luotang power company analysis

The following case analysis discusses the macro and micro elements that influence Luotang Power. When viewed as a company among dozens of others in the same firm, Luotang does not have a great impact to the industry in China. Although Luotang Power has been claimed to be successful and grew rapidly when it was first opened for business, the 20-year Build Operate Transfer (“BOT”) contract with the government is due very soon; the plant will be given to the Hubei Provincial Government after 2 centuries of operation at no cost to the government.

Ever since the power plant has begun operating, there were already political restrictions put into use and some even before the plant opened. In addition to Luotang Power ultimately becoming the property of the Hubei Provincial Government, this plant is strictly foreign owned and the conditions were that only Chinese manufactured equipment will be used within and around the plant.

This shows how political factors have already taken a great toll on Luotang plant before anything has happened; this also sets a limit of 20 years for the current rightful owner to try to make as much profit as possible before the contract ends (the microanalysis will elaborate on how this can harm the company). Economically, Luotang was one of many power plants that were in operation in China but only one of the few around the provincial area.

Around the time Luotang Power began operations, this opened up opportunities for many other small businesses to form around the plant. The case provided information about how Luotang experienced rapid growth when it had first opened; many other power plants around the country were also growing quickly (refer to Appendix A for more information about the companies) and many power plants at the time were growing rapidly due to smaller businesses that formed around the electrical power industry.

More recently, the parent company China Hua Tong Company (“HT”) has been considering the idea of a large expansion of the Luotang Power plant; this requires not only for the plant to have performed well over the past years but also some reliable information that the plant will be performing well in the future. Future performance of Luotang Power must be at a level where an expansion will be quickly paid off with profits and therefore worth the time and money. Compared to other companies of similar output, Luotang Power appeared close to the average.

Since Tan is concerned about revenue and performance, a simple ratio of net profit divided by revenue would show how much of total revenue actually becomes a profit for the company. The use of ratios allows companies that are completely different sizes to be compared to each other; Luotang Power had the ratios of 0. 43, 0. 45, and 0. 42 for the years of 2009, 2010, and 2011, respectively. Other power companies such as Anhui Xinlong Electrical Co. Ltd. (“AX”) had 0. 08, 0. 07, and 0. 09 for 2009, 2010, 2011, and Rongxin Power Electronic Co. Ltd.

(“RX”) had ratios of 0. 21, 0. 22, and 0. 19 for 2009, 2010, and 2011. Calculations and more information can be found in Appendix B. Although Luotang Power had revenue and a seemingly good amount of profit, the comparison to some other companies of the same industry show that this ratio for Luotang Power is much too high. AX’s ratios are likely lower than desired because only around 7% of total revenue is made into net profit each year; this gain of profit is very slow and the numbers can drop dangerously low if there is a sudden unusual event in the future.

RX has a safe ratio of around 20%; this shows that the company is utilizing profit from previous years to make more income while at the same time their profit can be allowed to suffer slightly if any unexpected expenses suddenly occur. Luotang Power’s ratio is very high and can mean that much of the total revenue makes up the net profit; in this case the ratio is too high and it simply means that there is idle cash that is not being utilized to make more revenue.

Since Luotang Power has mainly one customer, they should turn to other sources of revenue such as using profit to advertise or look into making some long-term investments. Micro Analysis In terms of a microanalysis of Luotang Power, concerns about customers and suppliers are definitely the most important elements for this company. It was stated clearly in the case that when Luotang Power first opened, the Hubei Provincial Power Company (“HPPC”) was expected to be the main, if not only, customer for the plant.

Luotang Power is also under contractual terms with HPPC which states that HPPC will purchase a minimum amount per annum as long as Luotang Power is able to provide the required demand. The contract also required that any amount HPPC purchased after their annual contract has been satisfied will be 65% of the original price. This is, in other words, a 35% discount for any amount of power purchased from Luotang Power after the contract has been fulfilled for the year. Although there is an almost guaranteed amount of revenue being received from HPPC every year, the terms of this contract can be a great disadvantage for Luotang Power.

As mentioned later in the case, HPPC has been negotiating with more pressure in 2010 which allowed Luotang Power to receive more revenue but at the same time lost potential revenue if they had made sales to another customer or to HPPC in the next fiscal year. HPPC is more than able to produce their own power, but since the contract is such an advantage, HPPC can just purchase much more from Luotang Power at a discount instead of spending more cash for their own production.

The case also only mentioned one supplier for Luotang Power and that supplier is Pingdingshan; they are a large and successful supplier of coal to various customers (see Appendix C for detailed information). The case stated, however, that this sole coal supplier sometimes supplies low quality coal that has a significant amount of moisture, which does not allow all coal to be immediately put to use. The price for the qualities of coal are calculated and varies, but other non-cash expenses such as storage room and production delay can be some negative factors resulting from bad quality coal.

Unfortunately it appears that regarding both customers and suppliers, Luotang Power does not have most of the control over price and quality and must abide to whatever terms the other parties follow. The high debt that Luotang Power owes since the construction of the plant is becoming more significant due to declining revenues over the last few years; a substantial amount of construction costs was and still is being financed by debts and meanwhile, the company is not generating enough cash to pay off the debts.

Another factor worth noting is that the 20-year contract with the provincial government is almost finished; the lack of some parts of the company may be due to employees having their own self-interest. Since the contract is almost finished, some employees may focus investing in their short term goals rather than the company’s long term goals; Appendix D discusses this issue known as the horizon problem. SWOT Analysis Based upon the information about Luotang Power that was given in the case, the company does not seem to have much strength at all.

There are a few weaknesses, however, such as the fact that Luotang Power has no control of its customers or suppliers; as mentioned already it seems that Luotang Power must cooperate with the terms that other parties create in order to keep surviving as a company. If the customer or supplier wanted to change the terms, Luotang Power would most likely have to agree in order to keep a source of income and supplies. Opportunities for Luotang Power are definitely limited; the company has not expanded yet and they have even admitted that HPPC was expected to be their only major customer.

This situation causes Luotang Power to depend heavily on their main customer, meaning that they are forced to be flexible based upon HPPC’s desires. The only major threat is in fact not other companies but the demands of the customer, HPPC. According to the case, HPPC had negotiated much harder in 2010 than previous years; Luotang Power can lose a lot of potential revenue because of the terms of the contract and this loss of revenue would be considered the greatest threat at that point in time.

Overall, Luotang Power seemed to have made some mistake when beginning operations by not securing enough customers and suppliers; now in the future they are very dependent on HPPC and Pingdingshan, and they still cannot make enough revenue to pay back debt due to the lack of customers. Appendix A ISI Emerging Markets. (2013, 09 13). Retrieved from Anhui xinlong electrical co. , ltd. (???????????? ). (2013, 09 13). Retrieved from http://site. securities. com. myaccess. library. utoronto. ca/php/companies/index/financials?

pc=CN&cmpy=2587097&analysis_options=1&analysis_type=N&excel_export=0&view-fins=income&stmt_type=&curr=CNY&cons=A&fptype=A&pub_standard=1070-1070-CN_CNSHSE_LCF&periods[]=2011YY&periods[]=2010YY&periods[]=2009YY&display_units=3&hide-empty=yes&stm_order=L&get_cpt=0&get_all_cpt=0&company_name=&prods=CN&indu_search=&indu=&activity_type=ALL&city=®n=&cids=&expanded= Appendix B Luotang Power 2009 2010 2011 540189/1267832 620061/1503070 578751/1362104 0. 426 0. 446 0. 425 ANHUI XINLONG ELECTRICAL CO. , LTD. 2009 2010 2011 38681. 49/512854. 33 43073. 98/609526. 62 73837. 41/802131. 20 0.

075 0. 070 0. 086 ISI Emerging Markets. (2013, 09 13). Anhui xinlong electrical co. , ltd. (???????????? ). Retrieved from http://site. securities. com. myaccess. library. utoronto. ca/php/companies/index/financials? pc=CN&cmpy=2587097&analysis_options=1&analysis_type=N&excel_export=0&view-fins=income&stmt_type=&curr=CNY&cons=A&fptype=A&pub_standard=1070-1070-CN_CNSHSE_LCF&periods[]=2011YY&display_units=3&hide-empty=yes&stm_order=L&get_cpt=0&get_all_cpt=0&company_name=&prods=CN&indu_search=&indu=&activity_type=ALL&city=®n=&cids=&expanded= ISI Emerging Markets. (2013, 09 13).

Anhui xinlong electrical co. , ltd. (???????????? ). Retrieved from http://site. securities. com. myaccess. library. utoronto. ca/php/companies/index/financials? pc=CN&cmpy=2587097&analysis_options=1&analysis_type=N&excel_export=0&view-fins=income&stmt_type=&curr=CNY&cons=A&fptype=A&pub_standard=1070-1070-CN_CNSHSE_LCF&periods[]=2010YY&display_units=3&hide-empty=yes&stm_order=L&get_cpt=0&get_all_cpt=0&company_name=&prods=CN&indu_search=&indu=&activity_type=ALL&city=®n=&cids=&expanded= Appendix B (Continued) ISI Emerging Markets. (2013, 09 13). Anhui xinlong electrical co.

, ltd. (???????????? ). Retrieved from http://site. securities. com. myaccess. library. utoronto. ca/php/companies/index/financials? pc=CN&cmpy=2587097&analysis_options=1&analysis_type=N&excel_export=0&view-fins=income&stmt_type=&curr=CNY&cons=A&fptype=A&pub_standard=1070-1070-CN_CNSHSE_LCF&periods[]=2009YY&display_units=3&hide-empty=yes&stm_order=L&get_cpt=0&get_all_cpt=0&company_name=&prods=CN&indu_search=&indu=&activity_type=ALL&city=®n=&cids=&expanded= ISI Emerging Markets. (2013, 09 13). Retrieved from http://site. securities. com. myaccess. library. utoronto.

ca/php/companies/index/financials? pc=CN&cmpy=2587097&analysis_options=1&analysis_type=N&excel_export=0&view-fins=income&stmt_type=&curr=CNY&cons=A&fptype=A&pub_standard=1070-1070-CN_CNSHSE_LCF&periods[]=2011YY&display_units=3&hide-empty=yes&stm_order=L&get_cpt=1&get_all_cpt=0&cccpt=CN2334658&compare_period=L&submit=Submit&company_name=&prods=CN&indu_search=&indu=&activity_type=ALL&city=®n=&cids=&expanded=1&cccptphp[]=CN2334658 Appendix B (Continued) RONGXIN POWER ELECTRONIC CO. , LTD. 2009 2010 2011 195961. 62/922196. 52 295939. 36/1336892. 02 310360. 54/1630819. 96 0. 21 0. 22

0. 19 ISI Emerging Markets. (2013, 08 06). Rongxin power electronic co. , ltd. (???????????? ). Retrieved from http://site. securities. com. myaccess. library. utoronto. ca/php/companies/index/financials? pc=CN&cmpy=2334658&analysis_options=1&analysis_type=N&excel_export=0&view-fins=income&stmt_type=&curr=CNY&cons=A&fptype=A&pub_standard=1070-1070-CN_CNSHSE_LCF&periods[]=2009YY&display_units=3&hide-empty=yes&stm_order=L&get_cpt=0&get_all_cpt=0&company_name=&prods=CN&indu_search=&indu=&activity_type=ALL&city=®n=&cids=&expanded= ISI Emerging Markets. (2013, 08 06). Rongxin power

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