China Milk price valuations projections

Due to my upcoming holiday trip (flying off Wednesday 4 June) I had been taking a back seat in terms of trading. Hence I took the opportunity to read up on value investing. In future I will look to combine both value calculations and TA in my stock picks and decision making.

I've done some calculations for China Milk which I feel is a good company with a good business.

Return of Equity (ROE) = Net Income/Equity

	ROE	ROE growth
2008	26.42	-5.53
2007	27.973	1.00
2006	27.69

China Milk was listed on 13 March 2006. Hence the equity figures had increased after that resulting in a drop in ROE. However ROE rose to 16.6% from 2007. It is hard to look at the ROE at this stage due to the lack of a track record for the company after listing.


Net Profit Margin (NPM) Net income/Revenue

	NPM	NPM growth
2008	87.89	2.85
2007	85.46	-5.64
2006	90.57	2.23
2005	88.59

Net profit margin however is unaffected by listing. It is an extremely high NPM business!

Liquidity

	Current ratio
2008	14.9
2007	9.78
2006	24.8
2005	6.75

China Milk is extremely solvent. No liquidity problems definitely.

Solvency

	LT Debt/Equity Ratio
2008	52.4168215
2007	70.9722985
2006

On 5 January 2007, the Company issued a zero coupon convertible bonds due 2012 with an aggregate principal amount of uS$150,000,000. the convertible bonds were issued with a conversion price of S$2 per share and will mature on 5 January 2012. The yield for the bonds was 5.25%. How the management uses this money is important. The interest yield does not seem very high and if the money is invested well, this is good for the company despite the debt to equity ratio being relatively high.

Free Cash Flow

	Free Cash Flow(FCF)	FCF/Revenue
2008	94,228	17.2
2007	150,552	33.99
2006	160,004	53.15
2005	141,969	58.26

China Milk's FCF is good. FCF as revenue shows how much of the revenue is generated as cash and China Milk excels in this area. 2008's FCF was lower because management used the cash to invest in the milk processing plant for future growth.

Price valuation projection

EPS Data	EPS	EPS growth
2005	0.33
2006	0.41	24.24
2007	0.51	24.39
2008	0.58	13.72

Looking at the EPS growth, I would assume a 10% EPS growth over the next 5 years using current EPS of 0.58 RMB

	Projected EPS at yr end
End year 1	0.63
End year 2	0.70
End year 3	0.77
End year 4	0.84
End year 5	0.93

Currently 1SGD=5.1RMB

Hence projected EPS at end of next 5 years = SGD$0.18

Current price of stock is SGD$0.725
Latest EPS = SGD$0.11
P/E ratio = 6.6

Using a projected P/E ratio of 10, we would expect China Milk to be trading at $1.80 in 5 years time.

Price calculation based on dividend payout

Total EPS projected over next 5 years = SGD$0.76
Dividend payout ratio over past 4 years is about 9%
Hence dividend expected to be paid out over next 5 years = SGD$0.07
Future price in 5 years time based on dividend payout = $0.795

Assume dividend payout to keep up with inflation, use 5% desired return.

	Present price to pay for stock
Year 5	0.757
Year 4	0.721
Year 3	0.686
Year 2	0.654
Year 1	0.622

Desired price to buy China Milk would be SGD$0.622

At the current price of SGD$0.725 we would get a return of about 2% on projected dividend over the next 5 years

	Present price to pay for stock
Year 5	0.779
Year 4	0.764
Year 3	0.749
Year 2	0.734
Year 1	0.720

Overall the analysis from the figures show that China Milk is a profitable company with good ROE and excellent NPM.

I will read into the business itself in more detail but this is just a breakdown of the numbers which look quite good.