Appendix 1.

Peng Plasma Solutions, Statement of Income

(millions of Rmb, year ending December 31)

Income Item 2008 2009 2010

Sales 1,861.7 1,560.3 1,940.3
COGS 1,255.1 1,160.1 1,456.7
Gross margin 606.6 400.2 483.6
Gross margin (%) 32.6% 25.6% 24.9%

Marketing & selling 125.4 128.2 116.8

G&A expenses 162.7 158.3 160.8
EBITDA 318.5 113.7 205.9
EBITDA margin (%) 17.1% 7.3% 10.6%

Depreciation 50.5 58.2 62.0

EBIT 267.9 55.5 143.9
EBIT margin (%) 14.4% 3.6% 7.4%

Interest 26.1 34.6 47.7

EBT 241.8 20.9 96.2
EBT margin (%) 13.0% 1.3% 5.0%
Taxes @ 25% 60.5 5.2 24.1
Net Income 181.4 15.7 72.2
Return on sales (%) 9.7% 1.0% 3.7%

Dividends 60.0 60.0 60.0

Retained earnings 121.4 (44.3) 12.2
Appendix 2. Peng Plasma Solutions, Balance Sheets
(millions of Rmb, year ending December 31)

Assets 2008 2009 2010

Cash 61.2 26.4 17.4
Accounts Receivable 201.2 198.8 292.9
Inventory 192.3 183.5 247.8
Prepaid Expenses 34.2 38.7 32.6
Current Assets 488.9 447.4 590.7

Gross fixed assets 437.2 493.4 565.9

Accum depreciation 98.6 156.8 218.8
Net fixed assets 338.6 336.6 347.1

Total Assets 827.5 784.0 937.9

Liabilities & Net Worth 2008 2009 2010e

Accounts Payable 107.0 105.3 140.5
Accrued expenses 43.7 35.8 44.2
Short-term debt 119.5 137.3 242.7
Current Liabilities 270.3 278.4 427.4

Long-term debt 127.8 120.6 113.2

Equity 429.4 385.1 397.3

Liabilities & Net Worth 827.5 784.0 937.9

Net Working Capital 276.94 279.94 388.65

Appendix 3. Sales Decomposition by Region

Sales by Region (millions of Rmb) 2008 2009 2010

China 484.0 530.5 776.1
Europe 279.3 187.2 194.0
Americas 446.8 312.1 310.4
Singapore/Indonesia 502.7 405.7 523.9
South Korea 148.9 124.8 135.8
Global sales, net 1,861.7 1,560.3 1,940.3

Sales by Region (percent) 2008 2009 2010

China 26% 34% 40%
Europe 15% 12% 10%
Americas 24% 20% 16%
Singapore/Indonesia 27% 26% 27%
South Korea 8% 8% 7%
Global sales, net 100% 100% 100%

Average Exchange Rate 2008 2009 2010

Rmb/€ or RMB/EUR 10.15 9.48 8.96
Rmb/$ or RMB/USD 6.94 6.84 6.76
Rmb/S$ or RMB/SGD 4.90 4.69 4.96
Rmb/Won or RMB/KWN 0.0063 0.0053 0.0058
Appendix 4. Sales, Cost of Sales and Investory Assessment, 2008-2010 (millions of Chinese Rmb)

2008 2009 2010

Product Line Sales Cost of Sales Inventory Sales Cost of Sales Inventory Sales Cost of Sales Inventory
Handheld Systems 707.4 470.2 76.3 570.3 450.2 74.3 670.8 540.6 96.3
Mechanized Systems 844.7 542.2 85.2 725.9 498.1 81.9 950.1 657.3 114.2
Consumables 223.4 179.8 21.6 183.6 149.5 17.9 219.2 179.5 24.2
Controls 86.2 62.9 9.2 80.5 62.3 9.4 100.2 79.3 13.1
Total 1,861.7 1,255.1 192.3 1,560.3 1,160.1 183.5 1,940.3 1,456.7 247.8
 PENG PLASMA SOLUTIONS
Financial Analysis Worksheets

TABLE 1 The Profit & Loss Statement

TABLE 2 The Managerial Balance Sheet

TABLE 3 Net Working Capital (NWC) Analysis

TABLE 4 Inventory Analysis

TABLE 5 Cash Flow Analysis

TABLE 6 Return on Capital

TABLE 7 Benchmarking 2010 Performance

Thunderbird
 TABLE 1
PENG PLASMA SOLUTIONS
(millions of Chinese renminbi, Rmb)

THE PROFIT AND LOSS STATEMENT (P&L)

2008 2009 2010

Sales revenues (net) 1,861.7 100.0% 1,560.3 100.0% 1,940.3 100.0%

Cost of sales (COS) (1,255.1) -67.4% (1,160.1) -74.4% (1,456.7) -75.1%
Gross profit 606.6 32.6% 400.2 25.6% 483.6 24.9%

Marketing and selling (125.4) -6.7% (128.2) -8.2% (116.8) -6.0%

G&A expenses (162.7) -8.7% (158.3) -10.1% (160.8) -8.3%
Operating profit EBITDA 318.5 17.1% 113.7 7.3% 205.9 10.6%

Below The Line

Depreciation expense (50.5) -2.7% (58.2) -3.7% (62.0) -3.2%

Earnings bef interest & tax EBIT 267.9 14.4% 55.5 3.6% 143.9 7.4%

Interest expense (26.1) -1.4% (34.6) -2.2% (47.7) -2.5%

Earnings before taxes EBT 241.8 13.0% 20.9 1.3% 96.2 5.0%

Taxes (60.5) -3.2% (5.2) -0.3% (24.1) -1.2%

Net income NI or EAT 181.4 9.7% 15.7 1.0% 72.2 3.7%

NOTES

Profit Distribution:
Dividends paid 60.0 60.0 60.0
Retained earnings 121.4 (44.3) 12.2

Sales growth 12% -16% 24%

Currency:
RMB/US$ 6.94 6.84 6.76
Sales (millions of US$) 268.3 228.1 287.0
NI (millions of US$) 26.1 2.3 10.7

Many companies use the financial results above the line, EBITDA, as a metric of managerial performance. This is because the
principle components below the line, depreciation, interest, taxes, are all driven by financial and accounting activities largely
controlled by corporate and are therefore not under the discretion or direction of business unit management.
 TABLE 2
PENG PLASMA SOLUTIONS
(millions of Chinese renminbi, Rmb)

The Managerial Balance Sheet

31 December 2008
Cash 61.2 9.0% Short-term debt 119.5 17.7%
NWC 276.9 40.9% Long-term debt 127.8 18.9%
Net fixed assets 338.6 50.0% Equity 429.4 63.5%
Invested capital 676.7 100.0% 676.7 100.0%

31 December 2009
Cash 26.4 4.1% Short-term debt 137.3 21.4%
NWC 279.9 43.5% Long-term debt 120.6 18.8%
Net fixed assets 336.6 52.4% Equity 385.1 59.9%
Invested capital 643.0 100.0% 643.0 100.0%

31 December 2010
Cash 17.4 2.3% Short-term debt 242.7 32.2%
NWC 388.7 51.6% Long-term debt 113.2 15.0%
Net fixed assets 347.1 46.1% Equity 397.3 52.7%
Invested capital 753.2 100.0% 753.2 100.0%

Note: Net working capital (NWC) = A/R + Inventories + Prepaid - A/P - Accrued.

The "Managerial Balance Sheet" reduces Assets to 3 categories (Cash, NWC & Fixed Assets), resulting in a
right-hand-side which is pure financing (short-term debt, long-term debt, and equity).

The Managerial Balance Sheet is intended to focus the analyst's attention on key asset categories and how
the firm is financing those assets -- in order to make a clear distinction between operations (assets) and
financing (the funding of those assets).
 TABLE 3
PENG PLASMA SOLUTIONS
(millions of Chinese renminbi, Rmb)

Net Working Capital (NWC) Management

2008 2009 2010

Sales (Rmb) 1,861.7 1,560.3 1,940.3

Sales growth (%) -16.2% 24.4%

Net Working Capital (NWC in Rmb) 276.9 279.9 388.7

NWC/Sales (percent) 14.9% 17.9% 20.0%

Net Working Capital Components

Days sales outstanding 39.5 46.5 55.1

(A/R / (Sales/365) )

Days of inventory 55.9 57.7 62.1

(Inventory / (Cost of sales/365) )

Days of prepaid expenses 6.7 9.1 6.1

(Prepaid / (Sales/365) )

Days to pay (31.1) (33.1) (35.2)

( - A/P / (Cost of Sales/365) )

Days accrued expenses (8.6) (8.4) (8.3)

( - Accrued / (Sales/365) )

Days of NWC 62.4 71.8 79.8

(A/R + Inv + Prepaid - A/P - Accrued)

Financing of Net Working Capital

% of NWC Financed by Long-Term Debt 79% 60% 42%

(LT Debt + Equity - Net Fixed Assets) / NWC

% of NWC Financed by Short-Term Debt 21% 40% 58%

(ST Debt - Cash) / NWC

Peng Plasma's days sales outstanding and inventory levels are rising, increasing the total days of
net working capital for the firm.

Peng has been rapidly expanding the use of short-term debt in the financing of its net working
capital, which, depending on market and company conditions, may be increasingly risky.
 TABLE 4
PENG PLASMA SOLUTIONS
(millions of Chinese renminbi, Rmb)

Inventory Analysis

2008

Product Line Sales Cost of Sales Inventory Gross Margin Days Inventory
Handheld Systems 707.4 470.2 76.3 33.5% 59.2
Mechanized Systems 844.7 542.2 85.2 35.8% 57.4
Consumables 223.4 179.8 21.6 19.5% 43.8
Controls 86.2 62.9 9.2 27.0% 53.4
Total 1,861.7 1,255.1 192.3 32.6% 55.9

2009

Product Line Sales Cost of Sales Inventory Gross Margin Days Inventory
Handheld Systems 570.3 450.2 74.3 21.1% 60.2
Mechanized Systems 725.9 498.1 81.9 31.4% 60.0
Consumables 183.6 149.5 17.9 18.6% 43.7
Controls 80.5 62.3 9.4 22.6% 55.1
Total 1,560.3 1,160.1 183.5 25.6% 57.7

2010

Product Line Sales Cost of Sales Inventory Gross Margin Days Inventory
Handheld Systems 670.8 540.6 96.3 19.4% 65.0
Mechanized Systems 950.1 657.3 114.2 30.8% 63.4
Consumables 219.2 179.5 24.2 18.1% 49.2
Controls 100.2 79.3 13.1 20.9% 60.3
Total 1,940.3 1,456.7 247.8 24.9% 62.1
 TABLE 5
PENG PLASMA SOLUTIONS
(millions of Chinese renminbi, Rmb)

Constructed Statement of Cash Flows

2009 2010
Opening Cash Balance 61.2 26.4

Cash Flow from Operations

EBIT 55.5 143.9
Plus depreciation 58.2 62.0
Change in NWC (3.0) (108.7)
Taxes paid (5.2) (24.1)
Cash flow from operating activities 105.5 73.2

Cash Flow from Investing

Capital expenditure (56.2) (72.5)
Net acquisitions of assets - -
Cash flow from investing activities (56.2) (72.5)

Cash Flow from Financing

Interest payments (34.6) (47.7)
Dividend payments (60.0) (60.0)
Change in Long Term Debt (7.2) (7.4)
Change in Short Term Debt 17.8 105.4
New Issues (Repurchases) of Equity - -
Cash flow from financing activities (84.0) (9.7)

Closing Cash Balance 26.4 17.4

"Cash Flow from Investing" for 2009-2010 is based on the reported new investment undertaken in that
year by Peng. A second method of calculating cash flow from investing is to use the following basic
relationship from information presented on the balance sheet alone:
Net Fixed Assets (2010) = Net Fixed Assets (2009) + New Capital Expenditure (2010) - Depreciation (2010)
347.2 = 336.63 + New Capex - 61.96
which, solving for New Capex,
New Capital Expenditure = -72.5
"Cash Flow from Investing" is negative, indicating a new use of cash -- a cash outflow.
 TABLE 6
PENG PLASMA SOLUTIONS
(thousands of Chinese renminbi, Rmb)

Return on Invested Capital

2008 2009 2010

Margin = EBIT / Sales 14.4% 3.6% 7.4%

x x x x

Capital Turnover = Sales / Invested Capital 2.75 2.43 2.58

= = = =

Pre-tax ROIC = EBIT / Invested Capital 39.6% 8.6% 19.1%

x x x x

Tax Effect = (1 - Tax Rate) 75.0% 75.0% 75.0%

x x x x

After-tax ROIC 29.7% 6.5% 14.3%

Return on Assets

After-tax Return on Assets 21.9% 2.0% 7.7%

(EAT/Total Assets)

Return on Equity

After-tax Return on Equity 42.2% 4.1% 18.2%

x x x x

Retention Rate (Note 2) 66.9% -282.0% 16.9%

x x x x

Sustainable Growth Rate 28.3% -11.5% 3.1%

(Retained Earnings/Equity)

ROE = Return on Equity; ROIC = Return on Invested Capital; EAT = Earnings After Tax
Note 1: Financial leverage multiplier = Pretax ROE / Pretax ROIC
Note 2: Retention rate (b) = Retained earnings / Earnings after tax
The "Sustainable Growth rate" is that rate of sales growth the company could support financially using
internal financing at the current rate of profitability. For example, a 3.1% sustainable growth rate
means that if the company's sales grow faster than 3.1%, at current operating parameters, external
financing will be needed (debt or equity).
 TABLE 7
PENG PLASMA SOLUTIONS
Benchmarking 2010 Performance

Peng Company Company Company

Plasma A B C

Working Capital Management

Days Sales Outstanding 55.1 38 41 40

Days of Inventory 62.1 44 39 38

Days Payables 35.2 36 34 35

Use of Debt Financing

Debt / Total Assets 0.38 0.26 0.21 0.25

Debt / Invested Capital 0.47 0.31 0.35 0.29

Debt / Equity 0.90 0.65 0.59 0.52

Returns on Sales and Capital

Gross Profit Margin 24.9% 28.0% 24.6% 25.3%

Return on Sales 3.7% 14.2% 7.7% 12.1%

Return on Invested Capital (ROIC) 14.3% 23.2% 17.3% 21.9%

Return on Assets (ROA) 7.7% 14.3% 10.1% 15.9%

Return on Equity (ROE) 18.2% 29.5% 22.5% 27.4%

Peng Plasma is not collecting on its receivables at a comparable rate, and also appears to be carrying significantly
higher inventories than comparable companies.

Peng is also much more highly leveraged, which means it is carrying significantly higher interest expenses as well
as being considered higher in risk than comparable companies.

Although Peng's gross margins are comparable with other companies, its return on sales and returns on all
measures of capital are underperforming.