week 3

Week 3: Stock Analysis – Fundamental Approach TRA 2001 Financial Translation 1

Week 3: Stock Analysis – Fundamental Approach

Why Stock Analysis?

•Mission: to determine if a stock is worth investing in; to evaluate the potential profit arising from such investment.

•Two approaches: Fundamental Analysis and Technical Analysis.

•Different approaches; Same objective.

Fundamental Analysis – Basic Concepts

•Analyze the fundamental elements concerning a stock / the business of an issuer.

•Financial factors: all data in financial statements, such as profit and loss, leverage ratio, inventory, property value,

dividend payout, cash flow, etc.

•Non-financial factors: management and competitive advantages of company, competitors, market trend, forecast on

market demand, peer comparison, demographic or policy changes, etc.

•Conduct financial forecasting based on historical and present data.

•Focus on the intrinsic value of stock.

•Assumption: stock price should be determined by its intrinsic value. Any deviation from its intrinsic value reflects

the impacts of external factors, e.g. political, economic, market sentiment.

Fundamental Analysis – Objectives

•Measure the stock value and predict the future trend of stock price.

•Estimate the future performance of the company.

•Evaluate the management quality of the company.

•Measure the default risk of the company in question.

Top-down Approach

•Start by looking at domestic and international economic indicators, such as GDP growth rate, inflation rate,

exchange rate, oil and coal price, etc.

•Next is sector analysis, such as sales volume of the industry, pricing standard, product efficiency, foreign

competition, industry barrier, etc.

•Finally the focus is on individual companies, including sales price and volume, product innovation, profitability,

patents, etc.

Bottom-up Approach

•Bottom-up approach: starts with specific businesses, regardless of their industry/region.

•De-emphasize the significance of economic and market cycles.

•Assuming individual companies can perform well even the industry as a whole does not.

•Such bottom-up investing strategy entails a thorough review of the company.

•This includes becoming familiar with the company's products and services, its financial stability and its research

reports.


Quantitative Analysis

•Look at revenue, expenses, assets, liabilities and all other financial aspects of a company.

•Fundamental analysts look at these information to evaluate a company's future performance.

•From simple financial ratios such as earnings per share, P/E ratio, etc. to something more complicated, such as

discounted cash flow.

•Complex mathematical and statistical modeling are used.

•Make financial assessments through mathematics, particularly statistics. Examples include producing a more

objective valuation of a financial asset with a formula.

•The work of a quantitative financial analyst can be particularly useful with derivatives.

•Derivatives: Financial assets that derive their value from one or more other asset, e.g. options contracts, callable

bull/bear contracts, warrants

Qualitative Analysis

•Researchers aim to obtain an in-depth understanding of human behavior and the reasons that govern such

behavior.

•Conduct analysis on the basis of subjective methods instead of any factual or statistical data.

•Assessing a company’s management (management quality), marketing programs, the power of a specific company’s

brand (brand quality) and level of competition (entry barrier), etc.

•Other factors include expertise of the company, the look of packaging, the company’s competitive advantages, or

employee morale.

•The use of such non-quantifiable methods to evaluate investment or business opportunities and make decisions

should be complement to quantitative analysis rather than against it.


Value Investing

•Explore and select stocks that trade for less than their intrinsic value.

•Value investors believe that the market is not always efficient.

•As the market may overreact to good and bad news, stock price may move in a way that does not correspond to a

company’s long term fundamentals.

•Therefore, some stocks may have been undervalued by the market.

•Timing of sale: stock price rises to a level that is equal or higher than the intrinsic value.

•In more extreme case, “Cigar Butts Investing”, invented by Benjamin Graham.

•Market value < asset value – liabilities = potential transaction

•Margin of safety = underlying value discounted by 33% (Benjamin Graham)

•Both quantitative and qualitative analysis are conducted.

•Not only consider the financial metrics (P/E ratio, cash flow, asset value, etc.) but also taken qualitative assessments

(customer taste, management, market trend, etc.) into account.

Warren Buffet

•Warren Buffett, a notable practitioner of qualitative analysis and value investing; student of Benjamin Graham.

•No.3 on Forbes’ ranking of the wealthiest person in the world (2 March 2015)

•Accomplished many great investments in his life.

•His investment philosophy reflects some of the themes in value investing.

•His stock selection criteria:

–A leading company with monopolistic position in its industry;

–Products are simple and easy to understand.

–Stable track record with sound financial profile.

–Reliable management team.

–High efficiency and cash flow; low CAPEX.

–Price is reasonable.

Dollar Cost Averaging / Constant Dollar Plan

•Investor’s concerns: profit, risk and rate of return.

•Simple mechanism: making fixed investment amounts at predetermined times.

•The investment target could be a specific stock or index fund.

•Require longer investment period.

•Keep buying at the designated times no matter how fluctuate the stock price is.


Source: JP Morgan Asset Management

•It is particularly suitable for people new to stock investing as it minimizes risk and trends towards profitability.

•The longer the process, the higher chance of being profitable.

•E.g. MPF, life insurance products.

•Still, it faces criticism.

Fundamental Analysis - Shortcomings

•Too much data and information to be considered.

•High cost to collect all such data and information.

•Expertise in various aspects is required.

•Factors are dynamic – they may change before the whole analysis is completed.

•Is the information you obtained true and accurate?

•No guarantee that the market can someday reflect the intrinsic value of stock.


Related Terms and Translation

•Price-earnings ratio / Price-to-earning ratio (P/E ratio):

Market Value per Share

Earnings per Share (EPS)

- sometimes known as “price multiple” or “earnings multiple”

- 市盈率 or 本益比？- or 股價收益比率 / 市價盈利比率？•Margins =

•Profit =

•Gross profit =

•Net profit =

•Marginal profit =

•Profit margin =

•Profitability =

•Earnings =

•Revenue =

•Income =

•Top line =

•Bottom line =

•Non-profit organization =


Translation Examples and Editing Skills Source: 2012 Annual Report of PetroChina

•“Under this method of accounting, the Group’s share of the post-acquisition profits or losses of associates is

recognised in the consolidated profit or loss and its share of post-acquisition movements in other comprehensive

income is recognised in other comprehensive income. ”

•「在這種方法下，本集團對購買後的聯營公司的利潤或虧損按持股比例在合併損益中確認，對購買後的聯營公司其他綜合收益的變動也按持股比例在其他綜合收益中確認。」•「在此會計方法下，本集團於收購聯營公司後應佔的利潤或虧損於合併損益表中確認，而在其他綜合收益應佔的收購後變動亦在其他綜合收益中確認。」

•The cumulative post-acquisition movements are adjusted against the carrying amounts of the investments.

•「上述購買後的累計變動均調整投資賬面成本。」•「上述收購後的累計變動在投資的賬面值中作調整。」

•When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other

unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made

payments on behalf of the associate.

•「當本集團按份額承擔的聯營公司損失等於或大於對聯營公司的投資(包括任何其他未經擔保的應收款項)時，本集團不再進一步確認損失，除非本集團因此產生負債或代聯營公司發生支出。」•「倘本集團於聯營公司的應佔虧損相等於或超過其擁有的權益進一步確認損失，除非本集團代表聯營公司承擔責任或支付款項。」

•“When the Group ceases to have control or significant influence, any retained interest in the entity is remeasured to

its fair value, with the change in carrying amount recognised in profit or loss.”

•「本集團對實體喪失控制權或重大影響時，以公允價值確認其在該實體中剩餘投資公允價值與賬面價值之間的差額計入損益。」•「當本集團對實體不再有控制權或重大影響力時，於該實體的任何保留權益均按公平值重新計量，賬面值的變動於損益賬確認。」


Class Exercise

Available Resources – HKEx website

•www.hkex.com.hk

•A giant databank of bilingual financial documents.

•Useful to your research, on-the-job training and professional needs.

week 3

Documents