Synergy Value Evaluation Background Equity Value VS

SynergyValue

Evaluation

Proudly presented by Group 4

BackgroundEquity Value

Agenda

Wang Qian

Angela Han

Xie Muyi

Yang Yiwen

Sheng Wandi

VS

Coca-Cola re-entered the Chinese market in 1979. Established 23 bottling plants and 27 production locations. Total investment adds up to more than 1.1 billion U.S. dollars Local employment reached 15,000.

SynergyValue

Evaluation

— Proudly presented by Group 4


HUIYUAN VS COCA-COLA

2008 Total Market Size:

Chinese Fruit, Vegetable, and

Soft Drink Market

SynergyValue

Evaluation




Coca-Cola, 11.8%

Huiyuan, 8.5%Master Kong,

7%

Tongyi, 6%

Daneng; 5.70%

Others, 60.4%

Following Google and Microsoft, Coca-Cola, with $67.6 billion

Brand Name

Market Share

Rank

Coca-Cola 52.8% 1

Pepsi 32.8% 2

Daneng 1.7% 3

China Softdrink Market Share (2008)

Brand Name Value (2008)

Cash Reserve (Sep 26, 2008)cash and cash equivalents: USD 7.8 billion

2004 2005 2006 2007 20080

5000

10000

15000

20000

25000

30000

35000

Net IncomeNet Operating Revenues

Built in 1992 and benefited from China’s growing soft drink market NO. 2 in China’s broad beverage market NO. 1 in leading China’ s vegetable and fruit juice market China’s most famous brand name of juice production

SynergyValue

Evaluation




HUIYUAN

1) Unsophisticated

marketing campaign

2) Limited cost saving by scales

3) High barrier to enter

international market

4) Insufficient financial

resource for expansion

1) Market leader position

2) Good quality supply

3) Welcomed flavor

4) Government benefit

5) Developed sales network

and distribution channel

Competitive Strengths

Bottle-neck of long-term development

SynergyValue

Evaluation




HUIYUAN

Coca-Cola’s Intention to Acquire HUIYUAN

• Coke-Cola: Enter Chinese Original Juice and premium market Dominate the entire beverage and juice market Enrich its brand image and achieve greater economic

scale

• HUIYUAN To save both COGS and Operating Expense Stronger marketing promotion Strengthen its brand value by aligning with Coca-

Cola

SynergyValue

Evaluation




Synergy Value

USD 2.5 Billion by CashHKD 12.2 per share

SynergyValue

Evaluation




Multiples Approach

Evaluation of HUIYUAN

DCF Approach

Synergy Value

Divided by total NO. of shares

WACC?


Background SynergyValue

EvaluationEquity Value

• Cost of Capital Calculation– WACC components

• Cost of equity• Cost of debt• D/E ratio• Tax rate





• Cost of Capital Calculation– Cost of Equity

• Cost of equity components– Beta: 2.60 (From Quamnet.com)– Risk-free rate: 2.96%– Market return: 15.19%

• Cost of equity calculation– CAPM = Risk free rate + Beta × (Market return – Risk-free rate)

– 34.75%






• Risk-free rate: Exchange Fund Notes during 15 years on September, 2008






• Market return: Daily geometric average growth rate of Hang Seng Index of the last 30 years, then obtain effective annual growth rate


Date Adjusted Close Growth Rate

9/3/2008 20585.1 97.83% Geometric Growth rate (daily) 0.03874%

9/2/2008 21042.5 100.65% Geometric Growth rate (annual) 15.1872%

9/1/2008 20906.3 98.33%

8/29/2008 21261.9 101.38%

8/28/2008 20972.3 97.71%




• Cost of Capital Calculation– Cost of Debt

• Retrieved directly from Huiyuan’s 2007 annual report• 6.49%





• Cost of Capital Calculation– Cost of equity = 34.75%– Cost of debt = 6.49%– D/E ratio = 0.33– Tax rate = 33% (from Huiyuan’s 2007 annual

report)





• Cost of Capital Calculation– D/E ratio calculation

• Book value of debt = HKD 2,225,987,000– Total liabilities from Huiyuan's 2007 consolidated balance

sheet

• Market value of equity = HKD 6,741,866,376– Share price = HKD 4.59

» Average closing price as quoted on the Stock Exchange for the 60 trading days prior to and including the last trading date

– Number of shares = 1,468,816,204» Stated in Huiyuan’s 2007 annual report





• Cost of Capital Calculation– WACC Formula

– Cost of Capital = 27.20%


) 1( /1

/

/11

RateTaxDebtofCostEDED

EquityofCostED

DCF Approach

Terminal Value

PV of In-

horizon

cash flows

Total

value of HuiYuan

DCF Approach• Assumption

– 2008 growth rate: 26%, decreases at rate of 1% each year until 2019

2005 2006 2007

RMB 000 RMB 000 RMB 000

Sales 1392100 2066275 2656337

DCF Approach

• Short-term period: 10 years• Long-term growth rate: 15% (According to a report)

DCF Approach

• Other assumptions– Current Liabilities, current assets and variable

costs grow in the same rate with sales– Long term assets and non- current liabilities are

constant during in-horizon period

Year Sales Net Income OCF2008 3346985 347662.4318 207551.4

2009 4183731 455563.2214 280424.5

2010 5187826 585044.1689 367872.1

2011 6381026 738910.6949 471789.1

2012 7784852 919938.0077 594049.6

2013 9419671 1130752.542 736427.6

2014 11303605 1373691.196 900501.3

2015 13451290 1650641.261 1087545

2016 15872522 1962866.019 1298413

2017 18570851 2310823.165 1533413

2018 21542187 2693985.388 1792189

2019 24773515 3110674.305 2073609

DCF Approach

• Future cash flow by pro Forma analysis• CFFA=OCF - Change in Capital Spending - Change in NWC

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

500000

1000000

1500000

2000000

2500000

10-year Cash Flow (RMB 000)

10-year Cash Flow

DCF Approach

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

1000000

2000000

3000000

4000000

5000000

600000010-year Cash Flow (RMB 000)

NormalHighUgly

Scenario analysis– High: 23%– Normal :26%– Low :35%

DCF Approach

• Terminal Value of Hui Yuan Juice:1.53 billion RMB

• PV of cash flow from 2009-2019: 1.79 billion RMB

• NPV of Hui Yuan Juice: 3.32 billion RMB Deduct book value of debt

Value of Equity of Hui Yuan Juice: 1.21 billion RMB




HUIYUAN VS COKE-COLA

Multiple approach

• P/E ratio multiple approach

Formula:





Multiple approach

• Comparable firms Tianyi Fruit Holdings Limited SDIC Zhonglu Fruit China Haisheng Juice Holdings Co Ltd. Uni-President China Holdings Ltd. Yantai North Andre Juice Co., Ltd.





NItarget EPScom pricecom Equity value

Tianyi 640,217,000 0.0280 0.80 18,318,296,854

Zhonglu 640,217,000 0.5030 17.86 22,870,903,057

Haisheng 640,217,000 0.1324 1.33 6,441,218,748

Uni-President 640,217,000 0.1404 5.08 23,144,280,278

Yantai 640,217,000 0.0520 1.05 12,924,782,161

Unit: RMBMultiple approach





Share price range: 4.4~15.6Weighted average share price: 11.4 RMB

Equity value range: 6.4B~23.1BWeighted average equity value: 16.7 billion RMB

Multiple approach

Result





2005 2006 2007Net income 110192 220983 640217

2005 2006 20070

200000400000600000800000

Multiple approach

Big Concern

Weights on Multiple and DCF

80%

20%

Sales

DCFMultiple Weighted value of equity:

4.22 billion RMB

20%*16.7B + 80%*1.21B =4.22 B

• Equity value • Synergy value• Debt

• Company value 15.23 billion RMB

Scenario Analysis盛要用

Performance Total value

Normal 15.23 billion RMB

High 17.83 billion RMB

Low 14.69 billion RMB


BackgroundSynergy

ValueEvaluationEquity

Value


• “If the Offers are completed, The Coca-Cola Company is expecting to use its expertise as a global beverage company to further develop the “Huiyuan” juice brand to address the evolving needs of the Chinese consumer. There are anticipated synergies that will drive operational and cost efficiencies, particularly in Huiyuan’s production footprint and in The Coca-Cola Company’s distribution and raw material purchasing capabilities.”

----JOINT ANNOUNCEMENT

Synergy Value


BackgroundSynergy


Value


In millions dollars 2007 2006 2005 2004 Average

Net operating revenues 28857 24088 23104 21742

Cost of Goods Sold 10406 8164 8195 7674

Cost % of Revenue 36.06% 33.89% 35.47% 35.30% 35.18%

Coca Cola’s cost

Same Cost % of Revenue after merge


BackgroundSynergy


Value


In millions

RMB2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 on

25% 24% 23% 22% 21% 20% 19% 18% 17% 16% 15%

Sales 3320.42 4117.32 5064.31 6178.45 7475.93 8971.12 10675.63 12597.24 14738.77 17096.97

COGS(65.83%) -2185.81 -2710.41 -3333.80 -4067.24 -4921.36 -5905.63 -7027.70 -8292.69 -9702.45 -11254.84

COGSafter

merge (35.18%)

-1168.11 -1448.46 -1781.61 -2173.56 -2630.01 -3156.01 -3755.65 -4431.67 -5185.05 -6014.66

Cost Saving 1017.70 1261.95 1552.20 1893.68 2291.35 2749.62 3272.05 3861.02 4517.39 5240.18

Synergy 11,006.70

Cost Savings


BackgroundSynergy

Value EvaluationEquity Value

Value of the deal = Weighted Average Equity Value + Synergy Value

4.22bil. + 11.006bil. RMB

=15.226 billions RMB

=17.42 billion HKD

RMB to HKD exchange rate (09/03/2008) =1.14390

Value per share =17.42 billions HKD /1,468,816,204 shares = 11.86HKD/ share

Cost of the deal = 12.20HKD /share


not so good a deal as it seems?


BackgroundSynergy



ScenarioPerformance

In Horizon Growth Rate

Total value of the deal (HKD) Value per share

Normal 26% 17.42 billion 11.86 HKD

High 36% 20.39 billion 13.89 HKD

Low 23% 16.80 billion 11.44 HKD


BackgroundSynergy


• May have under looked other synergy values– Brand effect– Possibility of expanding to international market

• Depends on Coca Cola’s valuation for the Chinese market– Eager to expand Chinese juice market

• Actual value may be larger for Coca Cola


USD 2.5 Billion by CashHKD 12.2 per share

SynergyValue

Evaluation




Multiples Approach

Evaluation of HUIYUAN

DCF Approach

Synergy Value

Conclusion

Divided by total NO. of shares

WACC?

Not a good deal ?

Documents

Synergy Value Evaluation Background Equity Value VS