Business Valuation Report: Analysis of Towngas China Company Limited

This report presents a business valuation analysis of Towngas China Company Limited, focusing on the determination of its intrinsic value using the discounted cash flow (DCF) model and dividend growth model. The study acknowledges the challenges in applying the DCF method to the gas utilities sector and subsequently employs the dividend per share (DPS) approach, considering the company's dividend payments. The report details the calculation process, including assumptions such as the ten-year government bond rate and the cost of equity, and highlights the potential overvaluation of the company's shares based on initial calculations. The analysis further discusses the assumptions underlying the DCF method, emphasizing the use of cost of equity instead of the weighted average cost of capital and the derivation of beta from industry averages. The report also explores the factors influencing share prices and intrinsic value, such as future earnings and financial health, and provides a conclusion based on the findings, including the company's strong financial performance and competitive market position.

Running head: BUSINESS VALUATION
BUSINESS VALUATION
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Executive summary
Intrinsic Value is calculated to estimate the future cash inflow from the current business value
and financial position of the company and also their investment into different areas. Here the
case study of Towngas China Company Limited is taken to find out their intrinsic value and
Discounted Cash Flow model is adopted for the purpose.

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Table of Contents
1.1Introduction...........................................................................................................................3
1.2 Discussion............................................................................................................................3
1.2.1 The calculation..............................................................................................................3
1.2.2 Assumptions..................................................................................................................4
1.2.3 Few important steps......................................................................................................5
1.3 Conclusion............................................................................................................................7

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1.1 Introduction
Business valuation can be considered as a general process for calculating the
economic value and company’s intrinsic value of stock. Here is one of a case study of
Towngas China Company Limited to find their intrinsic value. For this discounted cash flow
model is used to calculate the intrinsic value of the company. This method will help the
researcher to get the intrinsic value without any jargon. Using simple methods for calculating
the business value or the intrinsic value of the company will help the researchers to extract
almost accurate estimation from the result. Assuming the exact financial figure is not easy for
such a huge and expanding company and hence it is always better to adopt the easiest method
which will provide a straightforward result for further analysis of any cast study. The
company is however the most expensive appearing at the time of writing their business
valuation and there are many other reasons which increases their business value without
increasing the intrinsic vlue of the company.
1.2 Discussion
1.2.1 The calculation
Towngas China Company Limited is operating under gas utilities sector and hence
calculating the intrinsic value of it from free cash flows can be really difficult. Researchers
have used the method of dividend per share (DPS) payments as it will be easier to calculate
the intrinsic value with that because it is assumed that the dividend payments of any company
increases with the increase in their sustainable growth (Simply Wall St., 2020). For this study
purpose the researchers have used the ten-year government bond rate (1.6%). The dividend
per share which is expected was discounted and then with the current value of cost of equity
at 6.4% (Maeda et al., 2015). However, it is hard to get the exact value so an estimation can
be derived from the following formula:

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Value per share = Expected Dividend per Share/ (Discount Rate – Perpetual Growth Rate)
= HK$0.2 / (6.4% - 1.6%)
= HK$3.6
Source: SEHK: 1083 Intrinsic Value, February 21st 2020
The above picture shows that the assumed future cash flow of Towngas Company is
at HK$3.64 and their current share price is also overvalued at HK$4.90. The overvaluation of
the company share prices was made because the calculation was done using the actual flow
method. There is a huge difference between the current share price and the estimated future
cash flow value of the company. To eliminate this kind of differences the researchers have
used the Discounted Cash Flow model and the 10 year government bond rate at 1.6%. Which
will help the researchers get almost an accurate value (Ren, 2013).
1.2.2 Assumptions
It is to be noted that the researches have used the Discounted Cash Flow method and
not Actual Cash Flow method. The main reason is that it does not provide the actual potential
of the company. Hence, the cost of equity is being used by the researchers because it will not

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show the accounts for debts like weighted average cost of capital. The cost of equity was
assumed as discounted rate which is dependent on the levered beta of 0.8000.
Basically beta is considered as the measurement of stock’s volatility. Here the beta
was derived from the industry average beta which is from globally comparable companies
and the limit was from 0.8 to 2.0 (Bihari & Charde, 2014).
1.2.3 Few important steps
Currently the stock price is at HK$4.670. Their stock code is 1083. Here, business
valuation is one of a motive of the researchers however not the only motive. Adopting the
Discounted Cash Flow method will help to find out the stock value of the company. This
method can only be used as an assumption which needs to be real for the stock to become
overvalued or undervalued (Corporate Finance Institute., 2020). The output of the company
will shoe different result if the risk free rate or the cost of equity changes sharply. There are
many reasons for why a share price become different from the intrinsic value of the company
and they are following:
 Future earnings: This provides the estimation of the future business income. The
current income the fixed costs and company’s return is deducted from the future
value of the contracts.
 Financial health: the financial health of the company should be better. There is a
possibility that the company may earn maximum profit more than previous, here the
intrinsic value and the share price will be different because the company have to clear
the debt at first and then divide the profit (Corporate Finance Institute., 2020).
 Other alternatives: many other high quality stocks could be used like the value of
the company.

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Source: Simply Wall St
Source: Simply Wall St
From the above picture it is clear that the dividend of the company shows a high result
which means that the company is financially strong and stands as a strong company in the

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market. The past performance or the cash flow has influenced the growth of the company and
the business value has increased accordingly (Hkex.com.hk., 2020).
There are many competitors in the market for Towngas China like the Turcas Petrol, Ignities
Group, Star Group and many others under the same Energy & Utilities industry (LAI &
Wong, 2015).
1.3 Conclusion
From the above discussion on the case study of Towngas China, the intrinsic value
was determined by the dividend growth model of the company because the researchers found
the discounted cash flow method to be very difficult for such a big and financially strong
company. The reason why Discounted Cash Flow method was used because the company has
showed that they divide majority of their FCF as a dividend to their shareholders which
makes it quite difficult to estimate the value of stock from it because it underestimates the
value. The researches have estimated that the dividend payment of the company would
continue to grow at a very sustainable rate from the Gordon Growth Model. Conservative
growth rate used because it will not exceed the company’s Gross Domestic Product (GDP).
The company is performing great in the existing market where there is a lot of competition.

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References:
Bihari, S. C., & Charde, S. K. (2014). Intrinsic value of stocks: Does market appreciate it? A
study on three major private banks in India. Economics, Management and Financial
Markets, 9(1), 53.
Corporate Finance Institute. (2020). Intrinsic Value - Learn How to Calculate Intrinsic Value
of a Business. Corporate Finance Institute.
Corporate Finance Institute. (2020). Valuation Methods - Three Main Approaches to Value a
Business. Corporate Finance Institute.
Hkex.com.hk. (2020). Equities Quote. Hkex.com.hk.
LAI, P. F. B., & Wong, W. K. (2015). AN EMPIRICAL STUDY OF RELATIONSHIP
BETWEEN SHARE PRICE AND INTRINSIC VALUE OF COMPANY. Financial
Studies, 19(4).
Maeda, S., Harabuchi, Y., Ono, Y., Taketsugu, T., & Morokuma, K. (2015). Intrinsic reaction
coordinate: Calculation, bifurcation, and automated search. International Journal of
Quantum Chemistry, 115(5), 258-269.
Ren, T. Y. (2013). U.S. Patent Application No. 13/870,972.
Simply Wall St. (2020). Is Towngas China Company Limited (HKG:1083) Worth HK$4.9
Based On Its Intrinsic Value?. Simply Wall St.