Forecasting & Valuation – Analysis & Report – Spreadsheet
Background
My company is China Outfitter Holdings Limited. The company is an investment holding company which designs, manufactures, markets, and sells apparel and accessories in the People’s Republic of China. Its main focus is on menswear. However, it also is involved in the sales of software and the development, operation and management of properties for its subsidiaries – Doright Group Limited, CEC Menswear, Faith Enterprise Limited and SKY Trend Hong Kong Investment Limited.
China Outfitters Holdings Limited has see some significant changes since 2015.
In 2015, China’s economy entered a new phase of the ‘new normal’ with economic restructuring and transition. For the first time in 25 years the economic growth had slowed down to its lowest level ever and as a result it could be seen that the conventional retail industry would face numerous challenges of weakened market sentiment, sluggish consumer demand and fierce competition. This is where the top and large-scale retailers nationwide recorded a historical decline in clothing retail sales of 0.3%.
The company was confident however that the disposable income of the middle-class populations the group took several positive measures to increase investments in branding, retail channel, information technology, e-commerce, logistic warehousing and supply chain to give the company a competitive advantage and laid a solid foundation for future growth.
In 2016, saw the complicated and ever-changing political and economic environment where China’s economic growth continued to slowdown as the economy was again affected by the slowdown of global economic growth and the rise of trade protectionism from developed countries and turbulence in the global financial markets. This also saw that China Outfitter’s Holdings Limited its performance was adversely affected by the macro-environment. The firms revenue was significantly affected and the profit attributable to the owners of the parent decreased. However, the company continued with its measures that it put in place in 2015.
In 2017, saw China’s economy achieve a steady growth in the Gross Domestic Product (GDP). This marked the first accelerated growth in economy since 2010. Domestic Consumption became the major driver of China’s economic development. Retail sales of consumer goods increased to double figures over the year. China Outfitters Holdings Limited benefitted from the macroeconomic recovery and their increase in profit attributed to the owners of parent company where it represented an increase of approximately 21%.
By continuing with previous measures set in place of increasing investment in business digitalisation, retail channels and supply chain and logistics the company was able to reverse the unfavourable situation of continuous decrease in sales and profits of the past four years and a growth in the company’s performance.
In 2018, after a steady growth in 2017 the growth in the Chinese economy slowed as the growth rate of GDP recorded its lowest growth rate in 28 years since 1990. The Retail sales of apparel products achieved a growth rate down by 3.3 percent compared to the previous year. The company suffered under a consistently sluggish macro economy and total revenue decreased but the profit attributable to equity holder’s pf the parent increased. The group still followed through with measures to increase its investments.
Future developments that the company has decided to add to their business is combining the online and offline business through information and digitalization is their main priority for the year ending 31 December 2019. Their focus will be on the following initiatives for 2019.
- The launch of their social network-based commerce and marketing program. Her the will collaborate with Weimob and sell and deliver products on WeChat using the WeChat Mini Programs and WeChat Official Accounts
- Encourage their staff and third-party retailers in using the company’s self-developed 020 system. To increase the conversion rate at retail points and accelerate the response to ultimate consumer’s demands for the China Outfitters products use the online product picture system and cross-brand product sales function.
- Roll out a customer loyalty program
- Increase the sale of aged inventory though their factory outlets, bargain sales, discount stores and online channels
- To expand the retail of our self-owned brands
Financial Highlights
If anyone could be confused about what the financial highlights of their company were, I can say I was that person up until the bolt of lightning struck. My thoughts were that part of the answer would be found in “My Company” blog page as this is where I have putting my information as the term as progressed. This page has been my foundation page right through this term. Also, the company reports which I have been using for this assessment as well as searching the internet for news. Now getting down to business.
2018 – was a year of acquiring new businesses. China Outfitters Holdings completed the acquisition of MCS Apparel Hong Kong Ltd making “MCS” a brand wholly-owned by the Company in the Greater China region. Add MCS to the Portfolio of the Company’s self-owned brands will be beneficial to attaining the strategic objectives of the company which is to increase the proportion of sales of its self-owned brands.
However, China Outfitters Holdings Ltd was confronted with the ever-changing market place and started to search for ways to better adapt to the competitive landscape. This is where the company reported a decrease in revenue and had an increase in profit attributable to the equity holders of the parent.
In the mix of all of this came the acquiring 100% interest in Focus Asia Investment Holdings Ltd (Focus Asia) which had held 50% in collective group of MCS.
2017 – The sped-economic growth driven mainly by the increase in retail sales saw China Outfitters Holdings benefitting from the improved market sentiment and reporting an increase in revenue and also an increase in profit.
2016 – a master license agreement with Greg Norman Collection to make and market its men’s and women’s golf, sportswear and accessories and that the line would be developed in collaboration with a China based team to target the Chinese consumer which reflected the international reach of the Greg Norman brand. https://thegolfwire.com/325210-2/
This year was seen to be another difficult and challenging year especially in the menswear sector. China Outfitters Holdings Ltd was once again confronted with the weak market sentiment and increasing competitive market place which saw a decrease in revenue and also a decrease in profit. Self-operated retail sales decreased and was primarily due to the decline in customer flow in mainstream department stores.
2015 – This year was seen for most conventional retailers in the menswear sector to be difficult and challenging year. China Outfitters Holdings Ltd was once again confronted with the weak market sentiment and increasing competitive market place which saw a decrease in revenue and also a decrease in profit. Self-operated retail sales decreased and was primarily due to the decline in customer flow in mainstream department stores.
Key Aspects of Forecast
Could you class me as a risk taker? Looking at life everywhere you go, everything you do is a risk. A business is like driving a car. Whilst you take the precautions to put the seat belt on, fill the car with petrol make sure the radiator is full and the tyres are pumped up until you start driving the car you are safe. Once you start driving the car you have now taken the risk to get from one destination to another. What happens between the two points is not always in your control as you have taken risks to avoid pot holes, going through stop lights, bumping into the car in front of you whilst ensuring that you have taken check of other circumstances that are occurring around you. Why the analogy of the car with business? Both are similar as risks are taken to ensure that the best performance is achieved however outside influences can change the outcome.
China Outfitters Holdings Limited may have good business skills however the circumstances around the firm could turn the success of the company into jeopardy. Forecasting the future of China Outfitters Holdings Limited is taking a risk to see if the predictions that have been laid down will be advantageous to the future of the company. Therefore looking at Sales Growth, Profit Margin, Asset Turnover, WACC and Growth Rate to me are considered to be the key aspects of Forecasting.
Sales Growth
Reviewing the sales growth of China Outfitters Holdings Limited has been like riding a rollercoaster. There have been so many ups and downs with this. Looking at the figures that I have been able to gather through the reports we can see that 2017 was a good year in sales. However, when it came to forecast the sales growth, I think the figures that are being used are a bit conservative especially if the economy and consumer demand change.
Profit Margin
At present we see much happening in the business world with the economy, world trade and tariffs that looking at the figures of China Outfitters holdings the figures for profit have taken the average of the past four years to justify why a 5.28% margin is a conservative figure for future forecasts. However, if the company decides to acquire more businesses the profit margin may change.
Asset Turnover
The past four years have shown that the Asset Turnover has been low. How efficient is China Outfitters Holdings Limited you may ask? What I have found is that the company did not use any outside cash flow to finance activities. It was able to use internal funds to finance the asset turnover. You could say that the funds that came in to the company for future expansion needs. I have used the average of the last four years to predict what the future forecast.
Weighted Average Cost of Capital (WACC)
This was an intriguing exercise as I was unsure of the whole concept. Once I realized that Weighted Average Cost of Capital is the rate of return to which a company expects to compensate all its different investors. The WACC represents the minimum rate of return at which a company produces value for its investors and to find out how expensive it is for a company to raise the funds needed to buy buildings, equipment, and inventory. Using the figure that Martin gave us of 8% for the WACC I found that my forecast would be too high. China Outfitters Holdings Limited could use a lower WACC of 5% for funding any new projects as the cheaper the WACC the better for the company.
Growth Rate
Forecasting the growth rate of China Outfitters Holdings has led to some investigative work on my part. Since this course started so much as gone in the finance sector of late. Recent reports have shown that China and US are at odds about tariffs and trade war. Over the past three years the GDP has caused a major affect on the economy in China and this has led to a slowing of the economy. Using the growth rate of 4% is most likely a bit conservative however it is better to be conservative the over optimistic about achieving a high rate of growth.
Valuation
How do you put value on a company who does not distribute regular dividends to its shareholders? I have sat here and poured over the spreadsheets and Company Reports and can see that China Outfitters Holdings Limited board members are more interested in using the profits to develop and extend the company. Although the DCF Valuation and Economic Profit Valuation have similar Enterprise outcomes I am not sure which valuation gives the better benefit. As this company has no outstanding debts it is hard to think that if I used 8% borrowing rate would it benefit the company. I tried using 4 different borrowing rates and found that if used the 5% rate it would benefit the company with its enterprise value. However, if used the 8% borrowing rate it would not benefit the company.
| Short Term Borrowing Rate | Enterprise Value |
| 5% | $1,397,783 |
| 6% | $756,768 |
| 7% | $541,041 |
| 8% | $431,731 |
Whilst strategizing about which rate to use, I researched the net and found that my rate would be of more benefit. As at 17 August 2019 the designated Loan Prime Rate (LPR) set a new rate of 4.2% by the People’s Bank of China (PBOC). This back up my idea of only a 5% rate for short-term borrowing.
Response to other students questions and answers on Facebook
I placed a question on Facebook to Martin Turner in regard to “Should the enterprise value be the same for DCF and Economic Profit?” Daniel Saliba responded with that he believed they should. This made me go back and find where my mistake was in my spreadsheets. Billy Van also message me and mention that I had a mistake in my spreadsheet and that I need to go the Valuation tab, on Cell C34, you seem to have entered the NOA figure which overwrote the formula on the cell that copies it from the Key Value Drivers tab. To fix up the issue, change the 812486 value in Cell 34C to this formula: =+’Key Value Drivers’!G15 This should make both enterprise value figures match. Let me know if it doesn’t work. Apologies, Iris! I gave you the wrong cell reference, it should be cell C30 not C34. If you change the value of C30 on the Valuation tab to the formula I mentioned, it will balance.
Recommendation
My recommendation for China Outfitters Holdings Limited if I was a Chinese Investor I would strive to get in at the low rate for the purchasing for shares. The company has shown that although their profits may be down the company is still able to sustain its business. As I have said throughout this assignment there are a lot of factors that have come into play over the past five years and are continuing to affect business all over the world. With China and US at loggerheads about trade and tariffs I find it hard to think that this is a good time to invest in any company. If a company wants to stimulate growth within encouraging investors to buy into the company would be good. There is no right or wrong answer here at present because the exercise we have completed is all hearsay and could change at the drop of a hat.
Reflections on Experience of Learning
At the beginning of the term I realised that I was only a term away from completing my degree. What a scary thought!! I have now been studying for more than 15 years and am finally coming to the realization that I can do it. There is no place for failure in my books. There have been times where failure took its place in some areas but to be able to see the light at the big bright tunnel is an achievement. There have been obstacles along the way and at times having the belief in what you are doing is sometimes not easy. I have over the years had both Maria Tyler and Martin Turner as my lecturers and I can say that I have benefited from what they have provided for learning.
An overall summary of how you have experienced learning in our unit.
I entered this unit with trepidation. The old saying of ‘You can bring a horse to water, but you can’t make it drink” came to mind. There was a stubbornness in me that just wanted to get on the horse and ride away. With the previous terms concerns still on my mind I wondered if I was going to like or be able to cope with this course. But me being me gave it a go. My experiences with KCQ’s previously actually scared me as I was a person that hates to write. You wouldn’t think so now! Going from relearning how to use formulas to excel spreadsheets was a task itself. Instead of being the fence sitter I got in a got going.
PeerWise wasn’t that hard as I came from a course in the previous term and experience doing it earlier in my degree. Do I like PeerWise? I can see a benefit in it as it helps cement the learning of the different topics and features for each week. However, sometimes the time needed to write questions and answers, give feedback to others I sometimes wondered was it worth it. My thoughts went on to think well if I got the full marks that could be the difference between passing and failing.
The thing that really surprised me was using the blogs once again and having these assignments where there seemed to be so much information to take in. At one stage it became information overload as I couldn’t cope with the amount of stuff we were learning. Then realizing well what do you expect with a capstone subject. All the learning you have done over the past 6 years is consolidating that knowledge in this course. I’m thankful with this course that there has not been limitations placed upon us like word count. I’m thankful for assignments as I can express myself and take the knowledge that I have been learning and placing it on paper. If I had to do an exam at this point of time I would be freaking out as I have panic attacks and find it hard to cram all the knowledge in my head for the exam and then once the exam was finished not be able to remember what I did let alone how well I went.
WOW!!! How can this be? Today I have come to realize that this course all though has been a hard slog for many including myself I can see the light at the end of the tunnel. But as the course ends there is still so much more that can be. However, life has its challenges and through these trials we can gather more knowledge to take into our future. The future is not defined by our past it is defined on who we are and how we can manipulate our lives to better service our future.
Martin Turner, I think most of us would be able to say that you have be an inspiration to us all and that your care of students learning shows us as the learner that we matter. There have been times where I have found that working full time and then putting in the extra effort has given me the zest to do well. Thank you
A description of your contributions to and interactions with others in our unit.
Honestly this has been a struggle at my end. As a mature age student I have found at times that relating to other peers has been hard. I can say that I have tried to contribute as much as possible when interacting with other students. This assignment has shown me that I needed the interaction as much as other as I found that I was floundering under my own pressure of not knowing some of the material that was presented to us. Using Facebook and the blog have been a real benefit as I have found that other students have been able to relate to my style of writing. Nicole Olsen commented that although she worked in the industry didn’t make her any better equipped to tackle the KCQ’s. She also mentioned that the way that I presented some of my work made it easier for her to digest. She had her own lightbulb moment.
Evelyn Pelto says that I have a smooth conversational style and through reading my Step 2 it made her think of new different ways of looking at formulas. Katrina Brown liked how we had similar companies and seeing what would eventuate out of our discussions.
A summary of your learning in this unit.
What can you do now, and what do you know now, that you could not do and did not know when you first came into this unit? Asking a double-edged sword question makes this hard to answer. What can I do now? There is so much that I have learned throughout this term. The main area which I have struggled with over the past few years is being able to put what I know and have learned into a logical order. I have been able to write more freely and know that some people who have read my work can relate to what I have written.
What did I not know when I first came into this unit? Over the past five years I have done so many exams and assignments and wondering whether I was going to achieve well in this course. When looking at the content at the beginning I could not believe what was ahead of me. It gave me quite a big fright. The thoughts that went through my head was a total inadequacy of not knowing some of the work that was being presented in the term.
If I asked you to be a co-teacher for part of this unit next year, what topic, task, or activity would you volunteer to teach to a new student? Firstly, my question to you would be why would you choose me to be a co-teacher? As a person who up until now did not like writing I would say putting together a Blog page has been a pet of mine in this course. I like to put things in a logical order where the reader can see where to go and what can be done. Using WordPress was a challenging but with my prior computer knowledge was able to decipher how to go about putting the blog page together. It took some trial and error, but I achieved what was required.
And what happened to you in this unit that makes you think you would be a possible co-teacher? I’m not sure if I could be a co-teacher but with guidance it could be done. There are times when all of us lack confidence in what we can do however with guidance and encouragement it can be done.
Also, what was your more important realization concerning the subject matter of our unit? Here was the light bulb moment that this is not a course that can be taken lightly, and minimal work will not give you the marks that you require.
Why did you judge this to be of importance to you? When reading through the course profile you realize that the recommended hours may not be enough to pass the course. If you want to achieve the best results you need to make the time and effort to complete the tasks at hand.
What was the most important skill you learned? The most important skill not just I but anyone can learn is to believe in themselves that they can do anything that they put their mind to
Again, what was it that was so significant about this skill? Many people have the ability but until they see that through their own eyes they will not fulfill the full potential that they are capable of.
What is the primary learning that you feel you need to undertake the next time you could study in this area? As I have one subject left to do next year the one thing that I can take with me is that through persistence and dedication I will be able to finally finish this degree. I have learnt that through all the struggle there is a light at the end of the tunnel and waiting at the end is the biggest party ever.
A summary of what you think students who study this unit in future should know about how to survive and flourish in this unit.
The three most important things you should make sure you do to keep your sanity in this unit.
- Focus on the positive and not give up.
- Enjoy taking a break when needed. We all need to refresh our minds and revitalise our spirit.
- The biggest one don’t leave everything to the last as this course is one that is not to be taken lightly. There is so much to learn and there is no time to waste.
I will leave you with a quote:
“Sooner or later, your work speaks for itself. Outlasting the critics feels like it will take a very long time but you’re more patient than they are” Seth Godin
ACCT13017 - Financial Statement Analysis 