City University of Hong Kong Course Syllabus. offered by Department of Economics and Finance with effect from Semester A 2017/18

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1 City University of Hong Kong Course Syllabus offered by Department of Economics and Finance with effect from Semester A 2017/18 Part I Course Overview Course Title: Financial Analysis of Major Industries Course Code: EF4326 Course Duration: 1 Semester Credit Units: 3 Level: Proposed Area: (for GE courses only) B4 Arts and Humanities Study of Societies, Social and Business Organisations Science and Technology Medium of Instruction: English Medium of Assessment: Prerequisites: (Course Code and Title) Precursors: (Course Code and Title) Equivalent Courses: (Course Code and Title) Exclusive Courses: (Course Code and Title) English CB3410 Financial Management or FB3410 Financial Management Nil Nil Nil 1

2 Part II Course Details 1. Abstract This course aims to enhance students understanding of several major industries in the world with particular attention to value drivers and value destroyers. This course covers the practical aspects of financial analysis and valuation, and would be useful for students wanting to be management consultants, equity and credit analysts and portfolio managers. Upon completion of this course, students should be able to: a. evaluate and contrast the common approaches of equity analysis; b. discuss common issues that arise when valuing a company in a particular industry; c. understand the common earning drivers and cost structure of the major industries; d. analyse how companies add value for their shareholders; and e. develop and master the professional skills in presenting valuation reports from the perspective of analysts and management consultants. The course also aims to develop students creative and innovative abilities on identifying and analysing factors affecting a firm s value through various assessment tasks. Engaging lectures would develop students discovery abilities through class discussions on theories as well as examples of key players in selected industries. Students are expected to devote a significant amount of time and effort to conduct industry/company research and present the findings in writing and orally to fellow classmates in a professional manner. 2. Course Intended Learning Outcomes (CILOs) (CILOs state what the student is expected to be able to do at the end of the course according to a given standard of performance.) No. CILOs # Weighting* (if applicable) 1. Evaluate and contrast the common valuation models to value companies, and discover the appropriate tools for valuation. 2. Develop their creative and innovative ability when they go about identifying and analysing for each major industry and selected firms the main value determinants, cost structure and principal business and financial risks. 3. Interpret the impact of the macro-environment, legal factors and regulatory changes on different industries and selected firms. 4. Develop their innovative and creative abilities on analysing the growth prospects and constraints of each industry and selected firms. 5. Illustrate the valuation of major companies in the corresponding industry and analyse their performances. * If weighting is assigned to CILOs, they should add up to 100%. 100% Discovery-enriched curriculum related learning outcomes (please tick where appropriate) A1 A2 A3 2

3 # Please specify the alignment of CILOs to the Gateway Education Programme Intended Learning outcomes (PILOs) in Section A of Annex. A1: Attitude Develop an attitude of discovery/innovation/creativity, as demonstrated by students possessing a strong sense of curiosity, asking questions actively, challenging assumptions or engaging in inquiry together with teachers. A2: Ability Develop the ability/skill needed to discover/innovate/create, as demonstrated by students possessing critical thinking skills to assess ideas, acquiring research skills, synthesizing knowledge across disciplines or applying academic knowledge to self-life problems. A3: Accomplishments Demonstrate accomplishment of discovery/innovation/creativity through producing /constructing creative works/new artefacts, effective solutions to real-life problems or new processes. 3. Teaching and Learning Activities (TLAs) (TLAs designed to facilitate students achievement of the CILOs.) TLA Brief Description CILO No. Hours/week (if applicable) Lectures Case studies, Reports and Presentations Lectures are to provide key concepts and the theoretical framework. Students are expected to respond to questions and think critically during lectures. Students are required to read several cases, and write case reports on their selected firms. Case studies are designed to motivate active thinking and class participation, and to assess the understanding and application of problem-solving techniques taught in the area of financial valuation. 3 hours per week Exercises on selected topics In-class discussion of newspaper articles on related topics Students are also required to write two group industry/company valuation reports and present their findings. These activities provide avenues for students to develop and display their creative and innovative abilities as they go about discovering the value drivers and destroyers of their subject firms. To enhance students understanding of certain lecture materials. To familiarize students with the most up-to-date issues in the major industries. In class, discussions are highly encouraged to enhance students communication skills, critical thinking and develop students creative and innovative abilities. 3

4 4. Assessment Tasks/Activities (ATs) (ATs are designed to assess how well the students achieve the CILOs.) Assessment Tasks/Activities CILO No. Weighting* Remarks Continuous Assessment: 100% Reports 40% Presentations 40% Selected Short Exercises 10% Contributions to in-class discussions and attendance 10% Examination: 0% (duration: hours, if applicable) * The weightings should add up to 100%. 100% There are no exams and tests. The assessment would depend on two group presentations, two equity valuation reports, short exercises and in-class discussions. Students would work in groups of 4-5 members. Each group needs to do two reports on company/industry analysis. Applications of free cash flow to equity valuation financial models, ratio analysis and scenario testing are to be emphasized. Presentations: Students will need to make professional presentations and to answer questions by students in the class and instructor. 4

5 5. Assessment Rubrics (Grading of student achievements is based on student performance in assessment tasks/activities with the following rubrics.) Assessment Task Criterion Excellent (A+, A, A-) Good (B+, B, B-) Fair (C+, C, C-) Marginal (D) Failure (F) Reports Demonstrate the capability of applying proper analytical models to review, assess, and evaluate selected company and/or industry High Significant Moderate Basic Not even reaching marginal levels Presentations Selected Short Exercises Contributions to in-class discussions and attendance Demonstrate the capability of making professional presentation on the project findings and the capability of answer questions raised by students and lecturer in the class Demonstrate the capability to apply the knowledge learned in the course by completing short exercises as assigned by the lecturer. Demonstrate the understanding of the course materials during in-class discussions and participation. High Significant Moderate Basic Not even reaching marginal levels High Significant Moderate Basic Not even reaching marginal levels High Significant Moderate Basic Not even reaching marginal levels 5

6 Part III Other Information (more details can be provided separately in the teaching plan) 1. Keyword Syllabus 1. Why study industries? Understand the general operations of each industry and relate these operations and company practices to the sources of value creation and expenses. General review of the tools to value a company Discounted dividend model (DDM); Discounted cash flow model (DCF); free cash flow to equityholder (FCFE); free cash flow to firm (FCFF). 2. Broadcasting-TV Media Industry Earning drivers: Advertising income, licensing income, subscription income. Costs and expenses: cost of programmes, film rights, operating leases of equipment and transponders Current issues and keywords: Station-produced drama and non-drama programmes, TV ratings (TVR), prime time, penetration of digital terrestrial television (DRR), program licensing and distribution, overseas satellite pay TV operations, channel operations, internet operations, magazine publishing, subscription services, corporate structure changes of ATV and TVB. Suggested companies for illustration: 0511.hk Television Broadcasts Limited Case: Why TVB is more successful than ATV (as of 2010). 3. Energy Industry Focus on fossil fuels: Earning drivers for oil companies: sale of crude oil, natural gas, refined products and petrochemical products, sale from the transportation of crude oil and natural gas. Costs and expenses: operating expenses, purchase prices of crude oil, feedstock oil and refined products from external suppliers, increase in the lifting costs of oil and gas operations and the process costs of the refineries, exploration expenses, depreciation and depletion. Current issues and keywords: Upstream, downstream, BTUs, day rates, meterage, land rigs, drill ships, varieties of crude oil, oil grades, Brent crude, Brent sweet light crude, examples of oil fields like, oil sands, tar sands, bitumen, oil futures, crude futures, oil drilling, oil extraction, oil supply and demand. Suggested companies for illustration: 0857.hk PetroChina, Exxon 4. Property Development Industry Earning drivers: Sale of properties, gross rental income from properties letting under operating leases, revenue from hotel operation (if there is), property management, transport infrastructure management and shopping centres. Costs and expenses: Depreciation (or appreciation) of properties, cost of leasehold land and construction cost of buildings, borrowing costs and materials, cost approach, sales comparison approach and income approach for valuation. Current issues and keywords: Main players in the industry in Hong Kong, land conversion premium in Hong Kong, development land bank in China, land supply, railway projects and farmland conversions, gross floor area (GFA), Centa-City index, Centa-City Leading index, Land Registry. Suggested companies for illustration: 0012.hk Henderson Land and 0016.hk SHK Property 6

7 5. Automobile Industry Earnings drivers: Sale of motor vehicles, leasing Costs and expenses: raw materials, labour costs, depreciation of capital investments, etc. Current issues: automotive production system; consumer markets analysis, pricing, types and costs of raw materials, costs of operations. Suggested companies for illustration: Geely Automobile Holdings Limited and Toyota Motor Corporation and Daimler. Websites of companies: /~geelmhk1/en/index.html and Port Industry and Shipping Industry Earnings drivers: Revenue from oil/liquefied chemicals terminal and related logistics services, container terminal and related logistics services, automobile terminal and related logistics services, and port value-added services. Costs and expenses: New ship building, scrapping of existing tonnage, demand for oil and dry bulk, climatic conditions, government restrictions on shipments. Current issues and keywords: Baltic freight index, Baltic handymax index (for dry bulk segment) and world Scale (for tankers), China container freight index (CCFI), China purchasing manager index (PMI), Baltic dirty tanker index, Baltic clean tanker index, port s cargo throughput. Suggested companies for illustration: 2880.hk Dalian Port, 2866.hk CSCL and 1919.hk China COSCO 7. Food Processing Industry Earning drivers: If focusing on cereals, e.g. cereals, distribution channels for food, etc. Costs and expenses: Cost of producing food products, R&D expenses, write-down of inventories, lease payments and depreciation. Current issues and keywords: Globalization trend on food processing industry, mergers and acquisitions such as Kraft s acquisition of Cadbury. Suggested companies for illustration: Kraft Foods, Inc and Nestlé S.A. 8. Computer/Communications Industry Revenues: Patents, trademarks, copyrights and licenses, sales of hardware, software, third-party digital content and applications, peripherals, and service and support contracts. Costs and expenses: Raw materials, research and development, copyrights of third-party s products, warranty costs, obsolescence of products, cancellation fee reserves for orders of excess products and components, product manufacturing and logistical services provided by third parties. Current issues and keywords: Web portals, search engines, click-through rate (CTR), stickiness factor, burn rate, alliances, component suppliers and manufacturing vendors, seasonal business, backlog, market leader in online music services, partnership with Intel, S&P computer Hardware index. Suggested company for illustration: Apple Inc. 7

8 9. Utilities Industry Focus on Gas: Revenues: production, distribution and marketing of gas, and related activities. Costs and expenses: raw materials used, costs of properties and machineries, manpower costs, depreciation. Current issues and keywords: Energy futures contracts, number of customers, number of customers per km of mains, installed capacity, peak hourly demand, town gas sales, natural gas filling stations, pipelaying projects, West-to-East natural gas pipeline, liquefied natural gas (LNG) receiving station, tariffs. Suggested company for illustration: 0003.hk HongKong & China Gas, 2688.hk Xinao Gas Suggested 13-week Teaching Schedule, Topics, and Suggested Readings/References Week Topic Suggested Readings Why study the major industries? General review of the tools to value a company Broadcasting-TV Media Industry Current Issues Energy Industry What are the differences between renewable energy and fossil fuels? How important is oil to our world? What are the financial markets for trading instruments? Property Development Industry Who are the main players in the industry? Current Issues Valuation: measuring and managing the value of companies, Tim Koller, Marc Goedhart, David Wessels, Thomas E. Copeland, Wiley; 4 th edition Suggested Chapters: 1. Why maximize value? 3. Fundamental principles of value creation TV Commercials: How to Make Them: or, How Big is the Boat?, Ivan Cury, Focal Press Suggested Chapters: 1. Introduction 2. Client Annual Reports of 0511.hk Television Broadcasts Limited and 1097.hk Cable TV International oil company financial management in nontechnical language, James W. Bush, Daniel Johnston Oil: An Overview of the Petroleum Industry, Robert Grace, Gulf Publishing Company; 6 th edition Suggested Chapter: 3. How do we get it? drilling for oil Annual Report of 0857.hk PetroChina Reference link: Property Development, A.F. Millington An Introduction to Property Valuation, A.F. Millington Real Estate Development: Principles and Process, Mike Miles, Gayle Berens, Mark Eppli, Urban Land Institute Suggested Chapter: 1. Raw material: land and demographics Hotel Management and Operations, Denney G. Rutherford and Michael J. OFallon, John Wiley & Sons; 4 th edition Suggested Chapter: 1. Overview Annual Report of 0016.hk SHK Property 8

9 Week Topic Suggested Readings 5 Automobile Industry Current Issues such as M&A Toyota's Supply Chain Management: A Strategic Approach to Toyota's Renowned System, Ananth Iyer, Sridhar Seshadri, Roy Vasher, McGraw-Hill; 1st edition Suggested Chapter: Chapter 9. Dealer and demand fulfilment Annual Reports of Geely Automobile Holdings Limited and Toyota Motors 6 7 Ports Industry and Shipping Industry What does a port do and how is it related to the shipping industry? What are the issues affecting the demand and supply of the shipping industry? Food Processing Industry Current Issues Computer/Communications Industry 8 Current Issues Utilities Industry 9 Current Issues 10 Group Presentations 11 Group Presentations 12 Group Presentations 13 Group Presentations The World Shipping Industry, Ernst G. Frankel Port Management and Operations, P. Alderton, Informa Law; 3 rd revised edition Suggested Chapters: 1. Ports a general introduction 2. Port development Elements of Shipping, Alan Edward Branch, Routledge; 8 th edition Suggested Chapters: 1. Introduction 2.1 Main features of hull and machinery 2.2 International navigation limits Annual Reports of 2880.hk Dalian Port and 1919.hk China COSCO Food Processing: An Industrial Powerhouse in Transition, John M. Connor, William A. Schiek, Wiley-Interscience; 2 nd edition Suggested Chapter: 7. Input utilization Annual Reports of Kraft Foods, Inc and Nestlé Apple Inc., Jason D. O Grady, Greenwood Publishing Group Annual Report of Apple Inc. Annual Report of 0003.hk HongKong & China Gas 9

10 2. Reading List 2.1 Compulsory Readings (Compulsory readings can include books, book chapters, or journal/magazine articles. There are also collections of e-books, e-journals available from the CityU Library.) 1. Valuation: Measuring and Managing the Value of Companies, Tim Koller, Marc Goedhart, David Wessels, Thomas E. Copeland, McKinsey and Company, John Wiley and Sons, latest edition. 2. Business Analysis and Valuation: Text and Cases, Krishna G. Palepu, Erik Peek, Victor L. Bernard, Thomson, latest edition. 2.2 Additional Readings (Additional references for students to learn to expand their knowledge about the subject.) 1. An Introduction to Property Valuation, A.F. Millington. 2. Apple Inc., Jason D. O Grady, Greenwood Publishing Group. 3. Elements of Shipping, Alan Edward Branch, Routledge; 8 th edition. 4. Food Processing: An Industrial Powerhouse in Transition, John M. Connor, William A. Schiek, Wiley-Interscience; 2 nd edition. 5. Hotel Management and Operations, Denney G. Rutherford and Michael J. OFallon, John Wiley & Sons; 4 th edition. 6. International Oil Company Financial Management in Nontechnical Language, James W. Bush, Daniel Johnston, Pennwell Nontechnical Series. 7. Oil: An Overview of the Petroleum Industry, Robert Grace, Gulf Publishing Company; 6 th edition. 8. Port Management and Operations, P. Alderton, Informa Law; 3 rd revised edition. 9. Profit Strategies for Air Transportation, George Radnoti, McGraw-Hill, latest edition. 10. Property Development, A.F. Millington. 11. Real Estate Development: Principles and Process, Mike Miles, Gayle Berens, Mark Eppli, Urban Land Institute. 12. The World Shipping Industry, Ernst G. Frankel, Billing and Sons, Limited. 13. TV Commercials: How to Make Them: or, How Big is the Boat?, Ivan Cury, Focal Press. Online Resources Company websites. 10