Financial Valuation of a Chosen Company for IPO Purpose

Zeyu Liu

Master's thesis

Abstract:

The aim of this thesis is to give valuation of Huawei under risk, for which Excel will be used for data analyzing. Two-stage Discount Cash Flow method from Income Approach will be used for valuation. The first part of the thesis will start with general introduction of the thesis. The second part is the general description of valuation method. All formulas and Excel tools needed for valuation process will be introduced. The third part is the introduction of Huawei. Its history will be briefly introduced. SWOT analysis will be listed to show the market environment. Specific data will also be provided: common-size analysis and ratio analysis of the company in these recent years will be listed and moreover, market share and some industry data will also be provided to understand the competition better. In the last, there will be also vision and strategy of Huawei in 2019 presented. In the fourth part, the valuation process will be presented, and this is the core of the thesis. The recent 15 years of data from 2005 to 2019 will be used. The first procedure will be estimation of sales revenue and the regression analysis, we can find one most optimal macro indicator and find its linear relationship with sales. Monte Carlo simulation will be used to simulate the evolution of macro numbers and sales revenue in the following five years. 10,000 scenarios will be presented in the procedure. The second procedure is financial planning.With the financial plan we can get estimated free cash flow to the firm (FCFF) and estimated free cash flow to the equity (FCFE) in the following years. The third procedure is calculating cost of equity, cost of debt and weighted average cost of capital (WACC). In this part, data like risk-free rate, risk premium, beta coefficient and yield to maturity of the bond issued are needed. During this procedure, there will be 10,000 scenarios cause the simulation of random variables, so we will also get 10,000 different values of the company. For more precisely result, probability distribution will be done for free cash flow to the company, free cash flow to the equity, predicted company values and equity values. Sensitivity analysis will be presented to check the sensitivity of valuation as growth rate of FCFF changes. The valuation of equity is important for estimation of value of one share for initial public offering (IPO) purpose.

Abstract:

The aim of this thesis is to give valuation of Huawei under risk, for which Excel will be used for data analyzing. Two-stage Discount Cash Flow method from Income Approach will be used for valuation. The first part of the thesis will start with general introduction of the thesis. The second part is the general description of valuation method. All formulas and Excel tools needed for valuation process will be introduced. The third part is the introduction of Huawei. Its history will be briefly introduced. SWOT analysis will be listed to show the market environment. Specific data will also be provided: common-size analysis and ratio analysis of the company in these recent years will be listed and moreover, market share and some industry data will also be provided to understand the competition better. In the last, there will be also vision and strategy of Huawei in 2019 presented. In the fourth part, the valuation process will be presented, and this is the core of the thesis. The recent 15 years of data from 2005 to 2019 will be used. The first procedure will be estimation of sales revenue and the regression analysis, we can find one most optimal macro indicator and find its linear relationship with sales. Monte Carlo simulation will be used to simulate the evolution of macro numbers and sales revenue in the following five years. 10,000 scenarios will be presented in the procedure. The second procedure is financial planning.With the financial plan we can get estimated free cash flow to the firm (FCFF) and estimated free cash flow to the equity (FCFE) in the following years. The third procedure is calculating cost of equity, cost of debt and weighted average cost of capital (WACC). In this part, data like risk-free rate, risk premium, beta coefficient and yield to maturity of the bond issued are needed. During this procedure, there will be 10,000 scenarios cause the simulation of random variables, so we will also get 10,000 different values of the company. For more precisely result, probability distribution will be done for free cash flow to the company, free cash flow to the equity, predicted company values and equity values. Sensitivity analysis will be presented to check the sensitivity of valuation as growth rate of FCFF changes. The valuation of equity is important for estimation of value of one share for initial public offering (IPO) purpose.

Keywords

Valuation under risk, Huawei, Monte Carlo simulation

Keywords

Valuation under risk, Huawei, Monte Carlo simulation

Language used: English

Date on which the thesis was submitted / produced: 24. 4. 2020

Thesis defence

• Date of defence: 30. 6. 2020
• Supervisor: Petr Gurný
• Reader: Miroslav Čulík

VSB – Technical University of Ostrava

Ekonomická fakulta

Master programme / field:
Hospodářská politika a správa / Finance