The Application Of Method Of Valuation In Cyclical Industry

Since the financial crisis break out,the global economy ended stability and prosperity for a decade.As a country of emerging market economy,China that was the engine of world economic growth,also faced a adverse situation which is a slowing growth of economy.The economic transformation and upgrading were urgently needed in China.Because of railway,highway,infrastructure and real estate industry developed rapidly in the past few years,some industry faced with a very serious problem that was excess production capacity.Periodic industries are the key area which is easy excess of capacity,for example,steel,cement,electrolytic aluminium,glass,and shipbuilding industry,etc.These industries have a typical characteristic,which are high demand elasticity and low supply elasticity,possessing large investment scale and long construction period.It could be more easily influenced by the macro economic cycle.However,periodic industries are the focus industries that get more resources from our country,meanwhile investors also pay more attention to these industries.Because of the subprime crisis spread,the business performance of cyclical industries is decline,resulting in falling stock prices,part of company's value is significantly undervalued in these industries.In the long run,cyclical industries are fundamental industry in China,having been supporting the economic development,possessing pretty good prospect.Therefore,a correct evaluation of the value of the company on cyclical industries is beneficial.It is not only better to understand the company's own intrinsic value for business owners,but also to make better investment decisions for stock investors,meanwhile it could provide the corresponding reference in mergers,restructuring and other activities.The paper chooses the iron and steel industry which is the typical representative on cyclical industries as the research direction,and select Baosteel which is a large listed company as the research object.The paper use different methods of valuation evaluate Baosteel's value at first,and then choose a more accurate and reasonable method.The paper wish to provide certain theoretical and practical reference for evaluation related cyclical industries in our country by doing above.The paper combines theory with case.At the same time,the scenario analysis method and two stages discount free cash flow model is introduced to study the issue of periodic industry enterprise value evaluation.In this paper,the related basic theories and models of various valuation methods can be introduced at first.Meanwhile,the paper analyses and compares for detailed the application of various theoretical models.And then the paper introduces the current background of iron and steel industry and the difficulty of valuations about company in iron and steel industry.The paper put forward the deficiency of the traditional valuation method,raising some suggestions for improvement and adjustment to evaluation method.Next,by case study of Baosteel,the paper found that the free cash flow model is feasible.Therefore,the author thinks it is usefully evaluate the company's intrinsic value by using scenario analysis and applying free cash flow model,in terms of the company of iron and steel industry.