Intrinsic value of China Southern Airlines ADR - ZNH

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$42.20

  Intrinsic Value

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  Value-price divergence*

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

We calculate the intrinsic value of ZNH 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 12.6

 

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, %
  2.98
  2.80
  3.02
  3.22
  3.40
  3.56
  3.70
  3.83
  3.95
  4.05
  4.15
  4.23
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.63
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.82
  4.84
  4.86
  4.87
  4.88
  4.90
Revenue, $m
  16,635
  114,778
  118,245
  122,050
  126,195
  130,683
  135,519
  140,711
  146,266
  152,194
  158,506
  165,216
  172,336
  179,882
  187,870
  196,318
  205,245
  214,670
  224,616
  235,105
  246,162
  257,812
  270,082
  283,001
  296,599
  310,908
  325,963
  341,797
  358,450
  375,960
  394,368
Variable operating expenses, $m
 
  109,728
  113,042
  116,679
  120,642
  124,933
  129,557
  134,520
  139,830
  145,497
  151,532
  157,946
  164,753
  171,967
  179,604
  187,680
  196,214
  205,225
  214,733
  224,761
  235,331
  246,468
  258,198
  270,549
  283,549
  297,228
  311,620
  326,758
  342,678
  359,418
  377,016
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
  14,797
  109,728
  113,042
  116,679
  120,642
  124,933
  129,557
  134,520
  139,830
  145,497
  151,532
  157,946
  164,753
  171,967
  179,604
  187,680
  196,214
  205,225
  214,733
  224,761
  235,331
  246,468
  258,198
  270,549
  283,549
  297,228
  311,620
  326,758
  342,678
  359,418
  377,016
Operating income, $m
  1,838
  5,050
  5,203
  5,370
  5,553
  5,750
  5,963
  6,191
  6,436
  6,697
  6,974
  7,269
  7,583
  7,915
  8,266
  8,638
  9,031
  9,445
  9,883
  10,345
  10,831
  11,344
  11,884
  12,452
  13,050
  13,680
  14,342
  15,039
  15,772
  16,542
  17,352
EBITDA, $m
  3,683
  17,372
  17,896
  18,472
  19,099
  19,779
  20,511
  21,296
  22,137
  23,034
  23,990
  25,005
  26,083
  27,225
  28,434
  29,712
  31,064
  32,490
  33,995
  35,583
  37,256
  39,019
  40,876
  42,832
  44,890
  47,056
  49,334
  51,731
  54,251
  56,901
  59,687
Interest expense (income), $m
  380
  3,400
  3,545
  3,699
  3,869
  4,055
  4,255
  4,471
  4,703
  4,951
  5,216
  5,498
  5,798
  6,116
  6,453
  6,810
  7,187
  7,586
  8,007
  8,451
  8,920
  9,414
  9,934
  10,483
  11,060
  11,667
  12,307
  12,979
  13,687
  14,430
  15,213
Earnings before tax, $m
  1,108
  1,650
  1,658
  1,671
  1,683
  1,696
  1,708
  1,720
  1,733
  1,745
  1,758
  1,771
  1,785
  1,799
  1,813
  1,828
  1,843
  1,859
  1,876
  1,893
  1,911
  1,930
  1,949
  1,969
  1,991
  2,013
  2,036
  2,060
  2,085
  2,112
  2,139
Tax expense, $m
  255
  445
  448
  451
  454
  458
  461
  464
  468
  471
  475
  478
  482
  486
  490
  494
  498
  502
  507
  511
  516
  521
  526
  532
  537
  543
  550
  556
  563
  570
  578
Net income, $m
  730
  1,204
  1,211
  1,220
  1,229
  1,238
  1,247
  1,256
  1,265
  1,274
  1,284
  1,293
  1,303
  1,313
  1,324
  1,335
  1,346
  1,357
  1,369
  1,382
  1,395
  1,409
  1,423
  1,438
  1,453
  1,469
  1,486
  1,504
  1,522
  1,542
  1,562

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  601
  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
  28,998
  186,631
  192,268
  198,455
  205,195
  212,493
  220,357
  228,798
  237,831
  247,470
  257,734
  268,644
  280,221
  292,491
  305,480
  319,217
  333,732
  349,058
  365,230
  382,285
  400,263
  419,206
  439,157
  460,164
  482,275
  505,542
  530,021
  555,768
  582,846
  611,317
  641,249
Adjusted assets (=assets-cash), $m
  28,397
  186,631
  192,268
  198,455
  205,195
  212,493
  220,357
  228,798
  237,831
  247,470
  257,734
  268,644
  280,221
  292,491
  305,480
  319,217
  333,732
  349,058
  365,230
  382,285
  400,263
  419,206
  439,157
  460,164
  482,275
  505,542
  530,021
  555,768
  582,846
  611,317
  641,249
Revenue / Adjusted assets
  0.586
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
  0.615
Average production assets, $m
  24,483
  162,641
  167,553
  172,944
  178,818
  185,178
  192,031
  199,387
  207,259
  215,659
  224,604
  234,111
  244,200
  254,893
  266,212
  278,183
  290,832
  304,188
  318,281
  333,144
  348,812
  365,319
  382,706
  401,012
  420,281
  440,557
  461,889
  484,327
  507,924
  532,735
  558,820
Working capital, $m
  -7,837
  -20,086
  -20,693
  -21,359
  -22,084
  -22,870
  -23,716
  -24,624
  -25,597
  -26,634
  -27,739
  -28,913
  -30,159
  -31,479
  -32,877
  -34,356
  -35,918
  -37,567
  -39,308
  -41,143
  -43,078
  -45,117
  -47,264
  -49,525
  -51,905
  -54,409
  -57,043
  -59,815
  -62,729
  -65,793
  -69,014
Total debt, $m
  15,585
  101,272
  105,696
  110,553
  115,844
  121,573
  127,746
  134,373
  141,463
  149,030
  157,087
  165,651
  174,740
  184,372
  194,568
  205,351
  216,745
  228,776
  241,471
  254,860
  268,973
  283,843
  299,504
  315,994
  333,352
  351,616
  370,832
  391,044
  412,300
  434,650
  458,147
Total liabilities, $m
  22,712
  146,506
  150,930
  155,787
  161,078
  166,807
  172,980
  179,607
  186,697
  194,264
  202,321
  210,885
  219,974
  229,606
  239,802
  250,585
  261,979
  274,010
  286,705
  300,094
  314,207
  329,077
  344,738
  361,228
  378,586
  396,850
  416,066
  436,278
  457,534
  479,884
  503,381
Total equity, $m
  6,287
  40,126
  41,338
  42,668
  44,117
  45,686
  47,377
  49,192
  51,134
  53,206
  55,413
  57,758
  60,248
  62,886
  65,678
  68,632
  71,752
  75,047
  78,524
  82,191
  86,057
  90,129
  94,419
  98,935
  103,689
  108,692
  113,954
  119,490
  125,312
  131,433
  137,869
Total liabilities and equity, $m
  28,999
  186,632
  192,268
  198,455
  205,195
  212,493
  220,357
  228,799
  237,831
  247,470
  257,734
  268,643
  280,222
  292,492
  305,480
  319,217
  333,731
  349,057
  365,229
  382,285
  400,264
  419,206
  439,157
  460,163
  482,275
  505,542
  530,020
  555,768
  582,846
  611,317
  641,250
Debt-to-equity ratio
  2.479
  2.520
  2.560
  2.590
  2.630
  2.660
  2.700
  2.730
  2.770
  2.800
  2.830
  2.870
  2.900
  2.930
  2.960
  2.990
  3.020
  3.050
  3.080
  3.100
  3.130
  3.150
  3.170
  3.190
  3.210
  3.230
  3.250
  3.270
  3.290
  3.310
  3.320
Adjusted equity ratio
  0.221
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215
  0.215

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  730
  1,204
  1,211
  1,220
  1,229
  1,238
  1,247
  1,256
  1,265
  1,274
  1,284
  1,293
  1,303
  1,313
  1,324
  1,335
  1,346
  1,357
  1,369
  1,382
  1,395
  1,409
  1,423
  1,438
  1,453
  1,469
  1,486
  1,504
  1,522
  1,542
  1,562
Depreciation, amort., depletion, $m
  1,845
  12,321
  12,693
  13,102
  13,547
  14,029
  14,548
  15,105
  15,701
  16,338
  17,015
  17,736
  18,500
  19,310
  20,168
  21,074
  22,033
  23,045
  24,112
  25,238
  26,425
  27,676
  28,993
  30,380
  31,839
  33,376
  34,992
  36,691
  38,479
  40,359
  42,335
Funds from operations, $m
  3,258
  13,526
  13,904
  14,322
  14,776
  15,266
  15,795
  16,361
  16,966
  17,612
  18,299
  19,029
  19,803
  20,623
  21,491
  22,409
  23,378
  24,402
  25,482
  26,620
  27,820
  29,084
  30,416
  31,817
  33,293
  34,845
  36,478
  38,195
  40,001
  41,900
  43,897
Change in working capital, $m
  -180
  -547
  -607
  -666
  -725
  -785
  -846
  -909
  -972
  -1,037
  -1,105
  -1,174
  -1,246
  -1,321
  -1,398
  -1,478
  -1,562
  -1,649
  -1,741
  -1,836
  -1,935
  -2,039
  -2,147
  -2,261
  -2,380
  -2,504
  -2,635
  -2,771
  -2,914
  -3,064
  -3,221
Cash from operations, $m
  3,438
  18,448
  14,511
  14,987
  15,501
  16,052
  16,641
  17,269
  17,938
  18,649
  19,404
  20,203
  21,049
  21,944
  22,889
  23,887
  24,941
  26,051
  27,222
  28,456
  29,755
  31,123
  32,563
  34,078
  35,672
  37,349
  39,112
  40,966
  42,916
  44,965
  47,118
Maintenance CAPEX, $m
  0
  -11,983
  -12,321
  -12,693
  -13,102
  -13,547
  -14,029
  -14,548
  -15,105
  -15,701
  -16,338
  -17,015
  -17,736
  -18,500
  -19,310
  -20,168
  -21,074
  -22,033
  -23,045
  -24,112
  -25,238
  -26,425
  -27,676
  -28,993
  -30,380
  -31,839
  -33,376
  -34,992
  -36,691
  -38,479
  -40,359
New CAPEX, $m
  -2,744
  -4,466
  -4,912
  -5,392
  -5,874
  -6,360
  -6,853
  -7,356
  -7,871
  -8,400
  -8,945
  -9,507
  -10,089
  -10,693
  -11,319
  -11,971
  -12,649
  -13,356
  -14,093
  -14,863
  -15,667
  -16,508
  -17,387
  -18,306
  -19,269
  -20,276
  -21,332
  -22,438
  -23,597
  -24,811
  -26,085
Cash from investing activities, $m
  -2,279
  -16,449
  -17,233
  -18,085
  -18,976
  -19,907
  -20,882
  -21,904
  -22,976
  -24,101
  -25,283
  -26,522
  -27,825
  -29,193
  -30,629
  -32,139
  -33,723
  -35,389
  -37,138
  -38,975
  -40,905
  -42,933
  -45,063
  -47,299
  -49,649
  -52,115
  -54,708
  -57,430
  -60,288
  -63,290
  -66,444
Free cash flow, $m
  1,159
  1,999
  -2,723
  -3,098
  -3,474
  -3,855
  -4,241
  -4,635
  -5,038
  -5,452
  -5,879
  -6,320
  -6,776
  -7,249
  -7,740
  -8,251
  -8,783
  -9,337
  -9,916
  -10,519
  -11,150
  -11,810
  -12,499
  -13,221
  -13,976
  -14,767
  -15,595
  -16,463
  -17,373
  -18,326
  -19,325
Issuance/(repayment) of debt, $m
  -1,081
  4,122
  4,424
  4,857
  5,291
  5,729
  6,173
  6,627
  7,090
  7,567
  8,057
  8,564
  9,088
  9,632
  10,196
  10,783
  11,394
  12,031
  12,695
  13,389
  14,113
  14,870
  15,662
  16,490
  17,357
  18,265
  19,216
  20,212
  21,256
  22,350
  23,497
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  28
  101
  177
  255
  336
  421
  509
  601
  698
  798
  903
  1,012
  1,127
  1,247
  1,373
  1,505
  1,643
  1,787
  1,939
  2,097
  2,264
Cash from financing (excl. dividends), $m  
  -1,110
  4,122
  4,424
  4,857
  5,291
  5,729
  6,173
  6,627
  7,090
  7,567
  8,085
  8,665
  9,265
  9,887
  10,532
  11,204
  11,903
  12,632
  13,393
  14,187
  15,016
  15,882
  16,789
  17,737
  18,730
  19,770
  20,859
  21,999
  23,195
  24,447
  25,761
Total cash flow (excl. dividends), $m
  55
  6,121
  1,702
  1,759
  1,816
  1,874
  1,932
  1,992
  2,052
  2,115
  2,178
  2,244
  2,312
  2,383
  2,456
  2,532
  2,611
  2,694
  2,779
  2,869
  2,963
  3,060
  3,162
  3,269
  3,381
  3,498
  3,620
  3,749
  3,883
  4,024
  4,172
Retained Cash Flow (-), $m
  -638
  -1,081
  -1,212
  -1,330
  -1,449
  -1,569
  -1,691
  -1,815
  -1,942
  -2,072
  -2,207
  -2,346
  -2,489
  -2,638
  -2,793
  -2,953
  -3,121
  -3,295
  -3,477
  -3,667
  -3,865
  -4,073
  -4,290
  -4,516
  -4,754
  -5,002
  -5,263
  -5,536
  -5,822
  -6,121
  -6,435
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
 
  5,040
  490
  429
  367
  305
  242
  177
  110
  42
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Discount rate, %
 
  9.10
  9.56
  10.03
  10.53
  11.06
  11.61
  12.19
  12.80
  13.44
  14.12
  14.82
  15.56
  16.34
  17.16
  18.02
  18.92
  19.86
  20.86
  21.90
  23.00
  24.15
  25.35
  26.62
  27.95
  29.35
  30.82
  32.36
  33.97
  35.67
  37.46
PV of cash for distribution, $m
 
  4,620
  408
  322
  246
  180
  125
  79
  42
  14
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  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
  99.9
  99.7
  99.2
  98.6
  97.9
  97.0
  96.0
  94.8
  93.6
  92.3
  90.8
  89.3
  87.8
  86.1
  84.5
  82.8
  81.0
  79.2
  77.4
  75.6
  73.8

China Southern Airlines Company Limited provides air transportation services in the People’s Republic of China and internationally. The company operates through Airline Transportation Operations and Other segments. It offers passenger, cargo, mail delivery, and other transportation services. The company also provides ground, cargo handling, air catering, logistic, aircraft and engine maintenance, flight simulation, and other services, as well as property management services; and is involved in hotel and tour operations. As of February 6, 2017, it operated 700 passenger and cargo transport aircraft. China Southern Airlines Company Limited was founded in 1995 and is headquartered in Guangzhou, the People’s Republic of China. China Southern Airlines Co. Ltd. operates as a subsidiary of China Southern Air Holding Company.

FINANCIAL RATIOS  of  China Southern Airlines ADR (ZNH)

Valuation Ratios
P/E Ratio 567.5
Price to Sales 24.9
Price to Book 65.9
Price to Tangible Book
Price to Cash Flow 120.5
Price to Free Cash Flow 597
Growth Rates
Sales Growth Rate 3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 56.3%
Cap. Spend. - 3 Yr. Gr. Rate 9%
Financial Strength
Quick Ratio 0
Current Ratio 0
LT Debt to Equity 166.3%
Total Debt to Equity 247.9%
Interest Coverage 4
Management Effectiveness
Return On Assets 3.7%
Ret/ On Assets - 3 Yr. Avg. 2.8%
Return On Total Capital 3.5%
Ret/ On T. Cap. - 3 Yr. Avg. 2.5%
Return On Equity 12.2%
Return On Equity - 3 Yr. Avg. 9.1%
Asset Turnover 0.6
Profitability Ratios
Gross Margin 26%
Gross Margin - 3 Yr. Avg. 23.6%
EBITDA Margin 20%
EBITDA Margin - 3 Yr. Avg. 17.7%
Operating Margin 11%
Oper. Margin - 3 Yr. Avg. 9.2%
Pre-Tax Margin 6.7%
Pre-Tax Margin - 3 Yr. Avg. 5%
Net Profit Margin 4.4%
Net Profit Margin - 3 Yr. Avg. 3.1%
Effective Tax Rate 23%
Eff/ Tax Rate - 3 Yr. Avg. 22%
Payout Ratio 15.6%

ZNH stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ZNH stock intrinsic value calculation we used $111652 million for the last fiscal year's total revenue generated by China Southern Airlines ADR. The default revenue input number comes from 2016 income statement of China Southern 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 ZNH stock valuation model: a) initial revenue growth rate of 2.8% 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 9.1%, whose default value for ZNH is calculated based on our internal credit rating of China Southern 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 Southern 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 ZNH stock the variable cost ratio is equal to 95.6%.

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 ZNH 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 Southern Airlines ADR.

Corporate tax rate of 27% is the nominal tax rate for China Southern 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 ZNH 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 ZNH are equal to 141.7%.

Life of production assets of 13.2 years is the average useful life of capital assets used in China Southern 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 ZNH is equal to -17.5%. 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 - $39045 million for China Southern 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 298.823 million for China Southern 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 Southern Airlines ADR at the current share price and the inputted number of shares is $12.6 billion.


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Stock chart of ZNH Financial statements of ZNH Annual reports of ZNH
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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