A Valuation Based On Two Stage Residual Operating Income Model

Chinese stock market has experienced the Internet bubble, the global financial volatility and sharp rising and falling since 2000, and now is getting more maturly and rationaly. As the adjustment of industrial structure, merger and acquisition activity is becoming more frequently. The importance of enterprise valuation is increasing step by step.Haze pollution in the eastern region promots the implementation of Chinese energy strategy and the restructuring of the State Grid Corporation’s alternative energy strategies. As an important part of the energy restructuring strategies, UHV grid construction is inseparable with the power equipment manufacturing industry. Therefore, the power equipment manufacturing industry will face the next period of rapid development. The author took Pinggao electric Co., Ltd as an example, which is one of the "three Open" in the traditional power equipment manufacturing industry. The outstanding performance of Pinggao electric Co., Ltd attracted institutional investor’s attention in recent years.This article is a typical case article of enterprise valuation. After comparing the existing valuation models and analysis, the author decided to use the Two Stage Residual Operating Income model to value Pinggao electric Co., Ltd’s internal value. The author concluded the four steps of TSROIM by the analysis of the model and method, and applied the TSROIM to assess the internal value of Ping Gao Co., Ltd. Main steps as follows:In the first place, the author verified the TSROIM`s application suppose, the results shows that Pinggao electric Co., Ltd permitted the request of the TSROIM. Secondly, the author restructured Pinggao electric’s financial statements as the request of the TSROIM to provide direct data for the predict of parameters and the next calculations. In the third step, the author analysis pinggao electric’s economic fundamental to support the next prediction of parameters. Finally, by analyzing of Pinggao’s economic fundamental and the restructure of Pinggao electric’s financial statements, the author got the December 31,2013’s internal value of Pinggao electric and the internal value of per share, the result was 664,969.86 million Yuan and 8.20 Yuan. Compared to the market price 10.05 Yuan, the author insisted that the stock market overvalued the price of Pinggao electric Co., Ltd., then the author point out the reasons.The results of this study provided reference for the decision making of investors, while it is also helpful for other analysis of enterprise valuation using the TSROIM and other valuation model.