Ron:
As always, I appreciate your analysis. Discounted cash flows, if they can be reasonably estimated, are IMO the best way to value a company. The theory loses some steam in its treatment of terminal value (value into perpetuity) and the appropriate discount rate.
The discount rate is of course a function of risk. The P/E is a derivative of the discount rate, and as a high discount rate denotes high risk, a low P/E sends the same message. So what is the correct discount rate or P/E?
In my past discussions with John Nesbitt, I have gotten the impression that most chinese companies, as a result of the political risk, controls and other secular unknowns result in low P/E's. Deswell may actually be trading above its peer group already. He gave me the impression that a P/E of 4 to 5 wasa reasonable average for mainland companies.
This risk would tend to manifest itself in any potential valuation, including price/cash flow, price/sales, and of course P/E, which we always wish would be higher.
jmt
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