Real options valuation, also often termed real options analysis, ROV or ROA applies option valuation techniques to capital budgeting decisions. A real option itself. Thanks to PrepLounge I landed job offers from both McKinsey and BCG. Before I was introduced to PrepLounge I read 2 Case Books in order to understand the interview. McKinsey uses cookies to improve site functionality, provide you with a better browsing experience, and to enable our partners to advertise to you. Valuation using discounted cash flows is a method for determining the current value of a company using future cash flows adjusted for time value. Own The Future With JD. And Alibaba. We Bought JD on the Dip. Source Eastwestbank. Mckinsey Dcf Valuation Model' title='Mckinsey Dcf Valuation Model' />From Valuation Advisory to Investment Banking How to Network and Interview with Investment Banks and Get Hired in Lateral Recruiting. Alibaba BABA is up over 8. Jan 2. 01. 7. We expect more capital appreciation ahead and remain long term holders of BABA. While we predict BABA to reign as king of Asia e commerce in the long run, we recently began accumulating shares of JD. JD, BABAs biggest rival in the Chinese e commerce space. Mckinsey Dcf Valuation Model' title='Mckinsey Dcf Valuation Model' />In this article, we will share our due diligence on the lucrative Chinese e commerce market, build a new discounted cash flow DCF model for JD, and update our DCF model for BABA. In doing so, we hope to illustrate that the Chinese e commerce space is big enough for both companies to prosper for years to come. China E commerce Outlook. Goldman Sachs reported that Chinese e commerce sales amounted to 7. The banks research project the Chinese e commerce market growth at a 2. CAGR and reach 1. Goldman believes that infrastructure and technology spending by both public and private entities will boost online shoppers number from 4. We believe this forecast may be overly bullish but it does resonate with Mc. Kinseys report on Chinas rapidly growing middle and upper middle class. The management consulting firm estimates that the number of urban households will grow from 2. Mc. Kinsey also predicts that urban consumer spendingonline sales Brick Mortar sales will more than double from 1. Mckinsey Dcf Valuation Model' title='Mckinsey Dcf Valuation Model' />
Source Mckinsey Co. Mc. Kinsey explains the logic behind their estimates below In the decade ahead, the middle classs continued expansion will be powered by labor market and policy initiatives that push wages up, financial reforms that stimulate employment and income growth, and the rising role of private enterprise, which should encourage productivity and help more income accrue to households. Should all this play out as expected, urban household income will at least double by 2. Assuming JDs market share remains flat and the Chinese e commerce space grows from 7. JDs e commerce revenue will grow to approximately 8. Alibabas e commerce revenue in the same scenario would be close to 5. These revenue projections are on the conservative end as they neglect the promising growth potential of foreign markets such as South and Southeast Asia, These two scenarios also exclude the growth in other segments of JD and BABAs business such as entertainment, financial technology, and cloud services. The bottom line is that the Chinese e commerce industry likely has room for two behemoths to prosper for years to come. Understanding the Financial Position of JD and BABABABA trades at a market cap of 4. JD trades at a market cap of less than 6. Its important to note that JD actually generated higher revenue than BABA for the last fiscal year. BABA, on the other hand, is able to convert its revenue to free cash flow at a far superior rate. BABAs margins are naturally higher as a strong portion of the companys profit stems from its consumer to consumer and business to business sales on its Taobao and Alibaba. BABA incurs lower operating expenses for this business model because the consumerseller assume a majority of the costs of goods sold while also paying a sales commission to BABA. Source Bloomberg. Investors speculate that JD is taking Amazons business approach of focusing on top line growth by re investing. JD, similar to Amazon, provides direct online sales business to consumer and competes with Alibabas T Mall platform. Many of JDs business expenses such as production, logistics, and sales promotion are internal, leading to significantly higher operating cost compared to BABA. Source Bloomberg. Investors point to Amazons top line growth as the fuel for stock price growth and JD is the closest e commerce comparison to Amazon as we just discussed. Amazon is trading at 3. FY revenue, JD is currently trading at 1. FY revenue. If JD is trading at 3. FY revenue, the company would have a market cap of 1. English Grammar Books For Beginners Pdf. Cash Debt. Source Bloomberg. Both Alibaba and JD have sound balance sheets in terms of cash and debt. For the quarter ended June 3. Alibaba has 1. 3,7. Alibaba generated 9,3. FY 2. 01. 7. BABA can essentially pay back its total debt with less than 2 years of business earnings. For the quarter ended June 3. JD has 4,3. 92 million debt and 6,0. JD generated 9. 63 million in free cash flow for FY 2. JD would be able to pay back its total debt in less than 5 years of business earnings. JD DCF Valuation. Our FY 2. 01. 7 2. JD revenue projections are pulled from the average of sell side analyst estimates via Bloomberg. Our bullish 1. 1. WACC for JD is calculated by finbox. Source Bloomberg. We assume JDs operating cash flow will grow to be 5. Operating cash flow as 5. JD had posted this ratio back in 2. On a trailing twelve months basis, JD has posted operating cash flow as 6 of revenue. This leads us to below that our operating cash flow margin is on the conservative end. We assume that capex will be 1. JDs revenue going forward. This estimate is derived the average capex to revenue ratio of the last 5 fiscal years. Our 7 terminal growth rate assumes that China e commerce growth remains in the double digits into the mid 2. The growth opportunities are backed by the expected increase in spending power of Chinas middle and upper middle class. Once the e commerce growth slows in China, we expect JDs foreign investments, especially in Southeast Asia, to begin taking shape. We are initiating our bullish coverage on JD with a 9 to 1. BABA DCF Valuation. Our FY 2. 01. 8 2. BABA revenue projections are pulled from the average of sell side analyst estimates via Bloomberg. Our selected 1. 1 WACC is pulled from Finbox. Source Bloomberg. Our 5. 2. 8 operating cash flow margin is derived from the average operating cash flow margin of BABAs business for the last 6 fiscal years. We assume that capex will be around 1. This estimate is derived from BABAs average capex to revenue ratio of the last 3 fiscal years. We assume this high capex spending will fuel an 8 terminal growth rate. The 8 terminal growth rate accounts for growth beyond just BABAs domestic core e commerce business. We are also factoring in BABAs growth opportunities in foreign e commerce, cloud services, entertainment, and innovation. These growth opportunities are backed by the expected increase in spending power of Chinas middle and upper middle class. We are reiterating a buy recommendation on Alibaba with a price target of 2. Conclusion. We believe opportunities in the Chinese e commerce market are far too great to be seized by a single player. We expect the business margins JD in particular of both companies to rise as Chinese spending power increases for the middle and upper middle class. We also acknowledge both companies made savvy investments in SouthSoutheast Asia will take off once growth in China slows down. We currently see JD having higher short term upside than BABA. We are actively looking to add more JD shares to our portfolio and well continue to hold shares of BABA until a buying opportunity presents itself. Disclosure I amwe are long BABA, JD. Gobi 2000 Driver Windows 10 on this page. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it other than from Seeking Alpha. I have no business relationship with any company whose stock is mentioned in this article.