Intrinsic value of China Eastern Airlines ADR - CEA

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$30.36

  Intrinsic Value

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  Value-price divergence*

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$30.36

 
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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of CEA stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 14.0

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  5.25
  4.20
  4.28
  4.35
  4.42
  4.48
  4.53
  4.57
  4.62
  4.66
  4.69
  4.72
  4.75
  4.77
  4.80
  4.82
  4.84
  4.85
  4.87
  4.88
  4.89
  4.90
  4.91
  4.92
  4.93
  4.94
  4.94
  4.95
  4.95
  4.96
  4.96
Revenue, $m
  14,309
  97,916
  102,106
  106,550
  111,256
  116,235
  121,498
  127,056
  132,923
  139,111
  145,636
  152,511
  159,754
  167,381
  175,409
  183,859
  192,749
  202,100
  211,936
  222,278
  233,152
  244,583
  256,598
  269,225
  282,496
  296,440
  311,092
  326,486
  342,658
  359,648
  377,495
Variable operating expenses, $m
 
  91,308
  95,168
  99,260
  103,595
  108,180
  113,027
  118,147
  123,550
  129,249
  135,258
  140,464
  147,134
  154,159
  161,553
  169,335
  177,523
  186,136
  195,194
  204,720
  214,734
  225,262
  236,328
  247,958
  260,180
  273,023
  286,518
  300,696
  315,591
  331,238
  347,675
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  12,502
  91,308
  95,168
  99,260
  103,595
  108,180
  113,027
  118,147
  123,550
  129,249
  135,258
  140,464
  147,134
  154,159
  161,553
  169,335
  177,523
  186,136
  195,194
  204,720
  214,734
  225,262
  236,328
  247,958
  260,180
  273,023
  286,518
  300,696
  315,591
  331,238
  347,675
Operating income, $m
  1,806
  6,608
  6,939
  7,290
  7,662
  8,055
  8,471
  8,910
  9,373
  9,862
  10,377
  12,047
  12,619
  13,222
  13,856
  14,524
  15,226
  15,965
  16,742
  17,558
  18,417
  19,320
  20,269
  21,267
  22,315
  23,417
  24,574
  25,790
  27,068
  28,410
  29,820
EBITDA, $m
  3,613
  18,060
  18,833
  19,652
  20,520
  21,438
  22,409
  23,434
  24,516
  25,658
  26,861
  28,129
  29,465
  30,872
  32,353
  33,911
  35,551
  37,275
  39,090
  40,997
  43,003
  45,111
  47,327
  49,656
  52,104
  54,676
  57,378
  60,217
  63,200
  66,334
  69,625
Interest expense (income), $m
  464
  3,851
  4,079
  4,315
  4,566
  4,832
  5,113
  5,411
  5,725
  6,056
  6,405
  6,774
  7,162
  7,571
  8,002
  8,455
  8,933
  9,435
  9,963
  10,518
  11,103
  11,717
  12,362
  13,041
  13,754
  14,504
  15,291
  16,119
  16,988
  17,902
  18,861
Earnings before tax, $m
  940
  2,757
  2,860
  2,974
  3,095
  3,223
  3,357
  3,499
  3,648
  3,806
  3,972
  5,273
  5,457
  5,651
  5,854
  6,068
  6,293
  6,530
  6,779
  7,040
  7,315
  7,604
  7,907
  8,226
  8,561
  8,913
  9,283
  9,672
  10,080
  10,508
  10,959
Tax expense, $m
  223
  744
  772
  803
  836
  870
  906
  945
  985
  1,028
  1,072
  1,424
  1,473
  1,526
  1,581
  1,638
  1,699
  1,763
  1,830
  1,901
  1,975
  2,053
  2,135
  2,221
  2,312
  2,407
  2,506
  2,611
  2,721
  2,837
  2,959
Net income, $m
  651
  2,012
  2,088
  2,171
  2,259
  2,353
  2,451
  2,554
  2,663
  2,778
  2,899
  3,850
  3,984
  4,125
  4,274
  4,430
  4,594
  4,767
  4,948
  5,139
  5,340
  5,551
  5,772
  6,005
  6,250
  6,507
  6,777
  7,060
  7,358
  7,671
  8,000

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  245
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  30,717
  197,013
  205,446
  214,387
  223,856
  233,873
  244,462
  255,646
  267,450
  279,902
  293,029
  306,863
  321,436
  336,782
  352,936
  369,937
  387,824
  406,641
  426,430
  447,240
  469,118
  492,118
  516,293
  541,701
  568,402
  596,459
  625,940
  656,913
  689,453
  723,637
  759,546
Adjusted assets (=assets-cash), $m
  30,472
  197,013
  205,446
  214,387
  223,856
  233,873
  244,462
  255,646
  267,450
  279,902
  293,029
  306,863
  321,436
  336,782
  352,936
  369,937
  387,824
  406,641
  426,430
  447,240
  469,118
  492,118
  516,293
  541,701
  568,402
  596,459
  625,940
  656,913
  689,453
  723,637
  759,546
Revenue / Adjusted assets
  0.470
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
  0.497
Average production assets, $m
  20,852
  126,997
  132,432
  138,196
  144,299
  150,757
  157,583
  164,792
  172,401
  180,427
  188,889
  197,807
  207,201
  217,093
  227,506
  238,465
  249,995
  262,124
  274,881
  288,295
  302,398
  317,224
  332,807
  349,185
  366,397
  384,483
  403,486
  423,452
  444,428
  466,463
  489,610
Working capital, $m
  -7,551
  -16,744
  -17,460
  -18,220
  -19,025
  -19,876
  -20,776
  -21,727
  -22,730
  -23,788
  -24,904
  -26,079
  -27,318
  -28,622
  -29,995
  -31,440
  -32,960
  -34,559
  -36,241
  -38,010
  -39,869
  -41,824
  -43,878
  -46,038
  -48,307
  -50,691
  -53,197
  -55,829
  -58,595
  -61,500
  -64,552
Total debt, $m
  17,038
  116,535
  123,297
  130,468
  138,062
  146,097
  154,589
  163,558
  173,025
  183,011
  193,540
  204,634
  216,322
  228,629
  241,585
  255,219
  269,565
  284,656
  300,527
  317,216
  334,763
  353,209
  372,597
  392,974
  414,388
  436,890
  460,534
  485,374
  511,471
  538,887
  567,686
Total liabilities, $m
  23,563
  158,005
  164,767
  171,938
  179,532
  187,567
  196,059
  205,028
  214,495
  224,481
  235,010
  246,104
  257,792
  270,099
  283,055
  296,689
  311,035
  326,126
  341,997
  358,686
  376,233
  394,679
  414,067
  434,444
  455,858
  478,360
  502,004
  526,844
  552,941
  580,357
  609,156
Total equity, $m
  7,154
  39,009
  40,678
  42,449
  44,323
  46,307
  48,404
  50,618
  52,955
  55,421
  58,020
  60,759
  63,644
  66,683
  69,881
  73,247
  76,789
  80,515
  84,433
  88,553
  92,885
  97,439
  102,226
  107,257
  112,544
  118,099
  123,936
  130,069
  136,512
  143,280
  150,390
Total liabilities and equity, $m
  30,717
  197,014
  205,445
  214,387
  223,855
  233,874
  244,463
  255,646
  267,450
  279,902
  293,030
  306,863
  321,436
  336,782
  352,936
  369,936
  387,824
  406,641
  426,430
  447,239
  469,118
  492,118
  516,293
  541,701
  568,402
  596,459
  625,940
  656,913
  689,453
  723,637
  759,546
Debt-to-equity ratio
  2.382
  2.990
  3.030
  3.070
  3.110
  3.150
  3.190
  3.230
  3.270
  3.300
  3.340
  3.370
  3.400
  3.430
  3.460
  3.480
  3.510
  3.540
  3.560
  3.580
  3.600
  3.620
  3.640
  3.660
  3.680
  3.700
  3.720
  3.730
  3.750
  3.760
  3.770
Adjusted equity ratio
  0.227
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198
  0.198

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  651
  2,012
  2,088
  2,171
  2,259
  2,353
  2,451
  2,554
  2,663
  2,778
  2,899
  3,850
  3,984
  4,125
  4,274
  4,430
  4,594
  4,767
  4,948
  5,139
  5,340
  5,551
  5,772
  6,005
  6,250
  6,507
  6,777
  7,060
  7,358
  7,671
  8,000
Depreciation, amort., depletion, $m
  1,807
  11,452
  11,894
  12,362
  12,859
  13,384
  13,939
  14,525
  15,143
  15,796
  16,484
  16,082
  16,846
  17,650
  18,496
  19,387
  20,325
  21,311
  22,348
  23,439
  24,585
  25,791
  27,057
  28,389
  29,788
  31,259
  32,804
  34,427
  36,132
  37,924
  39,806
Funds from operations, $m
  3,663
  13,464
  13,982
  14,534
  15,118
  15,736
  16,389
  17,079
  17,807
  18,574
  19,383
  19,931
  20,829
  21,775
  22,770
  23,817
  24,919
  26,078
  27,296
  28,578
  29,925
  31,341
  32,830
  34,394
  36,038
  37,765
  39,580
  41,487
  43,490
  45,595
  47,805
Change in working capital, $m
  62
  -675
  -717
  -760
  -805
  -851
  -900
  -950
  -1,003
  -1,058
  -1,116
  -1,176
  -1,238
  -1,304
  -1,373
  -1,445
  -1,520
  -1,599
  -1,682
  -1,769
  -1,859
  -1,955
  -2,055
  -2,159
  -2,269
  -2,385
  -2,505
  -2,632
  -2,765
  -2,905
  -3,052
Cash from operations, $m
  3,601
  26,368
  14,698
  15,294
  15,923
  16,588
  17,289
  18,029
  18,810
  19,632
  20,499
  21,107
  22,068
  23,079
  24,143
  25,262
  26,439
  27,677
  28,978
  30,346
  31,784
  33,296
  34,884
  36,553
  38,307
  40,150
  42,086
  44,120
  46,256
  48,500
  50,857
Maintenance CAPEX, $m
  0
  -9,910
  -10,325
  -10,767
  -11,235
  -11,732
  -12,257
  -12,812
  -13,398
  -14,016
  -14,669
  -15,357
  -16,082
  -16,846
  -17,650
  -18,496
  -19,387
  -20,325
  -21,311
  -22,348
  -23,439
  -24,585
  -25,791
  -27,057
  -28,389
  -29,788
  -31,259
  -32,804
  -34,427
  -36,132
  -37,924
New CAPEX, $m
  -3,149
  -5,099
  -5,435
  -5,763
  -6,104
  -6,458
  -6,826
  -7,209
  -7,609
  -8,026
  -8,462
  -8,918
  -9,394
  -9,892
  -10,413
  -10,959
  -11,530
  -12,129
  -12,756
  -13,414
  -14,103
  -14,826
  -15,583
  -16,378
  -17,212
  -18,086
  -19,003
  -19,966
  -20,976
  -22,035
  -23,147
Cash from investing activities, $m
  -5,379
  -15,009
  -15,760
  -16,530
  -17,339
  -18,190
  -19,083
  -20,021
  -21,007
  -22,042
  -23,131
  -24,275
  -25,476
  -26,738
  -28,063
  -29,455
  -30,917
  -32,454
  -34,067
  -35,762
  -37,542
  -39,411
  -41,374
  -43,435
  -45,601
  -47,874
  -50,262
  -52,770
  -55,403
  -58,167
  -61,071
Free cash flow, $m
  -1,778
  11,358
  -1,062
  -1,237
  -1,416
  -1,602
  -1,793
  -1,991
  -2,197
  -2,410
  -2,632
  -3,167
  -3,408
  -3,658
  -3,920
  -4,193
  -4,479
  -4,777
  -5,089
  -5,416
  -5,757
  -6,115
  -6,490
  -6,882
  -7,293
  -7,724
  -8,176
  -8,650
  -9,147
  -9,668
  -10,214
Issuance/(repayment) of debt, $m
  14
  6,504
  6,763
  7,171
  7,594
  8,034
  8,492
  8,969
  9,467
  9,986
  10,528
  11,095
  11,687
  12,307
  12,956
  13,635
  14,346
  15,091
  15,871
  16,689
  17,547
  18,446
  19,388
  20,377
  21,414
  22,502
  23,643
  24,841
  26,097
  27,416
  28,799
Issuance/(repurchase) of shares, $m
  1,236
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  777
  6,504
  6,763
  7,171
  7,594
  8,034
  8,492
  8,969
  9,467
  9,986
  10,528
  11,095
  11,687
  12,307
  12,956
  13,635
  14,346
  15,091
  15,871
  16,689
  17,547
  18,446
  19,388
  20,377
  21,414
  22,502
  23,643
  24,841
  26,097
  27,416
  28,799
Total cash flow (excl. dividends), $m
  -961
  17,862
  5,700
  5,934
  6,178
  6,433
  6,699
  6,978
  7,270
  7,576
  7,896
  7,928
  8,280
  8,649
  9,036
  9,441
  9,867
  10,314
  10,782
  11,274
  11,789
  12,331
  12,899
  13,495
  14,121
  14,778
  15,467
  16,191
  16,950
  17,748
  18,585
Retained Cash Flow (-), $m
  -1,742
  -1,598
  -1,670
  -1,770
  -1,875
  -1,984
  -2,097
  -2,214
  -2,337
  -2,465
  -2,599
  -2,739
  -2,885
  -3,038
  -3,199
  -3,366
  -3,542
  -3,726
  -3,918
  -4,120
  -4,332
  -4,554
  -4,787
  -5,031
  -5,287
  -5,555
  -5,837
  -6,133
  -6,443
  -6,768
  -7,110
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  16,264
  4,031
  4,164
  4,303
  4,449
  4,603
  4,764
  4,933
  5,110
  5,297
  5,189
  5,394
  5,610
  5,837
  6,075
  6,325
  6,588
  6,864
  7,153
  7,457
  7,777
  8,112
  8,464
  8,834
  9,222
  9,630
  10,058
  10,508
  10,980
  11,475
Discount rate, %
 
  9.70
  10.19
  10.69
  11.23
  11.79
  12.38
  13.00
  13.65
  14.33
  15.05
  15.80
  16.59
  17.42
  18.29
  19.21
  20.17
  21.17
  22.23
  23.34
  24.51
  25.74
  27.02
  28.38
  29.79
  31.28
  32.85
  34.49
  36.21
  38.03
  39.93
PV of cash for distribution, $m
 
  14,826
  3,320
  3,070
  2,811
  2,548
  2,285
  2,025
  1,772
  1,531
  1,304
  1,033
  855
  696
  556
  436
  335
  252
  185
  133
  93
  63
  42
  27
  17
  10
  6
  3
  2
  1
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

China Eastern Airlines Corporation Limited, together with its subsidiaries, operates in the civil aviation industry. It offers passenger, cargo, mail delivery, ground, cargo handling, and other extended transportation services. The company also provides flight training, cargo carriage, cargo logistics, and airlines consultation and maintenance services. In addition, it is involved in the provision of import and export, investment, leasing, and consultation services; hotel services; tour, travel and air ticketing agency, and transportation operations; and the provision research and development of technology and products in the field of aviation. Further, the company engages in the operation of e-commerce platform and non-aviation points for travelers, points mall and online floating market, digital marketing, and integrated non-aviation products for exploring transformation resources. As of December 31, 2015, the company operated a fleet of 551 aircraft, including 526 passenger aircraft, 9 freighters, and 16 business aircraft. It has operations in the People’s Republic of China and internationally. The company was founded in 1988 and is headquartered in Shanghai, the People’s Republic of China. China Eastern Airlines Corporation Limited is a subsidiary of China Eastern Air Holding Company.

FINANCIAL RATIOS  of  China Eastern Airlines ADR (CEA)

Valuation Ratios
P/E Ratio 674.7
Price to Sales 30.7
Price to Book 61.4
Price to Tangible Book
Price to Cash Flow 122
Price to Free Cash Flow 971.7
Growth Rates
Sales Growth Rate 5.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 149.7%
Cap. Spend. - 3 Yr. Gr. Rate 64.2%
Financial Strength
Quick Ratio 0
Current Ratio 0
LT Debt to Equity 166.8%
Total Debt to Equity 238.2%
Interest Coverage 3
Management Effectiveness
Return On Assets 3.4%
Ret/ On Assets - 3 Yr. Avg. 3.6%
Return On Total Capital 2.8%
Ret/ On T. Cap. - 3 Yr. Avg. 3%
Return On Equity 10.4%
Return On Equity - 3 Yr. Avg. 11.9%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 24.1%
Gross Margin - 3 Yr. Avg. 23.2%
EBITDA Margin 22.4%
EBITDA Margin - 3 Yr. Avg. 20%
Operating Margin 12.6%
Oper. Margin - 3 Yr. Avg. 10.9%
Pre-Tax Margin 6.6%
Pre-Tax Margin - 3 Yr. Avg. 5.7%
Net Profit Margin 4.5%
Net Profit Margin - 3 Yr. Avg. 4.4%
Effective Tax Rate 23.7%
Eff/ Tax Rate - 3 Yr. Avg. 16.2%
Payout Ratio 16.4%

CEA stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the CEA stock intrinsic value calculation we used $93969 million for the last fiscal year's total revenue generated by China Eastern Airlines ADR. The default revenue input number comes from 2016 income statement of China Eastern Airlines ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our CEA stock valuation model: a) initial revenue growth rate of 4.2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 9.7%, whose default value for CEA is calculated based on our internal credit rating of China Eastern Airlines ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of China Eastern Airlines ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of CEA stock the variable cost ratio is equal to 93.3%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for CEA stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for China Eastern Airlines ADR.

Corporate tax rate of 27% is the nominal tax rate for China Eastern Airlines ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the CEA stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for CEA are equal to 129.7%.

Life of production assets of 12.3 years is the average useful life of capital assets used in China Eastern Airlines ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for CEA is equal to -17.1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $37411 million for China Eastern Airlines ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 462.558 million for China Eastern Airlines ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of China Eastern Airlines ADR at the current share price and the inputted number of shares is $14.0 billion.


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COMPANY NEWS

▶ China Eastern Engine-Cover Trouble Forces Emergency Landing   [Jun-12-17 06:18AM  The Wall Street Journal]
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▶ Delta, Korean Air to form joint venture   [12:35PM  at bizjournals.com]
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▶ [$$] American Airlines to Invest $200 Million in China Southern   [04:43AM  at The Wall Street Journal]
▶ Report: Delta Air Lines, Korean Air in joint venture talks   [Feb-27-17 07:32AM  at bizjournals.com]
▶ Can Chinese Airline Stocks Soar Higher in 2017?   [Jan-25-17 01:40AM  at Barrons.com]
▶ Hang Seng Gains As China Pushes For Mixed Ownership Reform   [Dec-20-16 10:44PM  at Barrons.com]
▶ Why buying China bonds and stocks is looking dicey   [Dec-16-16 01:23AM  at CNBC]
▶ China's Ctrip Goes Overseas With Skyscanner Deal   [Nov-24-16 05:36AM  at MarketWatch]
▶ [$$] Two Chinese Passenger Jets Nearly Collide at Shanghai Airport   [Oct-13-16 01:05AM  at The Wall Street Journal]
▶ 2 Chinese Airline Stocks Set to Gain Altitude   [12:01AM  at Barrons.com]
▶ [$$] Emerging market multinationals eclipse competitors   [Jun-27-16 04:15PM  at Financial Times]
▶ Who's the Mystery Buyer Behind Boeing's 787?   [May-07-16 08:13AM  at Motley Fool]
▶ [$$] Business Watch: News Digest   [May-01-16 01:12PM  at The Wall Street Journal]
▶ CHINA EASTERN AIRLINES CORP LTD Financials   [01:04PM  EDGAR Online Financials]
▶ Why Did the SSE Composite Index Fall?   [Apr-25-16 12:50PM  Market Realist]
▶ Ctrip Takes a Ride on China Eastern   [Apr-22-16 06:02AM  at The Wall Street Journal]
Stock chart of CEA Financial statements of CEA Annual reports of CEA
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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