SUDA INVESTMENT Case Solution
Michael D, Ding-man, in 2013, the owner of a family office i.e. the Ships-ton Group was assessing the viability of his investment alternative, which was to invest in SuDa Electric Vehicle Company (Chaplinsky & Hoang, 2017). The SuDa Company is one of the largest and a growing business of electric bikes in the PRC (People’s Republic of China) market. The Ships-ton Group was focused on achieving success through profitable investments opportunities in the PRC market, as the Chinese market represented a growing middle class segment.
In the PRC, the population grew to a higher level because of the increased urbanization rates in the country. The rural workforce started moving to the urban areas to find appropriate jobs in order to improve their living standards. Along with this, the industrialization also grew in urban areas, thereby inviting more workforce. The whole process led to the heavy population in the PRC market. Furthermore, the growth in population resulted in crowded and inefficient transportation systems and created a demand for electric bikes, as a convenient means of personal transportation.
The e-bikes were adopted by the market successfully as the bikes were affordable for the growing middle class population of China and it reduced the CO2 emissions, thereby reducing the environmental pollution. The PRC market had around 200 million bikes on the road. Looking at such a growth potential of the e-bike market, the Ships-ton Group decided to put up an investment CNY 37.8 i.e. around $6 million in the SuDa Company, by taking the 10% of the Stockholder’s equity.
In the e-bikes industry of PRC, there was no big player and the Ships-ton found it as an attractive opportunity. It is because, the other competitors were focused on investment in other emerging markets (for instance USA).Wang decided to put $6 million in the SuDa Electric Vehicle Company, which was one of the fastest growing company in the e-bike market. On his investment, Wang demand a 205 required rate of return with a 10% stake in the company’s shareholders equity. The case analysis has been performed to access the investment alternative of the Ships-ton Group, its viability, risks associated and the exit options. The discounted cash flow model and the multiple valuation technique has been used to calculate the enterprise value of the company and IRR is calculated in assessing the investment alternative in comparison to the required rate of return.
The e-bike market of PRC represented a fastest growing sector, with 200 million e-bikes on the roads. The increased population levels and acute energy shortages led to a rise in the demand of the e-bikes in the market. The rural population started shifting to the urban areas in search of jobs. Their residential places were at a greater distance from the work sites, which led to the adoption of e-bikes. The bikes were energy efficient as the country was facing an energy shortage challenge.
Further, bikes were affordable for the middle class customers in the PRC market. Particularly, an e-bike ranged from CNY 1200 – 2400, ultimately making a cheaper, affordable and convenient mean of personal transportation. Moreover, the e-bikes had very low carbon dioxide emission rates as compared to other transportation modes, which helped the government in reduction of environmental pollution caused by excessive industrialization as well as urbanization.The other reason of high growth in the e-bike resulted from the inefficient transportation systems, as a result of urbanization. The e-bikes market was expected to reach CNY 31 billion by the end of 2006, because, the per capita of income was expected to increase by 8 to 9% on an annual basis.
The e-bike industry was exposed to a lot of potential risks, even though there existed a huge growth potential in the PRC market. Wang needs to overview these risk factors before making such a huge investment in the SuDa Company. The risk factors are defined as below
- The PRC market represented a fragmented market with diverse needs and wants. The fragmentation could lead to high risk as the SuDa Company would have to create a differentiating point in each segment to remain competitive in maintaining its brand image and in maintaining the profitability as well.
- The entry barriers in the PRC market were kept in order to foreign direct investment in the market, which could satisfy the fastest growing and the diverse demand s of the middle class consumers. The low entry barriers led to a high threat of new entrants in the industry and a strong competition within the industry. The price cut down was used as a penetration strategy in grabbing the market……………….
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