Forecasting and Valuation:
Hogs and Chestnuts
Who profits when the
Chinese eat?
Bennet’s Law
Source: FAO (2008).
Zhongpin (HOGS) Valuation Ratios
What is the PEG ratio? (use analyst forecasts)
◼“we believe that, ultimately, the projected 20% top–line
growth should fall to the bottom line”
Assuming 0 growth in ‘abnormal earnings’ in future,
what is predicted PEG ratio? What if g = .02?
PEG ratio at HOGS
forward P/E ratio = 11.4/1.20 = 9.5
PEG = 9.5/.20*100 = .475.
PEG =Pe/NI1
h*100 =1
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1+h–re
re–g
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h*100
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Forecasting Zhongpin (HOGS)
Recall the idea is that
1. Chinese like pork
2. Chinese middle class is growing rapidly
3. desire to improve pork processing safety
December 31, 2009 December 31, 2008
Bank notes receivable 7,997,172 1,268,890
Accounts receivable, net of allowance for doubtful accounts of $ 1,132,038 and
$1,215,901 20,419,797 20,432,752
Other receivables, net of allowance for doubtful accounts of $290,436 and
$500,447 652,523 1,907,243
Purchase deposits 5,653,192 4,308,852
Deferred tax assets 256,151 213,566
Other current assets 120,709 96,402
Total current assets 166,682,013 112,265,790
Property, plant and equipment (net) 189,588,904 133,867,635
Deposits for purchase of land usage rights 8,718,740 6,429,295
Other non-current assets 1,761,709 412,503
Total assets $ 498,111,802 $ 329,783,071
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—
HOGS – accounting analysis
Accounts Receivable Allowance
The Company regularly evaluates and monitors the creditworthiness of each of its customers in accordance with the
prevailing practice in the meat industry and based on general economic conditions in the PRC. The Company maintains a
general policy of providing 100% allowance for doubtful accounts in an amount equal to the aggregate amount of those
accounts that are not collected within one year plus an amount equal to 5% of the aggregate amount of accounts receivable less
than one year old. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The
Company also examines the credit terms of significant customers regularly and asks for more cash deposits if these customers
appear to have any indicators of delaying their payments to the Company. Such deposits are usually applied for the collection of
the outstanding accounts receivable during the year. With such a practice in place, the Company did not have any specific
December 31, 2009 December 31, 2008
Beginning balance $ 1,215,901 $ 1,341,872
Reduction in allowance for bad debt (83,863) (125,971)
Ending balance $ 1,132,038 $ 1,215,901
HOGS – Ratios and Cash Flows
see my eVal model
ROE has declined. Why?
RNOA has declined. Why?
NOA turnover has declined. Why?
Income Statement Assumptions
Sales Growth
Cost of Goods Sold/Sales
R&D/Sales
SG&A/Sales
Dep&Amort/Avge PP&E and Intang.
Interest Expense/Avge Debt
Non
-Operating Income/Sales
Effective Tax Rate
Minority Interest/After Tax Income
Other Income/Sales
Ext. Items & Disc. Ops./Sales
Pref. Dividends/
Avge Pref. Stock
“cheating” with an analyst report