Suda (Private Equity Investment In China Study) Case Study Solution
Fragmentation
The e-bike industry was highly beaked which meant it was a multi-items market, where each section was working on the different needs and necessities of the customers and meeting such various needs could be damaging to Wang’s company. In order to operate with such different demands, the firm will have to create its own separations and innovations in the products in order to remain competitive and productive.
· Threat of New Entrants
The e-bikes industry showed the highest threat to newcomers as entry hurdle were very down. It was very easy to gather motors or bicycles even though it required big financial funds and administration expertise to do the work. These low entry hurdle are mainly due to beauty of newcomers to the market to refreshing the e-bikes industry and getting the sustainable growth. This high fear to the new comers creates a chance to Wang's financing as there will be many people in the sector, finally getting the market part from existing PRC firm’s players.
Poor Profitability
There were lower income in the firms as there were small and entryhurdles, and existing competitorshad to work on lower prices. As, the gain of e-bikes relies on the high-level prices charged to consumers. Prices for e-bikes are anticipatedto grow by 3%. Suda also suffers from fierce competition to lowcost and that affect theincome.
Legal and Regulatory risks
The e-bikes market has always been uncontrolled but developing discussion within the-firm. That will deal the difficulties of laws and ruleslike other automobile, including licenses, taxes etc. e-bikes markets. The rules were connected to dimension, speed etc. of e-bikes, which had the possibilities to decrease the sales expansions of the firms-working in the zone.
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), the discounted cash flow model is applied. The value of the firm is considered worth than the company’s market capitalization. In order to calculate the enterprise value through the DCF model, the cash flows have been 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 7.109%, at a tax rate of 25%. In addition, a terminal value is calculated at 201t through FCF*(1+G)/ (WACC –G). Then the cash flows including the terminal value are discounted at 7.109%, which resulted in an enterprise value of CNY 7062.39 million (See Appendix 3).
Internal Rate of Return
The internal rate of return is also calculated for initial investment of CNY 37.8 million (USD 6 million) and the cash flows of the Suda Electric Vehicle Company, which 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
The multiple approach is also used to determine the enterprise value for the Suda Electric Vehicle Company. The multiples used in valuation included EV/EBITDA, EV/Sales and EV/EBIT. The industry average multiples are multiplied with the company’s revenue, EBITDA and EBIT which resulted in different enterprise values (See Appendix 5).................
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