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An IPO Case Study of a Lodging Company

Abstract The global initial public offering (IPO) of the leading tourism-hotel operator in China gives international investors the opportunity to buy Chinese stocks with a renowned hotel brand in the country. This paper investigates the value of the company at the time of its global IPO. Unlike past studies which examined share performance post-IPO and the IPO underpricing phenomenon, we analyze the future growth and income of this company to develop a valuation of the entity, which is then compared to the IPO price. We use the free cash flow to the firm method with stable growth rate to estimate the value of the company based on its expected (future) cash flows. Under this approach, we can compare the IPO price to the stock’s estimated value Our findings show that the estimated value of the primary shares is marginally lower than the IPO price. The in-depth study builds the case for assessing IPO investment based on pre-IPO earnings and cash flows of firm. A sensitivity analysis is also conducted to compare the share value estimates using various earnings growth rate scenarios.