1、 Absolute and relative -- traditional valuation model

At present, there are two methods for stock valuation, namely absolute valuation method and relative valuation method. At present, there is a mature theoretical method for each model. The absolute valuation model generally refers to the DCF model. The theoretical basis of the model is that the stock valuation should be related to the expected earnings during the period of holding the stock, which can be defined as the future cash flow of the stock. Considering the time value of money, it is necessary to discount the future cash flow.

Therefore, the value of the stock can be estimated by the present value of the cash flow it can expect to obtain. The relative valuation method, also known as the comparable company method, refers to the analysis of comparable companies when valuing stocks, especially focusing on the stock price of companies with similar business and scale as the valuation basis, and then adjusting according to the specific characteristics of the target company.

（1） Analysis of absolute valuation method

In DCF model, due to the different definition of expected future income, there are three main application models: dividend discount model, free cash flow discount model and residual income pricing model. Dividend discount model is to calculate the value of the stock by discounting the future dividend. Usually, most of these companies are mature companies. According to different assumptions of dividend growth rate, dividend discount model can be divided into zero growth model, constant growth model, two-stage growth model and multiple growth model.

The model is mainly suitable for enterprises with the following characteristics:

(1) The target company pays dividends; (2) the target company has formulated a dividend payment policy, and the policy has a stable and continuous relationship with the company's profitability; (3) investors do not have control over the company.

According to the free cash flow model, the value of an asset is equal to the discounted value of the future free cash flow it generates. According to the different definition of cash flow, it can be divided into company free cash flow discount (FCFF) model and equity free cash flow (FCFE) discount model. According to the different growth of free cash flow of company (equity), the discount model of free cash flow of company (equity) can be divided into zero growth model and fixed growth model.

Obviously, this model is more suitable than the dividend discount model for those companies that pay less dividends or the dividend payment deviates greatly from the free cash flow of the company. However, the model also emphasizes that there should be a good matching relationship between the free cash flow and the profit of the applicable company, and investors should have certain control over the company. The disadvantage of free cash flow discount model is that the calculation results may be manipulated artificially, which will lead to the distortion of value judgment. In addition, the model is not suitable for the companies which are temporarily poor in operation and fall into losses because of the difficulty in predicting their future free cash flow.

Residual income pricing model is a method to evaluate enterprise value based on accounting profit. Enterprise value is the sum of profit ability value and potential profit opportunity value. That is, the enterprise value = the sum of the book value of the owner's equity + the discount of the residual income in the future years, in which the residual income is the balance after deducting the cost of ownership capital from the accounting income.

The internal mechanism of the residual income model is that the difference between the equity value and the book value of the company's net assets depends on the company's ability to obtain residual income. The calculation formula also shows that the stock value reflects the present net assets plus the net present value of future growth. The residual income pricing model is mainly applicable to those companies that do not distribute dividends or whose free cash flow is negative.

（2） Analysis of relative valuation method

In the relative valuation method, the stock price is determined by referring to the ratio between the value of the shares of comparable companies and a certain variable. Relative valuation includes P / E, P / B, EV / EBITDA and peg.

At present, the price earnings ratio pricing method is most widely used in the domestic and foreign securities markets. The main reason is that this method directly connects the price per share with the earnings index that investors are most concerned about, that is, earnings per share. The empirical analysis also proves that the price earnings ratio is related to the long-term average return rate. But the price earnings ratio pricing method is not suitable for the growing enterprises. In the volatile emerging markets, the traditional price earnings ratio pricing method can not accurately reflect the intrinsic value of new companies.

The price to net ratio method is the ratio of market price per share to net assets per share. Compared with the P / E ratio method, the P / B method pays more attention to the book value of the net assets of the enterprise, and is more suitable for the enterprises with negative earnings per share or high proportion of current assets.

The formula of enterprise value multiple pricing method is: enterprise value multiple = enterprise value / profit before interest, tax, depreciation and amortization, in which the enterprise value is obtained by the sum of the total market value of the company's stock and net debt. It can be seen from the formula that this method evaluates the overall value of the enterprise rather than the equity value.

This method is more suitable than P / E ratio method for the comparison of large differences in financial leverage, income tax rate or capital intensive enterprises, because this method is not affected by income tax differences and capital structure differences, and can more accurately reflect the company value. However, the enterprise value multiple pricing method is more suitable for the valuation of companies with single business or fewer subsidiaries. If the number of business or consolidated subsidiaries is large and complex adjustment is needed, its accuracy may be reduced.

The calculation formula of P / E growth ratio is: P / E growth ratio = P / E / net profit growth rate X 100. The development of this method makes up for the shortage of P / E ratio valuation method. Specifically, it is to measure the future profit growth rate of different companies, and the adjustment of P / E ratio. This method takes into account the P / E ratio and growth rate, which are two key factors that determine the value of stock investment. On the one hand, through the P / E ratio, which is an important index to measure the intrinsic investment value of stocks, it emphasizes that investment should have enough safety margin, on the other hand, it also emphasizes the important influence of company growth on stock investment value, so it is more suitable for the valuation of stock in growth period.

2、 A discussion on the method suitable for gem valuation

In the selection of valuation methods, there is no case of which valuation method is superior or inferior, but the most suitable valuation method should be selected according to different company characteristics, including the industry characteristics and the company's own characteristics.

When judging the value of start-up enterprises, we need to pay attention to some basic characteristics which are different from the mature enterprises of main board and small and medium-sized board

Most of the start-up enterprises are in the growth stage and have been set up for a short time, so there is a lack of historical data. Moreover, most of the enterprises are independent innovation enterprises, which can be compared with companies, and the indicators that need to be referred to in the valuation are not easy to obtain.

Venture enterprises generally have the characteristics of nonlinear growth law and large performance volatility, which makes it difficult to accurately predict their performance. Therefore, in addition to PE and Pb, which are commonly used in the valuation of main board and small and medium-sized board stocks, the valuation of gem enterprises should be combined with absolute valuation methods such as cash flow discount, but more emphasis should be placed on dynamic Valuation. For example, peg is more suitable for relative valuation, and multiple growth model is more suitable for absolute valuation.

In the process of valuation calculation, the setting of growth rate is very important. The choice of the growth rate, that is, the judgment of its growth, can not be determined simply based on the profits of the enterprise, but also comprehensively consider the industry situation, management quality, company technology level, market share and other factors. Value evaluation is not only a formulaic quantitative, but also a combination of quantitative and qualitative. Especially, according to the characteristics of start-up enterprises, investors can design their own valuation model which is suitable for the specific situation of enterprises.

The model comprehensively considers the following factors: the company's historical performance, asset quality, technical level, market share and customer quality, expected performance and growth rate, operational risk, price earnings ratio of comparable listed companies, business model, management quality, corporate governance and internal control, dividend distribution policy, resource control ability, corporate strategy, etc Quantitative weighted average was used to determine the benchmark valuation.

At present, there are two methods for stock valuation, namely absolute valuation method and relative valuation method. At present, there is a mature theoretical method for each model. The absolute valuation model generally refers to the DCF model. The theoretical basis of the model is that the stock valuation should be related to the expected earnings during the period of holding the stock, which can be defined as the future cash flow of the stock. Considering the time value of money, it is necessary to discount the future cash flow.

Therefore, the value of the stock can be estimated by the present value of the cash flow it can expect to obtain. The relative valuation method, also known as the comparable company method, refers to the analysis of comparable companies when valuing stocks, especially focusing on the stock price of companies with similar business and scale as the valuation basis, and then adjusting according to the specific characteristics of the target company.

（1） Analysis of absolute valuation method

In DCF model, due to the different definition of expected future income, there are three main application models: dividend discount model, free cash flow discount model and residual income pricing model. Dividend discount model is to calculate the value of the stock by discounting the future dividend. Usually, most of these companies are mature companies. According to different assumptions of dividend growth rate, dividend discount model can be divided into zero growth model, constant growth model, two-stage growth model and multiple growth model.

The model is mainly suitable for enterprises with the following characteristics:

(1) The target company pays dividends; (2) the target company has formulated a dividend payment policy, and the policy has a stable and continuous relationship with the company's profitability; (3) investors do not have control over the company.

According to the free cash flow model, the value of an asset is equal to the discounted value of the future free cash flow it generates. According to the different definition of cash flow, it can be divided into company free cash flow discount (FCFF) model and equity free cash flow (FCFE) discount model. According to the different growth of free cash flow of company (equity), the discount model of free cash flow of company (equity) can be divided into zero growth model and fixed growth model.

Obviously, this model is more suitable than the dividend discount model for those companies that pay less dividends or the dividend payment deviates greatly from the free cash flow of the company. However, the model also emphasizes that there should be a good matching relationship between the free cash flow and the profit of the applicable company, and investors should have certain control over the company. The disadvantage of free cash flow discount model is that the calculation results may be manipulated artificially, which will lead to the distortion of value judgment. In addition, the model is not suitable for the companies which are temporarily poor in operation and fall into losses because of the difficulty in predicting their future free cash flow.

Residual income pricing model is a method to evaluate enterprise value based on accounting profit. Enterprise value is the sum of profit ability value and potential profit opportunity value. That is, the enterprise value = the sum of the book value of the owner's equity + the discount of the residual income in the future years, in which the residual income is the balance after deducting the cost of ownership capital from the accounting income.

The internal mechanism of the residual income model is that the difference between the equity value and the book value of the company's net assets depends on the company's ability to obtain residual income. The calculation formula also shows that the stock value reflects the present net assets plus the net present value of future growth. The residual income pricing model is mainly applicable to those companies that do not distribute dividends or whose free cash flow is negative.

（2） Analysis of relative valuation method

In the relative valuation method, the stock price is determined by referring to the ratio between the value of the shares of comparable companies and a certain variable. Relative valuation includes P / E, P / B, EV / EBITDA and peg.

At present, the price earnings ratio pricing method is most widely used in the domestic and foreign securities markets. The main reason is that this method directly connects the price per share with the earnings index that investors are most concerned about, that is, earnings per share. The empirical analysis also proves that the price earnings ratio is related to the long-term average return rate. But the price earnings ratio pricing method is not suitable for the growing enterprises. In the volatile emerging markets, the traditional price earnings ratio pricing method can not accurately reflect the intrinsic value of new companies.

The price to net ratio method is the ratio of market price per share to net assets per share. Compared with the P / E ratio method, the P / B method pays more attention to the book value of the net assets of the enterprise, and is more suitable for the enterprises with negative earnings per share or high proportion of current assets.

The formula of enterprise value multiple pricing method is: enterprise value multiple = enterprise value / profit before interest, tax, depreciation and amortization, in which the enterprise value is obtained by the sum of the total market value of the company's stock and net debt. It can be seen from the formula that this method evaluates the overall value of the enterprise rather than the equity value.

This method is more suitable than P / E ratio method for the comparison of large differences in financial leverage, income tax rate or capital intensive enterprises, because this method is not affected by income tax differences and capital structure differences, and can more accurately reflect the company value. However, the enterprise value multiple pricing method is more suitable for the valuation of companies with single business or fewer subsidiaries. If the number of business or consolidated subsidiaries is large and complex adjustment is needed, its accuracy may be reduced.

The calculation formula of P / E growth ratio is: P / E growth ratio = P / E / net profit growth rate X 100. The development of this method makes up for the shortage of P / E ratio valuation method. Specifically, it is to measure the future profit growth rate of different companies, and the adjustment of P / E ratio. This method takes into account the P / E ratio and growth rate, which are two key factors that determine the value of stock investment. On the one hand, through the P / E ratio, which is an important index to measure the intrinsic investment value of stocks, it emphasizes that investment should have enough safety margin, on the other hand, it also emphasizes the important influence of company growth on stock investment value, so it is more suitable for the valuation of stock in growth period.

2、 A discussion on the method suitable for gem valuation

In the selection of valuation methods, there is no case of which valuation method is superior or inferior, but the most suitable valuation method should be selected according to different company characteristics, including the industry characteristics and the company's own characteristics.

When judging the value of start-up enterprises, we need to pay attention to some basic characteristics which are different from the mature enterprises of main board and small and medium-sized board

Most of the start-up enterprises are in the growth stage and have been set up for a short time, so there is a lack of historical data. Moreover, most of the enterprises are independent innovation enterprises, which can be compared with companies, and the indicators that need to be referred to in the valuation are not easy to obtain.

Venture enterprises generally have the characteristics of nonlinear growth law and large performance volatility, which makes it difficult to accurately predict their performance. Therefore, in addition to PE and Pb, which are commonly used in the valuation of main board and small and medium-sized board stocks, the valuation of gem enterprises should be combined with absolute valuation methods such as cash flow discount, but more emphasis should be placed on dynamic Valuation. For example, peg is more suitable for relative valuation, and multiple growth model is more suitable for absolute valuation.

In the process of valuation calculation, the setting of growth rate is very important. The choice of the growth rate, that is, the judgment of its growth, can not be determined simply based on the profits of the enterprise, but also comprehensively consider the industry situation, management quality, company technology level, market share and other factors. Value evaluation is not only a formulaic quantitative, but also a combination of quantitative and qualitative. Especially, according to the characteristics of start-up enterprises, investors can design their own valuation model which is suitable for the specific situation of enterprises.

The model comprehensively considers the following factors: the company's historical performance, asset quality, technical level, market share and customer quality, expected performance and growth rate, operational risk, price earnings ratio of comparable listed companies, business model, management quality, corporate governance and internal control, dividend distribution policy, resource control ability, corporate strategy, etc Quantitative weighted average was used to determine the benchmark valuation.

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