Suda Electric Vehicle Company: Private Equity Investment In China Harvard Case Solution & Analysis

Suda Electric Vehicle Company: Private Equity Investment In China The Case Solution  

1. The e-bike industry had a high fragmentation, where each section was working on different needs and necessities of the customers and meeting such various needs had the potential to damage Wang’s company. In order to operate with such different demands; the firm was required to create its own differentiation and innovations in the products in order to remain competitive and productive.
2. The e-bikes industry showed the highest threat to newcomers as the hurdles faced by the new entrants were very few and easily removable. It was very easy to gather motors or bicycles even though it required massive financial funds and administration expertise to do the work. These low entry hurdle were mainly due to the beauty of new comers to the market to refresh the e-bikes industry and to have the sustainable growth. This alarming threat of new comers in the industry created a chance for Wang's financing as many entrants were expected in the sector, finally getting the market share from the existing PRC firm players.
3. There was lower income in the firms as there were small entry hurdles, and existing competitors had to offer their products on lower prices, and the gain of e-bikes relied on the high-level prices being charged to consumers. Prices for e-bikes were anticipated to grow by 3%. Suda also faced an intense competition which forced it to lower its prices, affecting its income.
4. The e-bikes market had always been uncontrolled but the discussion were developing within the firm regarding the methods of dealing with the difficulties of laws and rules like other automobile, including: licenses, taxes etc. in e-bikes markets. The rules were connected to dimension and speed of e-bikes, which had the possibilities to decrease the sales’ expansions of the firms working in the sector.

Enterprise Value – DCF Valuation

In order to assess the company’s value after deducting all of its obligations, minority interests and cash investments form the total equity (Edu Pristine, 2018);a discounted cash flow model is applied. The value of the firm is considered to be worthy than the company’s market capitalization. In order to calculate the enterprise value through the DCF model; the cash flows are identified, i.e. the cash flows of Suda Electric Vehicle company are predicted as CNY 90.4 million in 2013 to CNY 136.6 million in 2017 (See Appendix 2).

After the weighted average cost of capital is calculated to find out the present value if these cash flows through discounting;the equity’s cost, as required by the investors, is 20% and the cost of long term debt is 7.4%. The weighted average cost of capital for Suda Electric Vehicle Company is calculated as 7.11%, at the tax rate of 25%. In addition, a terminal value is calculated at 2017 through FCF*(1+G)/ (WACC –G). Then the cash flows including the terminal value are discounted at 7.11%, which has resulted in an enterprise value of CNY 10207.67 million (See Appendix 3).

Internal Rate of Return

The internal rate of return is also calculated for an initial investment of CNY 37.8 million (USD 6 million) and the cash flows of the Suda Electric Vehicle Company, which has resulted in an IRR of 227%.  (See Appendix 4). The evaluation of IRR (Hayes, 2020) can be made on assumption that if the IRR of an investment is greater than the required rate of return by the investors; then the project should be taken.

Multiple Approach Valuation

In order to make the investors more aware about the firms’ value; multiple valuation has been put into consideration, whereby the enterprise value for Suda Electric Vehicle Company is calculated through different multiple valuation multiple, including enterprise value to EBITDA multiple, enterprise value to return multiple and enterprise value to EBIT multiple. Suda’s enterprise values through these multiples is given in the Appendix 5................

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