Extract of Hup Seng Industries Berhad annual report 2015, page 4.

.The extracted annual report of Hup Seng Industries Berhad shows that the company

had a well financial performance on Year 2015 because their revenue increase 9.4%
compared to last year. They also indicate that the drivers for this good profit
performance were optimal utilization of existing operational facilities, favourable
trends in cost of the raw materials and also falling Ringgit against most of the
currencies the Group was engaged on.

Extract of Hup Seng Industries Berhad annual report 2015, page 5

Furthermore, Hup Seng also contributes much to the area of corporate social
responsibility besides focusing on profitability to optimize shareholders value. The
group has been supporting and making contributions and donation towards local community
and also set up an occupational Safety and Health Committee which ensure that all practices
met the required safety standards.
Moreover, Hup Seng expects year 2016 to be challenging so they will more focus on
productivity improvement in all areas of operation. They have come out a strategy to diversify
their product portfolio and keeping in line with the rest of the industry players. In addition,
Hup Seng has entered into agreement in March 2016 to acquire two parcels of land and
building adjacent to the groups current factory in order to meeting their objective of
rationalizing and modernizing its production lines and to upgrade their existing technology by
addition of new lines with corresponding support facilities as well as to improve the layout of
its packaging areas for more efficient operation.

Hup Seng Industries Berhad

Assumptions
1. According to the historical data in the annual report, it shows that the sales
revenue increase gradually every year from 2011 to 2015. With an average of
5.59%, we expect the sales will further increase 7% for the five consecutive
years with the proposed business plan and programmes.
2. Although net profit experiences significant reduction from 2010 to 2011, but
Hup Seng still can achieves average growth of 22.97%, so the net profit is
expected to increase 25% from 2016 to 2020.
3. The annual report shows that the total equity of Hup Seng increases from 2011
to 2012 slightly drop on 2013 but continue increase for next two years. With
an average growth of 2.53%, we assume that there will be a constant increase
of 3% from 2016 to 2020.
4. The dividend payment is also expected to increase 10% annually for the
following years.
5. For the sales revenue beyond 2020, or also known as terminal year, the sales
growth is expected to be equivalent to the inflation rate, 3.14%.

Forecasted extracted financial statement

Calculations

2016
2017
2018
2019
2020
2021

Sales
RM 286,860,291 (1+7%)
306,940,511.4 (1+7%)
328,426,347.2 (1+7%)
351,416,191.5 (1+7%)
376,015,324.9 (1+7%)
402,336,397.7 (1+3.14%)

Forecasted Sales
RM 306,940,511.4
328,426,347.2
351,416,191.5
376,015,324.9
402,336,397.7
414,969,760.6

2016
2017
2018
2019
2020
2021

Net Profit
RM 54,731,064 (1+25%)
68,413,830 (1+25%)
85,517,287.5 (1+25%)
106,896,609.4 (1+25%)
133,620,761.7 (1+25%)
167,025,952.1 (1+25%)

Forecasted NP
RM 68,413,830
85,517,287.5
106,896,609.4
133,620,761.7
167,025,952.1
208,782,440.2

2016
2017
2018
2019
2020
2021

Total Equity
RM165, 664,974 (1+3%)
170,634,923.2 (1+3%)
175,753,970.9 (1+3%)
181,026,590 (1+3%)
186,457,387.7 (1+3%)
192,051,109.4 (1+3%)

Forecasted TE
RM 170,634,923.2
175,753,970.9
181,026,590
186,457,387.7
192,051,109.4
197,812,642.6

Return on Common Shareholders Equity (ROCE)

ROCE = (Net Income Preferred Dividend) / Average Common Equity

2016
2017
2018
2019
2020
2021

Calculations
RM (68,413,830-0) / 168,149,948.60
(85,517,287.50-0) / 173,194,447.05
(106,896,609.40-0) / 178,390,280.45
(133,620,761.70-0) / 183,741,988.85
(167,025,952.10-0) / 189,254,248.55
(208,782,440.20-0) / 194,931,876.00

Dividends
Dividend per share2015 = RM44, 000,004 / 800,000,000
= 0.06 sen
Cost of Capital, k
P2015 = D2016 / k
1.29 = 0.0006 / k
K = 0.0005
K= 0.05%

Price-to-book (PB) ratio and Price-to-earnings (PE) ratio

ROCE
41%
49
60
73
88
107

Earning-based equity valuation model is applied to find the intrinsic value of equity
V2014.

Vt = BVt +

E (RI t +1)
(1+ k)1

E (RI t +1)
(1+ k)1

Vend of 2015 = 165,664,974 +

E (RI t +2 ) E( RI t +3 )
E (RI t +n )
+
++
21
3
(1+k )
(1+ k )
(1+k )n

68,413,830(0.0005 165,664,974)
1
(1+0.0005)

85,517,287.50( 0.0005 170,634,923.20)

2
(1+ 0.0005)

106,896,609.40(0.0005 175,753,970.90 ) 133,620,761.70(0.0005 181,026,590) 167,025,952.1

+
+
3
4
( 1+ 0.0005)
(1+0.0005)

= 165,664,974 + 68,296,849.09+ 85,346,602.10+ 106,648,679.40+

133,263,521.40+ 166,516,016.90+(- 6,525,563,645)
=RM 5,799,827,002
Fundamental Based
V end of 2015
PB ratio = BV end of 2015

PB Ratio =

Market-based
Market Value of equity end of 2015
Book Value of equity end of 2015
1.29 800,000,000
165,664,974

5,799,827,002
= 165,664,974

=-35.01

=6.23

PE Ratio =

V end of 2015
Net Income end of 2015

PE Ratio =

Market Value of equity end of 2015

Net Income end of 2015

5,799,827,002
=
68,413,830

1.29 800,000,000
=
68,413,830

=- 84.78

=15.08

As shown in the table above, the market-based PB ratio 6.23 is greater than
fundamental PB ratio (-35.01), it shows that the market price for the shares of Hup
Seng Industries Berhad is higher and hence overvalued. Therefore, it is recommended
that the investors sell the shares. For PE ratio, the market-based PE ratio (15.08) is
also greater than fundamental PE ratio (-84.78), it shows that the investors are willing
to spend pay more for the price per share of Hup Seng Industries Berhad compared to
the fundamental ratio of the company.