In the world of investments, not all companies showcase explosive growthSome may find themselves in a state of stagnation or slow growthHowever, these companies can still hold value for investorsFor example, Warren Buffett's acquisition of a furniture store in Nebraska serves as a classic caseAt the time of purchase, it was merely a local business with no apparent potential for rapid growthYet, even with minimal growth in the subsequent years, Buffett viewed it as a stable investment opportunityToday, a similar narrative can be drawn from various sectors, including the liquor industry.

Investors harbored an innate desire to chase the high growth they believe their invested companies can potentially reachThe challenge lies in assessing the investment value of companies that exhibit stagnant or merely modest growth

One way to approach this dilemma is through a zero-growth model to approximate intrinsic value, represented by the formula: Intrinsic Value = Free Cash Flow (FCF) / Discount Rate (r). Here, FCF denotes the free cash flow, while the discount rate illustrates the rate of return, accounting for inflation and the uncertainties tied to the future cash flow.

To delve deeper, let’s consider a prominent mid-tier liquor enterprise, referred to here as Company Y, to illustrate how this evaluation might unfold.

Firstly, envision a scenario where Company Y ceases all growthLet’s assume that its profits stabilize at no less than a set amount (for instance, 10 billion RMB per year post-2023). Since the company doesn’t need significant reinvestment or additional capital, we can take this profit value as representative of its free cash flow.

There are multiple factors to debate whether Company Y can maintain this profit level

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On one side, the liquor industry is expected to continue its upward trajectory over the long-term, competition has somewhat stabilized, and Company Y boasts a flagship product with a well-established brandConversely, challenges include potential slowdowns within the industry, possible dilution of Company Y's market share, and uncertainties regarding the management’s capabilityEach of these dynamics can significantly influence the overall investment risk.

In this context, determining the discount rate becomes crucialBased on the aforementioned risks, an increased discount rate needs to be set on top of the risk-free rate, which is, say, 2.5%. A conservative margin could place the lower end of our discount rate at 4%, suggesting that the highest possible valuation of Company Y stands at approximately 250 billion RMB (100 / 4%). Yet, considering the brand strengths we discussed, a maximum discount rate of 8% might be justified, yielding a lower valuation of 125 billion RMB (100 / 8%). Plugging these figures into the analysis leads us to a median estimate at around 166.6 billion RMB

Ultimately, while we may initially state that a reasonable valuation for Company Y falls within 125 billion to 200 billion RMB, this assessment exposes a flawed reliance on subjective discount rates.

Another evaluation route would be to directly discount the projected free cash flows instead of relying on the previously debated discount ratesHere, a practical lens incorporates direct risk assessment through Free Cash Flow evaluation coupled with the risk-free rate to factor in inflation.

If we postulate that the subjective likelihood of Company Y maintaining profits at 10 billion RMB is around 80%, our expected annual free cash flow projects to be 8 billion RMBThis equates to: Intrinsic Value = (Free Cash Flow × Subjective Probability) / Risk-Free Rate = (10 × 80%) / 4% = 200 billion RMB

Still, for risk-averse investors, a prescriptive buying price might be nearing 120 billion RMB (applying a 60% discount to the intrinsic value), ensuring additional cushion against potential financial mishaps.

It becomes abundantly clear that companies navigating through stagnation or slow growth still possess investment potential; a notion evident in Buffett’s historical purchase of MrsB's Nebraska Furniture Mart in 1983. At the time, the business demonstrated both scale and cost advantages, yet exhibited no foreseeable growthFollowing the acquisition, the profits experienced a dip in the subsequent year, showcasing growth averaging less than 4% across the following decade.

Buffett navigated his valuation using similar measuresFor MrsB's store, he noted a post-tax profit of 8.1 million USD, which when valued rendered the intrinsic worth around 6.48 million USD, applying an 80% discount to free cash flow and employing the prevailing risk-free rate of 10%. The remarkable detail comes forth in that he opted to purchase the store for 6.875 million USD, a figure that surprisingly lacked any safety margin

Nevertheless, this investment burgeoned into a success story for Buffett, one that he referred to as a business that generated extraordinary economic enrichment for him.

Another lens through which we can assess Y Company’s viability focuses on a multi-year dividend reinvestment perspectiveAre we to believe that Y Company will halt its growth trajectory in the near future? This seems improbable; with a nationwide expansion underway, sales are likely to see a gradual uptickPlus, the product mix is evolving, promising higher margins moving aheadEven amidst ongoing stockpile dilemmas—given the absence of a shelf life for liquor—it can make lucrative sales during peaks of favorable market conditions.

Let's now engage this valuation in tandem with a projected investment scenario: if an investor purchases 20,000 shares of Y Company at the aforementioned 120 billion RMB valuation at a price-to-earnings ratio of 12, and holds it for a 10-year duration, what returns could they expect? Presuming the annual growth rate wavers from approximately 5% to nil over the decade, maintaining the P/E ratio at 12 while also reinvesting increasing dividends, a typical return calculation suggests the potential to grow an investment of 1.59 million RMB into a market value of 4.13 million RMB, illustrating a handsome rate of return of 159% over the period and an annualized return approximating 10%.

According to this projection, investors in Y Company could enjoy over 6% dividends combined with a modest 3% growth

This more stable revenue marvel offers serene assurance to investors, standing at an advantage when compared to relying solely on capricious market price changes or evolving earnings multiples.

As we consider parallels with Buffett's valuation tactics when he initially engaged with Nebraska Furniture Mart—averaging P/E at 8.5, a compelling yield of 11.76%, notably against a backdrop of soaring U.STreasury yields, it perhaps appeared an unremarkable engagementYet the backbone of Buffett’s decision stemmed from the inherent asset values possessed by the furniture mart.

Following the acquisition, asset audits unveiled net asset valuations perched at approximately 85 million USD; a strategic purchase executed at about 80% of the recognized net asset valueThis leads to a significant observation, viewing Company Y through the lens of fair value, driven by its liquor inventory—a pivotal factor where the accounting figures starkly contrast with prevailing market valuations.

Given the 2023 sales figures suggesting a total of around 16.61 million tons, we can segment around 60% into mid- to high-end liquor and the other 40% as low-tier liquor