Valuation of Tom.Com

Valuation of Tom.com is indeed very challenging due to the infancy of the industry and reliance on too many assumptions. Majority of tech and internet companies are traded on NASDAQ, so if we look at the total return, we see that in 1999 the total return was 86% compare to 1998 of 40%, which is an indicator that tech and internet companies are very volatile and risky at the same time with high potential of being very profitable for aggressive investors. Also looking at the performance of Tom's close peer group, we believe that Perkin's assumptions are very reasonable. For example, if we look at the annual CAGR (one of the main drivers of the company's value) for Amazon.com in 1999, it is 94%; however, cumulative implied CAGR in the past four years is 652.7%, for Ebay it is 745.4%. Therefore, we believe that Perkin's assumptions for CAGR for Tom.com is very conservative, it is only 80%, which we believe is low considering the following facts: large Chinese population, economic growth, high investor and producer interest in China, and large Chinese population living outside China interested in the events happening in China.

By using Perkin's assumptions such as CAGR of 80% for the first five years, and 30% for the next five years, which gives us the cumulative implied CAGR for ten years of 50%, and with the help of two stage discount cash flow (DCF) model we obtained the intrinsic value for Tom.com of HKD 171,640, which gives us an implied share price of HKD 0.07, which is way far off from the proposed price of $1.63. However, such low value is due to the fact that all our assumptions are very conservative. The second major driver of the value of the company is WACC. To calculate the cost of equity, which is part of CAPM equation, we decided on using risk free rate (1 year) of 6.33 % and equity risk premium of 23.28% for Hong Kong since it is a Hong Kong based company. Therefore, the WACC for the first five years is very high, 48.2%, due to the fact that all financing is coming from the equity. However, the WACC for the next five years is much lower of 18% due to the capital restructuring and ability to borrow money.