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1 Assignment Title SME Valuation, the Case of Ai Mei Shen The Case: In late March 2016, Zhejiang Tolent Television and Film (ZTTF), a media company listed in Shenzhen, announced its plan to buy 51% of Ai Mei Shen (AMS), a young company owned by the then popular actress Fon Bingbing, in an all-cash transaction. The deal values Ai Mei Shen at around Rmb800 million Ai Mei Shen was only established in July the previous year with a registered capital of Rmb3 million. The Argument for the valuation given by ZTTF is as follows. The Empress of China, which stars Fan in the leading role as Wu Zetian, brought in Rmb190m for ZTTF in 2014. With the proposed acquisition, ZTTF will have a fuller control over one of China's most popular actresses, hence securing a stable revenue stream. But just because Fan stars doesn't necessarily guarantee a hit! Film producer Chun Qiu Hong tapped Fan to star in the historical drama Lady of the Dynasty, a film that cost Rmb235m, but had taken in only Rmb134m in ticket sales. The market capitalisation of Chun Qiu Hong fell from Rmb900m to Rmb232m in the weeks after the film was released. The proposed acquisition has caught the attention of Shenzhen Stock Exchange, which asked how ZTTF can value Fan's production firm at such a level. The deal was cancelled consequently. After story: Fan Bingbing was fined around RMB883m for tax evasion and other offences in Oct 2018, and was effectively ruined as an actress in the foreseeable future. The Requirement: 1. Suppose AMS will bring to ZTTF a perpetual extra net cash flow of RMB100m. What is the implied investor required rate of return (discount rate) when this income stream is valued at RMB800m? 2. Suppose Fan Bingbing will remain at the top of her popularity only for the next two years. Afterwards, she will bring no more cash flows to ZTTF. What is the implied net cash flow that was expected to be brought in by her in the next two years when investor required return was 25% per annum? 3. The following table gives the required rate of return sought by venture capitals. With reference to these rates, how reasonable is the implied discount rate in part 1 and what might be the likely outcome to investors should the proposed acquisition went ahead? Discussion the social economic factors which might have affected the above discount rates (hint: refer to lecture 8, "Entrepreneur financing & Venture capital methods." Indicative word counts: 500 words.) Rates of Return (ROR) Sought by Venture Capital Investors Stage Annual ROR% Seed and start-up First stage Second stage Expansion Bridge and mezzanine LBOS Tumarounds 50 - 100% or more 40-60% 30-40% 20 - 30% 20 - 30 30 - 50% 50% + Typical Expected Holding Period (Years) More than 10 5-10 4-7 3-5 1. 3 3-5 Jeffrey A. Timmons, New Versture Creation, 54 cd. (Irwin Chicago) 1999, p. 465. 4. Suppose after conducting some market research you have gathered the following information: Risk free rate Market portfolio return Standard deviation Market Risk Premium Correlation coefficient between market portfolio return and cash flow brought to ZTTE by Fan Bingbing 2% 5% 10 25 30 20 10 1.5 1.5 1.5 1.5 5% 10% 15% 12% 6% 5% You have further conducted a scenario forecast based on the information given above as follows: Net Cash flow brought to Probability Net cash flow brought to Probability ZTTF by Fan Bingbing ZTTF by Fan Bingbing (RMB million) {RMB million) -800 100% 0% 100 80% 0 20% 100 50% 0 50% 100 36% 64% 100 20% 0 80% 100 10% 0 90% (Hint: Refer to Lecture 7, "RADR & CEQ method." Based on CEQ valuation method, is this an investment worth pursuing by ZTTE