao Brewery Co. Ltd.Tsingtao Brewery Co. Ltd.

- Local company ‘Financials’- Local company ‘Financials’

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Tsingtao Brewery - SnapshotTsingtao Brewery - Snapshot

Brief Introduction

1903 Qingdao Brewery Factory was established

1993 Tsingtao Brewery Co., Ltd. was

founded and entered into capital market

2008 World

famous Tsingtao Beer

28,542 28,542 Employees Employees

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Mr. Zhi Guo JINVice Chairman,

President and Chairman of Strategy & Investment Committee

Mr. Ming Bo SUNExecutive Vice President,

Executive Director and Member of Strategy & Investment Committee

Mr. Yu Guo SUN Vice President, General Accountant, Director,

Member of Corporate & Remuneration Committee and Member of Strategy & Investment Committee

Mr. Ying Di Liu Senior Engineer and Executive Director

Top Compensated

Officers

Tsingtao Brewery - SnapshotTsingtao Brewery - Snapshot

Name Primary Company Age

Gui Rong Li Tsingtao Brewery Co., Ltd. 66

Stephen Burrows Anheuser-Busch Companies Inc. 55

An Gong Teng Tsingtao Brewery Co., Ltd. 55

Zhen Gang Chu Tsingtao Brewery Co., Ltd. 57

Yan Li Tsingtao Brewery Co., Ltd. 50

Mark Schumm Tsingtao Brewery Co., Ltd. 51

Chiu Kwok Poon Huabao International Holdings Ltd. 44

Yang Fu Tsingtao Brewery Co., Ltd. 57

Other Board Members on Board of Directors

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Tsingtao Brewery – Financial StatementsTsingtao Brewery – Financial Statements

Net Income

0

15,000

30,000

45,000

60,000

75,000

90,000

2003 2004 2005 2006 2007

IncomeIncomeStatementStatement

2003-20072003-2007

Display Currency US$(,000)

INCOME STATEMENT 2003 2004 2005 2006 2007

Net Sales 908,463 1,043,103 1,242,462 1,497,012 1,879,534

EBITDA 135,323 148,801 175,987 205,772 238,492

EBIT 62,699 70,003 80,238 103,671 120,360

Earnings Before Tax 51,572 57,179 65,513 78,819 137,665

Income Tax 35,166 36,500 42,093 55,798 81,986

Earnings After Tax 16,406 20,679 23,419 23,021 55,679

Other, Minority Interests, Exceptionals -4,447 -2,654 -4,403 -44 -5,465

Net Income 30,719 33,847 37,691 55,754 76,521

Ordinary Dividends -25,652 -23,744 -25,955 -36,897 -39,458

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Tsingtao Brewery – Financial StatementsTsingtao Brewery – Financial Statements

Display Currency USD (,000) 2003 2004 2005 2006 2007

Assets

Cash And Short term Investments 120,921 164,869 156,967 158,041 183,016

Accounts Receivable 165,204 159,420 105,068 113,372 94,199

Inventories 157,966 167,323 176,139 210,417 299,873

Total Current Assets 360,227 419,828 396,042 442,064 648,538

Property/Plant/Equipment Net Total 646,083 669,306 683,989 681,246 773,291

Goodwill & Intangibles Net Total 82,901 89,845 93,049 96,108 126,566

Other Long term Assets 55 16,260 15,970 9,946 34,457

Total Assets 1,089,267 1,195,239 1,189,050 1,229,365 1,582,852

Liabilities

Total Current Liabilities 450,061 517,027 477,945 465,696 730,238

Total Long term Debt 120,146 154,157 2,701 6,828 12,456

Total Financial Debt 349,315 375,401 164,096 116,058 194,438

Minorities 78,868 72,068 78,344 69,134 65,692

Provisions -- -- -- -- --

Total Liabilities And Debt 664,085 761,250 576,313 559,684 827,543

Book Value - Total Shareholders Equity 425,182 433,989 612,737 669,681 755,309

Total Liabilities And Equity 1,089,267 1,195,239 1,189,050 1,229,365 1,582,852

BalanceBalanceSheetSheet

2003-20072003-2007

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Tsingtao Brewery – Ratios AnalysisTsingtao Brewery – Ratios Analysis

Return on Equity (ROE) = Net Income / Stockholder's Equity

Return on Assets (ROA) = Net Income /Assets

Return on invested capital (ROIC) = EBIT*(1-Tax rate)/(Interest-bearing debt + Shareholders' equity)

Return on Capital Employed(ROCE) = Net income/Average Common Stockholders' Equity

Profit margin = Net income/Sales

Gross margin = Gross profit / Sales

Price to earnings (P/E) = Price per share / Earnings per share

Asset turnover = Sales / Assets

Fixed-asset turnover = Sales / Net property, plant, and equipment

Inventory turnover = Cost of goods sold / Ending inventory

Collection Period = Accounts receivable / Credit sales per day

Days' sales in cash = Cash and securities / Sales per day

Payables period = Accounts payable / Credit purchases per day

Assets to equity = Assets / Shareholders' equity

Debt to assets (Debt ratio) = Total liabilities / Assets

Debt to equity = Total liabilities / Shareholders' equity

Times interet earned = EBIT / Interest expense

Times burden covered = EBIT / Interest exp. + Prin.pay./(1-Tax rate)

Debt to assets (market value) = Total liabilities / No.equity shares*Price/share+Total liabilities

Debt to equity (market value) = Total liabilities / No.equity shares*Price/share

Current ratio = Current assets / Current liabilities

Acid test (Quick ratio) = Current assets - Inventory / Current liabilities

Equity ratio = Total Equity / Total assets

Profitability Ratios

Turnover-Control Ratios (Activity)

Leverage and Liquidity Ratios

ROE

ROA

P/E

Assetturnover

Inventory turnover

Assets to equity

Current Ratio

Acid test

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Tsingtao Brewery – Ratios AnalysisTsingtao Brewery – Ratios Analysis

Return on Equity/Retrun on Assets

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2003 2004 2005 2006 2007

Return on Equity (ROE) Return on Assets (ROA)

2003 2004 2005 2006 2007

Return on Equity (ROE) = Net Income / Stockholder's Equity 7.2% 7.8% 6.2% 8.3% 10.4%

Return on Assets (ROA) = Net Income /Assets 2.8% 2.8% 3.2% 4.5% 5.3%

Profit margin = Net income/Sales 3.4% 3.2% 3.0% 3.7% 4.83%

Price to earnings (P/E) = Price per share / Earnings per share 2.24 1.97 1.86 1.24 0.80

Profitability Ratios

Price to earnings (P/E)

0.00

0.50

1.00

1.50

2.00

2.50

2003 2004 2005 2006 2007

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Tsingtao Brewery – Ratios AnalysisTsingtao Brewery – Ratios Analysis

Asset turnover

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2003 2004 2005 2006 2007

Inventory turnover

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2003 2004 2005 2006 2007

2003 2004 2005 2006 2007

Asset turnover = Sales / Assets 0.83 0.87 1.04 1.22 1.17

Inventory turnover = Cost of goods sold / Ending inventory 3.92 4.30 4.91 5.00 4.26

Turnover-Control Ratios (Activity)

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Tsingtao Brewery – Ratios AnalysisTsingtao Brewery – Ratios Analysis

2003 2004 2005 2006 2007

Assets to equity = Assets / Shareholders' equity 2.56 2.75 1.94 1.84 2.10

Current ratio = Current assets / Current liabilities 0.80 0.81 0.83 0.95 0.89

Acid test (Quick ratio) = Current assets - Inventory / Current liabilities 0.45 0.49 0.46 0.50 0.48

Leverage and Liquidity Ratios

Current ratio/Acid test

0.00

0.25

0.50

0.75

1.00

2003 2004 2005 2006 2007

Current ratio Acid test (Quick ratio)

Assets to equity

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2003 2004 2005 2006 2007

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Tsingtao Brewery – ReferenceTsingtao Brewery – Reference

Valuation Ratios Growth RatesCompany Industry Company Industry

P/E Ratio (TTM) 41.13 3.2 Sales (MRQ) vs Qtr. 1 Yr. Ago 25.43 10.46P/E High - Last 5 Yrs. -- 0.34 Sales (TTM) vs TTM 1 Yr. Ago 18.1 1.72P/E Low - Last 5 Yrs. -- 0.21 Sales - 5 Yr. Growth Rate 14.6 4.06

Price to Sales (TTM) 1.71 0.34 EPS (MRQ) vs Qtr. 1 Yr. Ago 216.68 7.47Price to Book (MRQ) 4.45 2.18 EPS (TTM) vs TTM 1 Yr. Ago 48.78 --Price to Tangible Book (MRQ) 5.33 2.93 EPS - 5 Yr. Growth Rate 13.09 19.94Price to Cash Flow (TTM) -- 1.54 Capital Spending - 5 Yr. Growth Rate 16.46 3.85Price to Free Cash Flow (TTM) -- 28.53

Financial StrengthProfitability Ratios Company Industry

Company Industry Quick Ratio (MRQ) 0.47 0.72Gross Margin (TTM) 32.28 2.84 Current Ratio (MRQ) 0.88 0.95Gross Margin - 5 Yr. Avg. 31.18 41.59 LT Debt to Equity (MRQ) 1.65 42.78

Total Debt to Equity (MRQ) 27.34 76.37EBITD Margin (TTM) -- -- Interest Coverage (TTM) -- 0.09EBITD - 5 Yr. Avg 12.14 11.32

Management EffectivenessOperating Margin (TTM) 6.61 2.29 Company IndustryOperating Margin - 5 Yr. Avg. 5.77 6.97 Return on Assets (TTM) 5.58 0.94

Return on Assets - 5 Yr. Avg. 4.07 3.72Pre-Tax Margin (TTM) 7.49 2.07Pre-Tax Margin - 5 Yr. Avg. 5.9 7.21 Return on Investment (TTM) 11.13 1.22

Return on Investment - 5 Yr. Avg. 7.95 5.46Net Profit Margin (TTM) 4.37 1.47Net Profit Margin - 5 Yr. Avg. 3.81 4.32 Return on Equity (TTM) 11.04 2.37

Return on Equity - 5 Yr. Avg. 8.48 7.89Effective Tax Rate (TTM) 41.66 4.07Effecitve Tax Rate - 5 Yr. Avg. 35.46 39.62

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Case Study 4

Corporate Finance – Case StudyCorporate Finance – Case Study

Chinese public company capital structure and cost Chinese public company capital structure and cost of capital estimations and Investment Analysisof capital estimations and Investment Analysis

- Case: Tsingtao Brewery Co. Ltd.- Case: Tsingtao Brewery Co. Ltd.

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Tsingtao Brewery – Capital StructureTsingtao Brewery – Capital Structure

Balance Sheet

(In Millions of RMB) 2005 2006 2007

Accounts Payable 711 795 1,081

Accrued Expenses 1,297 1,562 1,919

Short Term Debt 1,295 854 1,201

Current Port. of LT Debt/Capital Leases 7 2 126

Other Current liabilities, Total 545 424 999

Total Current Liabilities 3,854 3,636 5,326

Long Term Debt 22 53 91

Total Long Term Debt 22 53 91

Total Debt 1,323 909 1,418

Minority Interest 632 453 479

Other Liabilities, Total 140 172 123

Total Liabilities 4,648 4,333 6,036

Common Stock, Total 1,308 1,308 1,308

Additional Paid-In Capital 2,802 2,855 2,865

Retained Earnings (Accumulated Deficit) 830 1,060 1,331

Other Equity, Total 1 5 6

Total Equity 4,941 5,228 5,509

Total Liabilities & Shareholders' Equity 9,589 9,561 11,545

LT/ST Debt Stockholders’ Equity

2005 2006 2007

Debt to Equity 94.1% 83.6% 109.56%Debt to Equity

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I-1. Capital structure of the company based on market valueI-1. Capital structure of the company based on market value

We take the end of 2007 as the point to perform this case.

Shanghai Stock: 653,150,000, price: 3,914

Hong Kong Stock: 655,070,000, price: 21.7 (exchange rate: 0.9364)

market value of the firm's equity = 653,150,000*39.14+655,070,000*21.7*0.9364

= 38,875,234,792

E = market value of the firm's equity E= 38,875,234,792

market value of the firm's debt = 5,556,989,200 (from balance sheet)

D = market value of the firm's debt D= 5,556,989,200

V = E + D V=44,432,223,992

E/ V = percentage of financing that is equity=87.5%

D/ V = percentage of financing that is debt=12.5%

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I-2. Beta coefficient I-2. Beta coefficient

beta coefficient A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Also known as "beta coefficient".

regression analysis Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market.

Weekly DataCurrency: RMB

Date Close Rate on Return Close Rate on Return4-Jan-08 41.94 0.071538068 5,361.57 0.019007671

28-Dec-07 39.14 0.061855670 5,261.56 0.031318481

21-Dec-07 36.86 0.014030261 5,101.78 0.018744346

14-Dec-07 36.35 0.058532324 5,007.91 -0.016467783

7-Dec-07 34.34 0.027528426 5,091.76 0.045153927

30-Nov-07 33.42 0.026097636 4,871.78 -0.031865234

23-Nov-07 32.57 -0.012132241 5,032.13 -0.053447248

16-Nov-07 32.97 0.115358593 5,316.27 0.000137333

9-Nov-07 29.56 -0.124925992 5,315.54 -0.080007823

2-Nov-07 33.78 -0.057477679 5,777.81 0.033665913

26-Oct-07 35.84 -0.031351351 5,589.63 -0.039260577

19-Oct-07 37 -0.063053938 5,818.05 -0.014434397

12-Oct-07 39.49 -0.087780088 5,903.26 0.063209841

SH Stock Exchange(000001)

Tsingtao Brewery(600600)

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-0.2

-0.1

0

0.1

0.2

0.3

0.4

-0.1 -0.05 0 0.05 0.1 0.15 0.2

SH Index

Ts

ing

da

o

In this case based on the weekly rates of return on the stocks of this company, and on the Shanghai Stock Exchange Index for the past two to three years, we conduct the regression analysis,

we can get beta coefficient:

β=0.7758

α=0.0037

I-2. Beta coefficient I-2. Beta coefficient

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I-3. “Cost of equity” or “Required rate of return on the company’s equity” I-3. “Cost of equity” or “Required rate of return on the company’s equity”

With the formula of

RE = α+βRM

We calculate the RM from stock price of the last week of 2007,

RM=0.0619,

Then we can get cost of equity

RE = 0.0037+0.7758×0.0619

RE = 0.04825

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I-4. Weighted average cost of capital I-4. Weighted average cost of capital

WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing:

Where: Re = cost of equity =4.825%Rd = cost of debt =7.65% interest rate (1 year) E = market value of the firm's equity = 38,875,234,792D = market value of the firm's debt =5,556,989,200 V = E + D =44,432,223,992 E/V = percentage of financing that is equity =87.5% D/V = percentage of financing that is debt =12.5% Tc = corporate tax rate =33%

WACC = 0.875×0.04825+0.125×0.0765× (1-0.33)

WACC = 4.26%

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I-4. Weighted average cost of capital I-4. Weighted average cost of capital

Year

Investment inMachinery

andequipment

Purchase ofmaterials

Direct andindirectlabour

Marketingexpenses

Revenues DepTaxableincome

TaxProfit

after taxCash flow Tax shields

Taxrebates

0 8,000 0 0 400 0 -400 - 400- -8,400 0

1 8,000 1,600 4,800 800 8,000 2000 -1200 - 1,200- -7,200 680

2 4,000 2,200 5,600 690 13,000 4000 510 173 337 337 1360 59-

3 0 2,200 5,600 690 13,000 5000 -490 - 490- 4,510 1700 1,533

4 0 2,200 5,600 690 13,000 5000 -490 - 490- 4,510 1700 1,533

5 0 2,200 5,600 690 13,000 3000 1510 513 997 3,997 1020 845

6 0 2,200 5,600 690 13,000 1000 340 875-

6 7,000

￥1,741

10,510 3,573 6,937 7,937

Conclusion: Based on required rate of return on the company's equity (RE =0.04825), we calculate the

NPV =1741, which is positive, so the proposal is acceptable.

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