Trade war that is easy to win

Donald Trump once declared trade wars are easy to win. 

In June, US applied 25% tariffs on 50 billion of Chinese goods. Three days later, US applied additionally 10% tariffs on 200 billion of Chinese goods. China responded with tariffs on 50 billion of US goods. 

Which country has the advantage in this trade war ? Let us look at it from some perspectives.

1. Trade balance

China import from US : $130 billion

China export to US : $500 billion

US China trade alone accounts for more than 50% of US trade deficit. 

China cannot keep up with US in charging tariff. China will run out of US goods to levy tariffs.

2. Mutual dependency

2.1 China relies on US for its core technology, such as the case of ZTE.

ZTE is banned from buying components from US company.

2.2 China depends on US for its agricultural products.

China import from US for 95 million tonnes of soybean. China produces 14 million tonnes of soybean. If China is determined to self-produced soybean, it would need 506 billion sqm of agricultural land to be self sustainable. China has about 1400 billion sqm of agricultural land. Is it feasible to use up to 33% of agricultural land for the sole purpose of soybean farming? The answer is obvious.

Argentina and Brazil are the number one and two soybean exported in the world. China could import soybean from Brazil. However, the soybean production, distribution, and sales network of Brazilian soybean are controlled by US company.

2.3 US company dependence of China market

GM sells more cars in China than in the US

Apple's 40 billion market in China

3. US dollar domination

3.1 Japan, China, Germany, their foreign reserve is held in USD. They are creditors to US. If they do not lend money to US, US prints its own money. US dollar depreciates. It is not good for the creditors. Therefore they continue to buy US treasury bonds. Furthermore, China is a trading country, the issuance of RMB is based on their reserve in USD. 

3.2 Crude oil is priced in US dollar. To buy oil, USD is needed.

Singapore Stock Analysis: SPH

Singapore Press Holdings (SPH) is listed on Singapore Exchange. This analysis was done on Apr 28, 2018. It is based on 2017 annual report.

1) All the top management in SPH are top scholars.

2) The CEO is granted 4 million ordinary shares accumulatively

3) Retained profit is 2 billion, cash holding is 312 million, investment property is 4 billion, net asset is 4 billion

4) Borrowings to be paid in one year,  is 1 billion

5) The share price on Apr 27 is $2.76, net value per share is $2.5

6) The fcfe is 450 million, pbt is 430 million, ocf is -19 mil (after dividends and income tax).

Conclusion: The fcfe is positive. The share price is close to navps. The ocf  before income tax and dividends is 355 million. The ocf is negative,  because the dividends payment of 300 million is included in the calculation of net cash used in operating activities. The bank borrowing is 275 million.

So the bank borrowing is used to support dividends payment and income tax payment.

FCFF and FCFE difference

FCFF - Free cash flow to firm
FCFE - Free cash flow to equity

FCFF is the cash available to bond holders and stock holders after all expense and investments have taken place.

FCFE is the cash available to stock holders after all expense, investments and interest payments to debt-holders on an after tax basis.

What is difference between FCFF and FCFE ?

The difference is the interest payment in FCFE. In FCFE you subtract the interest expense from the cash flow to do valuations. FCFF shows the obligations for both stockholders as well as bondholders whereas FCFE consider only the obligations for stockholders.

Apart from the difference mentioned above, there are two more differences which are basically related to the approach that we will use while doing valuation. How do we calculate the FCFF and FCFE?

** FCFF can be calculated by using the formulae as mentioned below:-

FCFF = EBIT (1- t) + Depreciation/Amortization – Change in Non- Cash Working Capital – Capital Expenditure

Where,
EBIT = Earnings before income tax
t  = Corporate tax rates

** FCFE can be calculated by using formula mentioned below,

FCFE = Net Income + Depreciation/Amortization – Change in Non- Cash Working Capital*(1-D) – Capital Expenditure*(1-D)

Where,
D  = Debt ratio

Now, there lies two important points about these formulas, those are as follows:-

1)      In FCFF, we use EBIT (1-t) whereas in FCFE, we use Net Income; this is because while using EBIT (1-t) in FCFF we do not consider the effect of interest payment as mentioned above.

2)      IN FCFE, we use Change in Non-Cash Working Capital*(1-D) – Capital expenditure*(1-D) whereas in FCFF we use  Change in Non-Cash Working Capital – Capital Expenditure. This is because in FCFE, we just want to concentrate on cash flow due to equity only.

To summarise:

Factors :  FCFF
Cash Flows :  Pre Debt Cash Flows
Expected Growth : Growth in Operating Income = Reinvestment rate * ROC
Discount Rate : WACC

Factors : FCFE
Cash Flows : post Debt Cash Flows
Expected Growth : Growth in Net Income = Retention ratio * ROE
Discount Rate : Cost of Equity