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