Technical question; Equity Risk Premium for a company operating overseas.
Hi I have a question for today.
The question is about which ERP I should use for a complicated company.
In Korea, there is a company named Coupang whose 100% of revenue is from Korea, which means they record revenue by KRW, not $.
The thing is that this company is listed on Nasdaq.
According to Damodaran, the risk-free rate should be aligned with the currency the company earns, so in this case I used 10yrs Korean government bond.
But I can't determine which ERP I should use for this company, the expected return of Korean market index or of Nasdaq.
My thought was as follows:
"I'm now calculating the cost of equity, which will be used to discount the cash flow in coming years, so I think I should use the expected return of Korean market index aligning with the currency this company is earning and also because they are operating their business in Korea. The Korean market index reflects the economy of Korea which the company is having business in. Oh wait, but we now want "an expected return of average equity," and this company is listed on Nasdaq, which means the majority of Coupang's investors would pay attention to Nasdaq, not Korean index, so the stock price of this company would be more likely to be aligned with Nasdaq..? And considering that we have to attach beta, the connection between the stock's return and market, to this ERP, do I have to use the expected return of Nasdaq?"
Very complicated. In terms of the relationship between location where the business is operated and the financial market, seems like Korean market index, but from the investor's view, seems like Nasdaq is the right answer.
Appreciate any opinions. I'd be happy to discuss this.
Thank you.
I would use the Korean market index as the ERP. You can always convert some figures later to fit the Nasdaq for valuation and comps purposes
Thanks for your comment!
Btw, could you elaborate on the situation where I would convert figures for valuation and comps?
I can't think of a situation where I use WACC in the process of comps.
And what kind of figures can I covert to fit the Nasdaq?
Thanks again.
i just can't justify valuing the rest of the company using korean metrics, then using the nasdaq as the ERP. Just doesn't sit well with me. There would run some problems of american companies running idiosyncratic bets, then if u used nasdaq as the ERP, Coupang might look cheap to you. Just a random example.
Top tip: Coupang is a very well-covered company by analysts, you could defo just dig up some coverage and find the premium attached to the company
As for conversion to fit Nasdaq companies, some examples would include converting accounting figures (korean comps report differently than nasdaq, and i 100% bet u'd need to convert to GAAP anyway), adjusting EV/ EBITDA to reflect different tax rates and D&A, experimenting with diff multiples to better fit your sample group in the Nasdaq. I'm not sure of any good direct comparables on the Nasdaq to reflect the geography tbh
And as for WACC, true haha u dont rlly use WACC for comps. I see you're an Aswath fan, you'll know he HATES people who mess up intrinsic and relative valuation, and just ascribe a multiple for their TV for their 'intrinsic valuation'. If anyone is using a multiple for their TV, that's relative valuation not intrinsic. But then that's Aswath's personal style
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