Week 3: Stock Analysis Fundamental Approach

Translation 1

TRA 2001 Financial

Week 3: Stock Analysis Fundamental Approach

Why Stock Analysis?
Mission: to determine if a stock is worth investing in; to evaluate the potential profit arising
from such investment.
Two approaches: Fundamental Analysis and Technical Analysis.
Different approaches; Same objective.
Fundamental Analysis Basic Concepts
Analyze the fundamental elements concerning a stock / the business of an issuer.
Financial factors: all data in financial statements, such as profit and loss, leverage ratio,
inventory, property value, dividend payout, cash flow, etc.
Non-financial factors: management and competitive advantages of company, competitors,
market trend, forecast on market demand, peer comparison, demographic or policy changes,
etc.
Conduct financial forecasting based on historical and present data.
Focus on the intrinsic value of stock.
Assumption: stock price should be determined by its intrinsic value. Any deviation from its
intrinsic value reflects the impacts of external factors, e.g. political, economic, market
sentiment.
Fundamental Analysis Objectives
Measure the stock value and predict the future trend of stock price.
Estimate the future performance of the company.
Evaluate the management quality of the company.
Measure the default risk of the company in question.
Top-down Approach
Start by looking at domestic and international economic indicators, such as GDP growth rate,
inflation rate, exchange rate, oil and coal price, etc.
Next is sector analysis, such as sales volume of the industry, pricing standard, product
efficiency, foreign competition, industry barrier, etc.
Finally the focus is on individual companies, including sales price and volume, product
innovation, profitability, patents, etc.
Bottom-up Approach
Bottom-up approach: starts with specific businesses, regardless of their industry/region.
De-emphasize the significance of economic and market cycles.
Assuming individual companies can perform well even the industry as a whole does not.
Such bottom-up investing strategy entails a thorough review of the company.
This includes becoming familiar with the company's products and services, its financial
stability and its research reports.

Quantitative Analysis

Week 3: Stock Analysis Fundamental Approach

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TRA 2001 Financial

Look at revenue, expenses, assets, liabilities and all other financial aspects of a company.
Fundamental analysts look at these information to evaluate a company's future
performance.
From simple financial ratios such as earnings per share, P/E ratio, etc. to something more
complicated, such as discounted cash flow.
Complex mathematical and statistical modeling are used.
Make financial assessments through mathematics, particularly statistics. Examples include
producing a more objective valuation of a financial asset with a formula.
The work of a quantitative financial analyst can be particularly useful with derivatives.
Derivatives: Financial assets that derive their value from one or more other asset, e.g.
options contracts, callable bull/bear contracts, warrants
Qualitative Analysis
Researchers aim to obtain an in-depth understanding of human behavior and the reasons
that govern such behavior.
Conduct analysis on the basis of subjective methods instead of any factual or statistical data.
Assessing a companys management (management quality), marketing programs, the power
of a specific companys brand (brand quality) and level of competition (entry barrier), etc.
Other factors include expertise of the company, the look of packaging, the companys
competitive advantages, or employee morale.
The use of such non-quantifiable methods to evaluate investment or business opportunities
and make decisions should be complement to quantitative analysis rather than against it.

Value Investing
Explore and select stocks that trade for less than their intrinsic value.
Value investors believe that the market is not always efficient.
As the market may overreact to good and bad news, stock price may move in a way that
does not correspond to a companys long term fundamentals.
Therefore, some stocks may have been undervalued by the market.
Timing of sale: stock price rises to a level that is equal or higher than the intrinsic value.
In more extreme case, Cigar Butts Investing, invented by Benjamin Graham.
Market value < asset value liabilities = potential transaction
Margin of safety = underlying value discounted by 33% (Benjamin Graham)
Both quantitative and qualitative analysis are conducted.
Not only consider the financial metrics (P/E ratio, cash flow, asset value, etc.) but also taken
qualitative assessments (customer taste, management, market trend, etc.) into account.
Warren Buffet
Warren Buffett, a notable practitioner of qualitative analysis and value investing; student of
Benjamin Graham.
No.3 on Forbes ranking of the wealthiest person in the world (2 March 2015)
Accomplished many great investments in his life.
His investment philosophy reflects some of the themes in value investing.
His stock selection criteria:
A leading company with monopolistic position in its industry;
Products are simple and easy to understand.
Stable track record with sound financial profile.
Reliable management team.
High efficiency and cash flow; low CAPEX.
Price is reasonable.
Dollar Cost Averaging / Constant Dollar Plan
Investors concerns: profit, risk and rate of return.

Week 3: Stock Analysis Fundamental Approach

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TRA 2001 Financial

Simple mechanism: making fixed investment amounts at predetermined times.

The investment target could be a specific stock or index fund.
Require longer investment period.
Keep buying at the designated times no matter how fluctuate the stock price is.

Source: JP Morgan Asset Management

It is particularly suitable for people new to stock investing as it minimizes risk and trends
towards profitability.
The longer the process, the higher chance of being profitable.
E.g. MPF, life insurance products.
Still, it faces criticism.
Fundamental Analysis - Shortcomings
Too much data and information to be considered.
High cost to collect all such data and information.
Expertise in various aspects is required.
Factors are dynamic they may change before the whole analysis is completed.
Is the information you obtained true and accurate?
No guarantee that the market can someday reflect the intrinsic value of stock.

Week 3: Stock Analysis Fundamental Approach

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Related Terms and Translation
Price-earnings ratio / Price-to-earning ratio (P/E ratio):
Market Value per Share
Earnings per Share (EPS)
- sometimes known as price multiple or earnings multiple
- or
- or /
Margins =
Profit =
Gross profit =
Net profit =
Marginal profit =
Profit margin =
Profitability =
Earnings =
Revenue =
Income =
Top line =
Bottom line =
Non-profit organization =

TRA 2001 Financial

Week 3: Stock Analysis Fundamental Approach

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Translation Examples and Editing Skills
PetroChina

TRA 2001 Financial

Source: 2012 Annual Report of

Under this method of accounting, the Groups share of the post-acquisition profits or losses
of associates is recognised in the consolidated profit or loss and its share of post-acquisition
movements in other comprehensive income is recognised in other comprehensive income.

The cumulative post-acquisition movements are adjusted against the carrying amounts of
the investments.

When the Groups share of losses in an associate equals or exceeds its interest in the
associate, including any other unsecured receivables, the Group does not recognise further
losses, unless it has incurred obligations or made payments on behalf of the associate.
()

When the Group ceases to have control or significant influence, any retained interest in the
entity is remeasured to its fair value, with the change in carrying amount recognised in profit
or loss.

Class Exercise
Available Resources HKEx website
www.hkex.com.hk
A giant databank of bilingual financial documents.
Useful to your research, on-the-job training and professional needs.

Week 3: Stock Analysis Fundamental Approach

Translation 1

TRA 2001 Financial