Suda Electric Vehicle Company: Private Equity Investment In China Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

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

·Low Profitability

There is low profitability in the industry, as there are much lower entry barriers, and the existing players have to compete with each other through cutting down their prices. However, the profitability of e-bikes depends on the high prices being charged to the customers. The prices of e-bikes are expected to grow by 3%, even less than the disposable income growth rate. Suda is also exposed to the risk of facing the consequences of the intense competition in cutting the prices down and hurting the profitability.

·Legal and Regulatory risks

The e-bikes market remains unregulated, but with the growing concerns; the industry tends to be faced with a challenge of rules and regulation, just like other automobiles, including: licenses, taxes and lane requirements etc. Regulatory authorities have demanded a strict regulation to be followed by the e-bikes markets. The regulations are related to the size, weight, emission levels and speed of the e-bikes, which tends to reduce the sales growth of the companies operating in the industry.

Suda’s Enterprise Value – DCF Model

The enterprise value is the value of the company after covering for all of its debt obligation, minority interest and cash investments from the equity of the company (EduPristine, 2018). It is more reliable as compared to the market capitalization of the company. In order to calculate the enterprise vale for Suda Electric Vehicle Company, the discounted cash flow model has been used. First of all the projected cash flows have been taken from the case study. (see Appendix 2).

Afterwards, the weighted average cost of the capital is calculated in order to discount the free cash flows. The cost of equity is the required rate of return by the investor of 20%, while the cost of capital is 10.4% (See Appendix 3). Suda had 89.12% debt and 10.79% of equity. With a tax rate of 25%, the resulted weighted average cost of the company equaled 9.11%

Then a terminal value is calculated at the end of the 5^th period i.e. 2017 through the equation “FCF(1+G)/(WACC –G). Afterwards, all of the cash flows are discounted at a WACC of 9.11% and added, which has resulted in an enterprise value of $6052.232 million (See Appendix 4).

Suda’s Enterprise Value – Multiple Valuation Approach

The other approach used in calculating the Suda’s enterprise’s value is the multiple valuation approach. The enterprise’s value has been calculated through EV/ EBITDA multiple, EV/ Revenues multiple and EV/ EBIT multiple. The industry ratio is been multiplied with the Suda’s EBITDA, revenue and EBIT figures, which has resulted in different enterprise values as shown in the Appendix 5.

Internal Rate of Return

The internal rate of return by Suda, is calculated by taking the initial investment of $6 million by Wang and the expected free cash flows over the future, resulting in an IRR of 1484%, which is extremely greater than the required rate of return by Wang, i.e. 20%. The IRR rule states that if the IRR of an investment is greater than the required rate of return by the investor, then the investment can be pursued.(Hayes, 2020).

Exit Options

The possible exit options for the company includes the management buyout, IPO and the acquisition. Through a management buyout; the management of the Shipston Group can acquire the Suda’s management by having a majority ownership, or it can also participate in the IPOs and in purchasing a large chunk of the company’s shares and using the hostile takeover strategies. As Wang is concerned about the exit point for the company and he believes the exit point should be at the lowest multiples. Appendix 7 shows the EV/ EBITDA multiple, EV/ Revenues multiple and EV/ EBIT multiple multiples for different comparable companies within the e-bike industry, and it is suggested that the company should maintain the industry average multiples as shown in Appendix 7, and if the multiples go 30-40% down from the industry average multiples then the company must use any of the exiting option to deal with the profitability as well as the challenges of the industry.

Conclusion

The Shipston should go for the investment in the Suda Electric Vehicle Company, because it provides a greater internal rate of return of rate as compared to the required rate of 20% by Wang. Additionally, the company’s enterprise value; using both the DCF and the multiple approach, is greater than many of the players operating in the e-bikes market. Not only this, the industry is expected to grow more due to the rising demand, population, need for transportation, hike in fuel costs and disposable income of the individuals. So, Suda is not overrated, and is analyzed to have the potential and higher possibility of generating positive value for the company.........................

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