Case Study 2 ROCKBORO Group 3 洪方正/許巧蓁/歐陽玉庭/施昕揚/李瑞祥

CONTENTS About Rockboro 01 02 Payout：Yes or No? 03 Calculations 04 Time for Decision 1

1 About Rockboro

1923 1975 1980s History 1 2 3 Established Achievement ROCKBORO 1923 Established 1 Design & Manufacturing of Machinery parts. Achievement 1975 2 Honored as an innovative producer of industrial machinery and machine tools. 我們可以看到他是以製造機械設備起家， 而在該業界它也確實成功成為領導者， 成功如它，它開始進入了創新領域，也是它的目前的核心領四-CAD/CAM。 1980s 3 New Business Start Worked with small software company to develop CAD/CAM. Acquired the software company and perfected the CAM equipment. 3

2008 2009 2012 2014 History 4 5 6 7 Financial Crisis Defeat in CAD/CAM ROCKBORO Financial Crisis 2008 4 Suffered from recession and launched steady dividend policy until it’s future become certain. 2009 Defeat in CAD/CAM 5 Fallen behind other competitor in CAD/CAM industry. Reformation 2012 但是很不幸，在2008年發生了金融危機， Rockboro的收入及利潤都縮減了，而且直到現在都還沒恢復， 因此在當時它實行穩定股利政策，但是仍從此一蹶不振， 為了力挽狂瀾，它開研發了新系統、重整、甚至最後取消發與股利。 6 Concentrated the budget in CAD/CAM and underwent 2 restructuring in 2012&2014. Shrink in Dividends 2014 7 Cut dividends half to $0.32 a share in 2014 and declared zero dividend for the first 2 quarters of 2015 4

Business Segments Machine Tools CAD/CAM Presses, Dies &Molds ROCKBORO Fierce Competition 這麼多年來，這是目前它的三個事業體， 佔比最高的是工業設備及CAD/CAM， 工業設備部分由於其他公司很小，因此Rockboro可位產業領導， CAD/CAM軟硬件部分，則是因為大型公司很多，因此它正處於劇烈競爭，甚至可以說已經落後其他技術者了。 Presses, Dies &Molds Industry Leader 5

2 Payout：Yes or No?

Objectives Rockboro needs more capital to reinvest. 1.Focused on AIW System More R&D in system application and improvements New offices abroad for growth in oversea sales Expansion via JV or M&A Annual sales growth by 15% 要讓成長達到15%，相較傳統穩定的業務，他必須靠AIW， AIW syste讓Rockboroy在業界擁有高端的技術，但是必須不斷地創新於app, improvement, more features for products才能保持領先地位， 加上有新競爭者。 ->更多r&d及透過併購取得更多創新及研發的能量 ->增加收入的辦法還有增加海外收入 CAD/CAM accounted for 75% sales , Press and Molds in 25% sales. Combat new comer in CAD/CAM industry. Acquisitions of small software companies, provided 50% of new products, others from in-house. Rockboro needs more capital to reinvest. 7

Objectives Create more earnings and higher stock price. ROCKBORO 2.Care the interests of outside shareholders Create high stock return Trading oriented：5%→12% Keep promise to pay dividends Retirement：37% →24% Maximize growth in market price 雖然Rockboro有高達30擠%屬於家族持有，但它們仍然很在乎外部股東的利益， Create more earnings and higher stock price. 8

Objectives Advertising or other methods? ROCKBORO 3.Reshape the image of Rockboro Change the name to “Rockboro Advanced Systems International” Signal confidence in future performance 根據financial magazine，我們知道大部分的人都認識Rockboro，但是他們不認為我們有辦法在表現的跟當初一樣好， 甚至沒有成長潛能，這對我們將來想繼續發展高科技是不利的。 Growth oriented investors decreased 7% from 2004 to 2014. While the value oriented investors increased 4%. High growth, High technology Advertising or other methods? 9

rebuild the company’s image. ROCKBORO Rockboro’s Goal We need to earn more money from sales of AIW to satisfy our shareholders and rebuild the company’s image. 10

Payout policy analysis ROCKBORO Share Repurchase Dividends Signal the market that Rockboro was undervalue. Increase EPS, positive correlation with stock price. Viewed as high tech company. Paying dividends gives incentive to long term share holders to buy our stocks. PROS Sacrificed the retirement oriented share holders benefit. Company might repurchase the stock at higher price. Sticky or high dividends policy give signals to market that company is in mature stage, and there’s no new investment opportunities. CONS 11

We may increase stock price through repurchasing. Stock price & EPS Statistics Economics R 𝑹 𝟐 Adj. 𝑹 𝟐 0.886 0.785 0.766 統計 Price Demand Supply Model Sum of Squares df Mean Square F Sig. Regression 736.648 1 40.230 .000 Residual 201.420 11 18.311 Total 938.068 12 REPURCHASE是為了提升eps，進而推高股價，創造報酬率，給短期投者 成長型公司通常股價波動較大，適合短期投資人比率增加(因為希望資金可以留回投資) 中間 Sig. <0.05 代表整條式子具解釋力～ R平方是解釋力大小 最下面是看EPS的B 8.493 代表 EPSg;4g/ Model Estimates of B Sig. Constant 8.567 .004 EPS 8.493 .000 Quantity We may increase stock price through repurchasing. 12

Shareholders’ Interests Dilemma ROCKBORO We wants to know which payout policy is best for Rockboro? Company Objectives Shareholders’ Interests 13

3 Calculations

Assumptions Sales Growth Rate = 15% All equity changes are affected by ROCKBORO Sales Growth Rate = 15% All equity changes are affected by dividends payout and △net income. D/E ratio should be less than 40% All liability changes are caused by debt financing 15

Previous Calculation WACC CAPM ROCKBORO WACC = 11.9% = 𝑾 𝒃 1* 𝑲 𝒃 2 * (1-t% 3) + 𝑾 𝒆 1 * 𝑲 𝒆 4 1 Depends on how much we pay in 2015 thus change 2 𝑲 𝒃 =3.8%，2015 AAA corporate bond rate 3 t% =34%，2015 USD Corporate income tax 4 CAPM=15.6%，as follows: CAPM = 15.6% = 𝑹 𝒇 5 + 𝜷6 * ( 𝑹 𝒎 7 - 𝑹 𝒇 ) 5 𝑹 𝒇 = 2.20%，2015 10-year treasury note yield 6 𝜷 = 1.25，Based on the percentage of sales of divisions 7 𝑹 𝒎 = 12.90%，in case page.1 16

Zero-dividend Payout Policy ROCKBORO DCF method *assume there is no interest expense. dollars: in millions 2015 2016 2017 2018 2019 2020 2021 Net Income 27 60 86.3 109.2 136.9 170.6 196.2 +)Depreciation 33.9 39 45 52 59 68 79 -)Capital Use (65.3) (75.1) (86.4) (99.3) (102.7) (118.1) (135.8) -)Net WC (29.5) (33.9) (39.0) (44.8) (51.6) (59.3) (68.2) -)Repurchase - -)Dividend FCF (10.0) 5.8 16.6 42.1 61.5 70.7 Terminal Value 702.72 Total 773.4 Firm Value 421.07 Shares outstanding 27.9M Stock Price $15.09 Stock Return (1.04)% D/E ratio (2015) 34.27% The DCF shows that the firm is overvalued. If we do nothing, the stock return will be negative in LR. 17

36% D/E ratio Payout Policy ROCKBORO DCF method *assume there is no interest expense. dollars: in millions 2015 2016 2017 2018 2019 2020 2021 Net Income 27 60 86.3 109.2 136.9 170.6 196.2 +)Depreciation 33.9 39 45 52 59 68 79 -)Capital Use (65.3) (75.1) (86.4) (99.3) (102.7) (118.1) (135.8) -)Net WC (29.5) (33.9) (39.0) (44.8) (51.6) (59.3) (68.2) -)Repurchase - -)Dividend (7.78) FCF (41.6) (10.0) 5.8 16.6 42.1 61.5 70.7 Terminal Value 711.49 Total 782.2 Firm Value 420.62 Shares outstanding 27.9M Stock Price $15.08 Stock Return 0.69% D/E ratio (2015) 36.00% When we borrow more money to pay dividend, the stock return is higher. 18

40% D/E ratio Payout Policy ROCKBORO DCF method *assume there is no interest expense. dollars: in millions 2015 2016 2017 2018 2019 2020 2021 Net Income 27 60 86.3 109.2 136.9 170.6 196.2 +)Depreciation 33.9 39 45 52 59 68 79 -)Capital Use (65.3) (75.1) (86.4) (99.3) (102.7) (118.1) (135.8) -)Net WC (29.5) (33.9) (39.0) (44.8) (51.6) (59.3) (68.2) -)Repurchase - -)Dividend (25.81) FCF (59.7) (10.0) 5.8 16.6 42.1 61.5 70.7 Terminal Value 731.77 Total 802.5 Firm Value 419.57 Shares outstanding 27.9M Stock Price $15.04 Stock Return 4.68% D/E ratio (2015) 40% When D/E reaches 40%, the stock return is even higher. 19

What do we find out ? Then we need to discuss : ROCKBORO What do we find out ? Stock returns positively increased with D/E ratio, which indicates paying dividends or repurchasing shares by leverage would be better than doing nothing . Then we need to discuss : Which method would be more beneficial ? Paying dividends or repurchasing shares? 20

All borrowings for dividend ROCKBORO DCF method *assume there is no interest expense. dollars: in millions 2015 2016 2017 2018 2019 2020 2021 Net Income 27 60 86.3 109.2 136.9 170.6 196.2 +)Depreciation 33.9 39 45 52 59 68 79 -)Capital Use (65.3) (75.1) (86.4) (99.3) (102.7) (118.1) (135.8) -)Net WC (29.5) (33.9) (39.0) (44.8) (51.6) (59.3) (68.2) -)Repurchase - -)Dividend (25.81) FCF (59.7) (10.0) 5.8 16.6 42.1 61.5 70.7 Terminal Value 731.77 Total 802.5 Firm Value 419.57 Shares outstanding 27.9M Stock Price $15.04 Stock Return 4.68% D/E ratio (2015) 40% When D/E reaches 40%, the stock return is even higher. 21

Use more repurchasing, the stock return is even higher. 50% dividend+50% buyback ROCKBORO DCF method *assume there is no interest expense. dollars: in millions 2015 2016 2017 2018 2019 2020 2021 Net Income 27 60 86.3 109.2 136.9 170.6 196.2 +)Depreciation 33.9 39 45 52 59 68 79 -)Capital Use (65.3) (75.1) (86.4) (99.3) (102.7) (118.1) (135.8) -)Net WC (29.5) (33.9) (39.0) (44.8) (51.6) (59.3) (68.2) -)Repurchase (12.9) - -)Dividend FCF (59.7) (10.0) 5.8 16.6 42.1 61.5 70.7 Terminal Value 731.76 Total 802.5 Firm Value 419.57 Shares outstanding 27.05M Stock Price $15.50 Stock Return 4.82% D/E ratio (2015) 40% Use more repurchasing, the stock return is even higher. 22

All borrowings for buyback ROCKBORO DCF method *assume there is no interest expense. dollars: in millions 2015 2016 2017 2018 2019 2020 2021 Net Income 27 60 86.3 109.2 136.9 170.6 196.2 +)Depreciation 33.9 39 45 52 59 68 79 -)Capital Use (65.3) (75.1) (86.4) (99.3) (102.7) (118.1) (135.8) -)Net WC (29.5) (33.9) (39.0) (44.8) (51.6) (59.3) (68.2) -)Repurchase (25.81) - -)Dividend FCF (59.7) (10.0) 5.8 16.6 42.1 61.5 70.7 Terminal Value 731.76 Total 802.5 Firm Value 419.57 Shares outstanding 26.2M Stock Price $16.00 Stock Return 4.98% D/E ratio (2015) 40% The DCF shows that the firm is undervalued. 100% of the Repurchase gives the best stock return. 23

We used the same analysis on Rockboro case… What do we find out ? Stock returns positively increased with the portion of stock repurchase, which benefits growth-oriented investors. 股利及買回股票都可以提升股東的報酬率，只是買回股票因為可以提高EPS，我們預期也會相對提升Stock price， 兩者差異在於，我們想要討好誰? 都討好? 還是只選中一邊。 After two discussion : We used the same analysis on Rockboro case… 24

How about 3 policies mentioned in case?

Zero-dividend Payout Policy ROCKBORO DCF method *assume there is no interest expense. dollars: in millions 2015 2016 2017 2018 2019 2020 2021 Net Income 27 60 86.3 109.2 136.9 170.6 196.2 +)Depreciation 33.9 39 45 52 59 68 79 -)Capital Use (65.3) (75.1) (86.4) (99.3) (102.7) (118.1) (135.8) -)Net WC (29.5) (33.9) (39.0) (44.8) (51.6) (59.3) (68.2) -)Repurchase - -)Dividend FCF (10.0) 5.8 16.6 42.1 61.5 70.7 Terminal Value 702.72 Total 773.4 Firm Value 421.07 Shares outstanding 27.9M Stock Price $15.09 Stock Return (1.04)% D/E ratio (2015) 34.27% 26

Steady 40% Payout Ratio DCF method ROCKBORO 2015 2016 2017 2018 2019 *assume there is no interest expense. dollars: in millions 2015 2016 2017 2018 2019 2020 2021 Net Income 27 60 86.3 109.2 136.9 170.6 196.2 +)Depreciation 33.9 39 45 52 59 68 79 -)Capital Use (65.3) (75.1) (86.4) (99.3) (102.7) (118.1) (135.8) -)Net WC (29.5) (33.9) (39.0) (44.8) (51.6) (59.3) (68.2) -)Repurchase - -)Dividend (10.81) (24.01) (34.52) (43.66) (54.78) (68.52) (78.48) FCF (44.7) (34.0) (28.7) (27.1) (12.7) (6.7) (7.8) Terminal Value (78.77) Total (86.6) Firm Value (172.50) Shares outstanding 27.9M Stock Price $(6.18) Stock Return (138)% D/E ratio (2015) 36.67% 27

Residual-Dividend Payout ROCKBORO DCF method *assume there is no interest expense. dollars: in millions 2015 2016 2017 2018 2019 2020 2021 Net Income 27 60 86.3 109.2 136.9 170.6 196.2 +)Depreciation 33.9 39 45 52 59 68 79 -)Capital Use (65.3) (75.1) (86.4) (99.3) (102.7) (118.1) (135.8) -)Net WC (29.5) (33.9) (39.0) (44.8) (51.6) (59.3) (68.2) -)Repurchase (25.8) - -)Dividend (5.85) (16.61) (42.08) (61.51) (70.69) FCF (59.7) (10.0) Terminal Value Total Firm Value (68.57) Shares outstanding 26.2M Stock Price $(2.61) Stock Return (117.16)% D/E ratio (2015) 40% 28

Maximize growth in market value of company stock. If we want: Maximize growth in market value of company stock. We should: Abandon the dividend policy, adopt the repurchasing.

4 Time for Decision!

Harmful to transformation! ROCKBORO Dividend policy Enterprise transformation is a must The dividend policy must comply with corporate strategy Dividends will reduce the space for investing in R&D. Competitors will catch up in a year. Need to invest in R&D as soon as possible to achieve the growth rate. Dividends give market a signal We are mature companies without better investment opportunities. Harmful to transformation! 15%成長是建立在保持競爭優勢前提下 We decide to pay no dividends. 31

Repurchase We decide to repurchase stock. ROCKBORO Repurchase No dividends will upset long-term investors. In order satisfy the investors and rise the stock return, we start thinking about whether repurchase is a viable option Repurchase rise the most stock return According to DCF, we find that repurchasing stocks has a better rate of return than paying dividends. 25 % Lorem ipsum dolor sit amet put any Male Investors can sell stocks if they need cash Except that attracting short-term investors, long-term investors can also sell stocks when stock prices become higher. 我們的成長率是建立在我們最新的AIW system，如果不繼續投資以維持優勢，也不會有盈餘可以發股利給股東， 更不用說在現在高成長率假設下，我們給予股東的只有不穩定的股利，而不是確定的股票報酬， 既然我們要改變，我們做出更果決的改變來改革我們的公司，即便這會短暫的讓我們的股東難過， 但我們為的是更長遠的未來、以及我們深信公司未來的成長展望。 所以目前我們決定僅買回股票，而不發放股利、或只是暫緩。 Repurchase give market a signal We are confident in the future performance of our company. We decide to repurchase stock. 32

New name? Renaming is not necessary Tight D/Eratio Enough signals ROCKBORO New name? Tight D/Eratio D/E ratio is already tight enough. Additional spending will further reduce investment in R&D Enough signals There are enough signals to the market that we are about to transform. Benefits remains unknown There is no empirical evidence to support the decision. Renaming is not necessary 33

Thank you