Finances of China Chaintek United Company Limited - Essay Example

?Executive summary The company is China chaintek united company limited that has invested in transport sector. Investment in transport sector has economical benefits, for instance in relation to the location and pattern of activities contributing to economy and hence helping to reduce disparities among regions. Appraisal for transport projects are done within a given framework. The framework sets out safety, environment and accessibility effects. Social benefits are estimated using these appraisals (GREAT BRITAIN, 2004). The company that I have chosen for this assignment is in the industry of transport and also it is listed in the London Stock Exchange. The bench mark companies in this industry include DP world limited, Global point investment and finally Hangar & plc. Review of U.K and global economy U.Ks economy is in a strong position. It has been stable and its growth rate has been consistent for the last two decades. The economy boosts of the highest employment rate among the G7 nations. The main challenge facing United Kingdom currently is finding ways to build it further in order to become more competitive in the globe. Currently UK has almost 30million people employed. Global economy has been changing at a very high rate. This is contributed to from different emerging economies that include china and India. This is illustrated in China’s growth that was at over 11% in 2005. With this trend it is likely to be the third biggest economy by 2016. Review of the target company sector The major players in this industry are small and medium sized enterprises. In this sector a person will notice that less than 1% of these companies do employ 300 people and above and on the other side sole traders make up 37%. In respect to education, 16% will account for people who have graduated. There are various forms of transport in this industry namely, land transport, water, warehousing, postal, courier and air transport (TAMARI, 1978). The key issues in this industry include attitude that people have especially the young graduates who are not interested to join this sector Company information The target company was incorporated in the year 2011 and does conduct its business through its subsidiary Fujian Xingtai Company limited. The company was founded by Mr. Shufang and Mrs Meijin. The main business undertaken by this corporation is providing logistic services. The corporation has a market share of about 60 manufacturers based. Swot analysis Strength Risk management system Company market position Business model Weakness Poor performance Management team Opportunities Assessment of the company’s sources of inputs and finance Threats Strong franchise value Expansion potential Strength of the company The company also has a strong market segment in Europe that it serves best. The company top 20 client’s account for 45% of the total revenue. In management of its risks, the company uses what we call a proactive approach. This approach ensures that both the employee and the customer are safely protected (FINE, 2009). The business model of this company forms the strength of the company. This is because it is loyal to its customer, the services are offered at affordable prices which create economic value hence sound business model. Opportunities for the company Sources of inputs and finance for the company are available and obtainable at a reasonable cost. A larger percentage of the company source of finance is through the owners’ contribution. The company also get loans from the leading financial institutions in the United Kingdom. Besides these, the company also raise part of their capital through issue of shares which are sold to the public at a given price (FINE, 2009). Threats Potentiality to expand its business activities is limited because of its competitors in Europe. The company get stiff competition from multinationals companies in the transport industry and this has led to reduced revenues in the company (WIEHLE. 2007). Weakness The Company has a poor management team which has resulted to poor performance of the company. This has motivated the stakeholders to opt for takeover of the company (BULL, 2008). The company has a strong franchise value such as consumer loyalty, good customer services and also fair pricing of their services compared to other competitors and yet they are not putting into practise (BULL, 2008). Financial performance Working capital = current assets - current liability. It measures efficiency and also operating liquidity. Current assets $213, current liabilities $187 Working capital =213 – 187 = $26M. Profitability ratio Gross profit margin = gross income/sales = $435/600 =0.72 What can you improve to generate synergy? Improving employee relationship and engagement at the work place, by doing this, it will help in making sure that the name of the organization has positive remarks. Gearing ratio, Debt /equity = 0.9/6.23 =0.145 * 100 = 14.5% Preliminary information There was an increase in index in the transport and storage sector of 0.7% in the fourth quarter of 2012. This was due to a boost of 0.2% in the earlier quarter. Price earning ration= Market Value per Share Earnings per Share (EPS) The company is currently trading at $300 per share, the earnings were $14. Price earnings ratio = 300/14 = $21.4 (HINE, et, al 2003). Market value earnings per share price earnings ratio DP world limited....................................$290 14 290/14 = $20.7 Global point investment..........................$325 15 325/15 =$21.6 Hangar & plc...........................................$521 21 521/21 = $24.8 Interpretation, a high price earnings ratio indicates that future earnings growth in future is higher in comparison with companies with lower P.E. Hangar & plc has a good future growth. Average industry bench mark is between 20-25 times (HINE, et, al 2003). Enterprise value to sale ratio Ev/sales = market capitalization + debt + preferred shares – cash and cash equivalent Annual sales = 35M + 264M + 255M – 324 40M + 270M + 220M- 300 600M 324M 230/600 = 0.38 China chaintek united ltd 230/324 = 0.71 for DP world limited 30M + 190M + 50M- 30 300M + 123M + 250M- 327 340M 612M = 240/340 = 0.7 for Global point investment 346/612 = 0.56 for Hangar & plc Interpretation, higher measure indicates good future sales and hence DP world and Global point investment reflects good future sales compared to the other two companies. Enterprise value to EBITDA ratio This is given by the formula EV/EBITDA =230/525 = 0.4 China chaintek united ltd 230/410=0.5 for DP world ltd =240/300= 0.8 for Global point investment 346/606= 0.52 for Hangar & plc Interpretation, the ratio determines the company’s value. Global point investment has a high value indicating high growth hence attractive for takeover. The other three companies have a low ratio an indication of a slow growth. EBITDA to sales ratio compares revenues with earnings. Margin= EBITDA/Revenue China chaintek united ltd = 0.525/2.1= 0.25M Global point investment margin 0.3/0.9= 0.33M DP world ltd margin 0.41/0.8=0.5125 Hangar & plc margin 0.606/1.2 =0.5 Interpretation, DP world ltd has a higher value an indication that the company is able to maintain its earnings at favourable level. The other three companies have a low ratio meaning that their expenses are high. Section 3 business plan for Target Company (China chaintek united ltd) Business planning offers the car agency’s management and its shareholders a chance to set their targets and goal. In this case, it is critical to form a business plan to assist the agency’s long term objectives (BARRINGER, 2008). The business operations Many young couples are interested in cars that are out for their interests. This means that; they want cars that are trendy and lavish to match the new lifestyle (BARRINGER, 2008). The common vehicle models from popular vehicle industries are the right cars for the job. This is if they want cars for pleasure. In the event they need cars that are for business, there are also a variety of them around to fulfil this desire. The price of hiring these cars will range depending on the make and model of the car (BARRINGER, 2008). The different assortment of cars will offer customers a variety to choose from, and their availability will make the business a top choice among clients. Everyone, in this day and age, wants to be affiliated with a posh lifestyle. To address this desire, cars that are cheap, but look desirable and lavish, are likely to be present. They all serve the same purpose, and the customer ends up feeling gratified with the selection they have made. Toyota’s Premio is an example that might serve this purpose. The rates of hiring the cars are likely to range from one price to another. The varieties of cars that the company will present will be a diversification in the business. The firm’s operations will no longer be rooted in one locality, which will enable it to reach more people. Investments Diverting customers from the competition is instrumental in covering the business and some of its costs. Rentals can be maximised through this method, and ensure a customer’s loyalty to the business (BARRINGER, 2009). There is a diverse market for the rental agency. Many individuals, incapable of buying cars, may find the rental business a relief to their needs. Most of the young people find these services working in their favour. This is because they can hire cars, have fun, and enjoy the advantages of having vehicles to transport them from place to place. The rental agency may have customers in the form of these visiting groups. They can offer cars for some time, and eventually, attain a vast number of clientele. This growth slowly leads to the control of an immense rental service, which is what every business is keen on attaining. The older people in society are also at an advantage if they use the rental agency. They might have an opportunity to use some of the cars they cannot afford to own. Also, business travellers may have contractual agreements with their companies and the rental agency, hence; provide the much needed client base (BARRINGER, 2009). Capital structure The capital structure of the company will be made up of the shareholders fund (owners’ equity), borrowed funds and equity shares (FINCH, 2006). All the capital that is saved after the provision of services will go back to raising some of the business’s fundamental activities. These include taking care of the vehicles in the firm’s possession. Source of capital Amount in $ Owners equity 56,000,250 Debt 1,435,500 Equity shares @ 15 per share 10,800,500 Retained earnings 1,297,000 Operating income 1500 3000 4500 Earnings per share 0.15 0.3 0.45 Return on equity 15% 30% 45% The aim of assessing potential for improvement and future growth This helps keep customers attracted to the services and products that are being offered. In the long run, ties to the business will be unbreakable as customers will always opt for quality in the products they use. While getting this publicity, one might take advantage and use the popularity to get more agencies involved (FINCH, 2006). Expansion is likely because of this growth and increase in profits. Synergy post acquisition The post acquisition implies that both the target company and the planned business will make more profit and grow faster. This is because of the following reasons, a) The target company has already established its market share and controls a bigger proportion of it. When the acquiring company come into existence, it will be bringing more resources into the business hence a threat to other competitors. b) The acquisition will be in favour of the target company because of the experienced management team they have. That is because it was established earlier and has carried business activities for sometimes and so this gives them the advantage over the planned business. c) The target company has a growth rate of over 11% compared to the other planned company which has no growth rate but will rely on projections that their team will come up with. To curb the loss of unused inventory, it will be paramount to offer these operations to other agencies to handle (KURATKO 2008). This is while taking some percentage from these dealings. This is a deal that will have the business acquire more capital from dealings it does not engage in, on a daily basis. Operational improvements Capital Allocation Period Pricing Amount Personal Plan -insurance -permits -company contract -taxes Car balancing Tyre checks Engine checks Annually Annually Annually Annually Annually Annually Annually $ 500 $ 3 000 $ 10 000 $ 600 $ 3 000 $ 3 000 $ 1 000 $ 2 000 $ 500 $ 3 000 $ 10 000 $ 600 $ 3 000 $ 3 000 $ 1 000 $ 2 000 Capital expenditure Asset name Price value (unit value) in $ Number required Total value Van 45,750 20 915,000 Salon cars 35,000 50 1,750,000 Executive buses 124,000 10 1,240,000 Land 80,000 0.25acre 80,000 Cash flow Monitoring the amount of capital spent in the business is fundamental in understanding how it is fairing (CHRISTY, 2009). Management needs to work out a strategy to monitor the receivables in the business to prevent the overreliance of one product. To achieve this, there is the need to concentrate on raise the productivity of the services provided. Most cash flows are addressed at the end of the month, the difference in retaining some of the capital the business gains should be for paying for and financing motor vehicles (CHRISTY, 2009). The projects cash inflows are as indicated on assumption that return is 12% Year 1 2 3 4 5 Amount $250,000 $400,000 $450,000 $600,000 $1,000,000 N.P.V for the project (250,000/1.12) + (400,000/1.122) + (450,000/1.123) + (600,000/1.124) + (1,000,000/1.125) 223,214 + 318,870 + 320,280 + 381,315 + 567,440 = 1,810,119 The terminal value should be above $ 1.810,119. Calculation of cost of capital using WACC Capital source Ratio cost Weighted Equity 0.55 14% 7.7% Debt 0.1 12% 1.2% Preference 0.35 5.4% 1.89% Weighted average cost of capital = 7.7 + 1.2+ 1.8 =10.79% Use of capital asset pricing model Risk free rate is given to be 4%, the risk measure is 3 and market return premium is 5%. By use of the formula, 4% + 3 (5% - 4%) = 4% + (15 – 12) = 7% Sensitivity analysis Introduction of the new business will help bridge the gap left in the transport industry. This is because of the high demand of transport services which could not be met by other companies offering the same services (LE TALLEC et, al 2002). Recommendations and conclusions a) Buy, in my opinion I think the planned business should buy the target company and make it a subsidiary. This is because of the target company has a poor management which is a motivating factor for takeover and also low enterprise value to EBITDA which indicates slow growth and the market share it has developed. b) What price, average price of purchase will depend on various factors such as the company’s value in terms of share value, its assets portfolio and current financial status? When all these factors have been taken into consideration, I think the value should be $2,000,000M. c) Any other issue is that the company after take over should realign its management team in order to be able to succeed in this transport industry. References BARRINGER, BR 2008, the truth about starting a business, PULP, New York. BARRINGER, BR 2009, preparing effective business plans: An entrepreneurial approach, Sage Publishers, London. FINCH, B 2006, How to write a business plan, Macmillan Publishers, London. KURATKO, DF 2008, Entrepreneurship: theory, process, practice, Free Press, New York. LANE, M 2002, A guide to the effective business plan, Oxford University Press, New York. GREAT BRITAIN. (2004). the future of transport: a network for 2030. [London], TSO (The Stationary Office). HINE, J., & PRESTON, J. (2003). Integrated futures and transport choices: UK transport policy beyond the 1998 white paper and transport acts [...] XD-US. Aldershot [u.a.], Ashgate. BAGWELL, P. S., & LYTH, P. J. (2002). Transport in Britain, 1750-2000: from canal lock to gridlock. London, Continuum. BULL, R. (2008). Financial ratios how to use financial ratios to maximise value and success for your business. Amsterdam, Elsevier/CIMA. TAMARI, M. (1978). Financial ratios: analysis and prediction. London, P. Elek. CALIFORNIA HOSPITAL ASSOCIATION, & HOSPITAL DATA CENTER (CALIFORNIA HOSPITAL ASSOCIATION). (1970). Financial ratio analysis program. [Sacramento, Calif.], California Hospital Association, Management, Services Division. BULL, R. (2008). Financial ratios: How to use financial ratios to maximise value and success for your business. Amsterdam: Elsevier/CIMA Pub. WIEHLE, U. (2007). 100 ifrs financial ratios=100 ifrs indicateurs financiers: DICTIONN. S.l.: Cometis. HESTER, R. E., HARRISON, R. M., & Royal Society of Chemistry (Great Britain). (1998). Risk assessment and risk management. Cambridge: Royal Society of Chemistry. COYLE, B. (2000). Cash flow control. Chicago (Ill.), Glenlake Publ. PLEWA, F. J., & FRIEDLOB, G. T. (1995). Understanding cash flow. New York, Wiley. CHRISTY, GEORGE C. (2009). Free Cash Flow Seeing Through the Accounting Fog Machine to Find Great Stocks: Epub Edition. John Wiley & Sons Inc. FINE, L. G. (2009). The SWOT analysis: using your strength to overcome weaknesses, using opportunities to overcome threats. [S.l.], Kick It. LE TALLEC, P., & LAPORTE, E. (2002). Numerical methods in sensitivity analysis and shape optimization. Boston, MA, Birkhauser. GA?L, T., & GREENBERG, H. J. (1997). Advances in sensitivity analysis and parametric programming. Boston, Kluwer Academic Publishers. APPENDIX Financial ratio Gross profit margin = gross income/sales Working capital = current assets - current liability Ev/sales = market capitalization + debt + preferred shares – cash and cash equivalent Annual sales Price earning = Market Value per Share/ Earnings per Share (EPS) Enterprise value to EBITDA ratio = EV/EBITDA EBITDA to sales ratio Margin= EBITDA/Revenue Debt = market value of equity/ Market value of the firm Preference = market value of preference/ Market value of the firm Equity = market value of debt/ Market value of the firm Read More