Hi Guys,
The company is accused of LARGELY overstating its sales, profitability ratios, cash position, acquisitions, since 2011(at least). The actual situation could be worst and its stock price plummeted significantly after an activist group published a report with the accusations.
It is expected to be suspended for a period of 12-18 months and I was hoping to get your input to validate the model I developed as I’m a newbie here!
Since it stopped trading a little while ago, my firm conducted research on the proper financial fraud accusation discount to be used. They ended up using the median excess return (against an internally built composite using various Hang Seng indexes) of comparables (Chinese companies accused of financial fraud) and they determined the financial fraud accusation discount, at this time, to be about 25%.
Now my job is to value the security going forward.
After conducting research, I decided not to use the cie’s beta and multiples linked to the accusations (sales, earnings, current stock price, etc…) Beta would be obtained from legitimate comparables in the same market.
Here’s the formula I developed. Explanations follow:
Fair Value_T= Fair Value( t0) *[1+(β*R_benchmark )]+ ε_T
Explanations of variables:
〖Fair Value〗_( t0)=Halted Market Value * (1-〖Discount〗_(Fraud Accusation) )
〖Fair Value〗_T =Current Fair Value
β= Leverage Adjusted Beta of company dertermined using comparables^’ unlevered adjusted beta
R_bench= Cumulative Return on Benchmark since 〖Fair Value〗_t0
ε= Cumulative Error term since trade halt
To re-lever the beta, I would use the following to get the D/E ratio for Cie in question:
Equity value would be determined using: Shares Outstanding *estimated share value after discount for fraud.
Debt value using total debt and accounting for impact of convertible debt, which RexLot and many small cap comparables issue. Equity portion of convertible could be moved to equity value.
All the work is really preliminary and goes as a project to value a broader set of securities, unfortunately.
Your input would be greatly appreciated!!!
Thanks