Crypto Market Relative Market Cap Valuation Method - Technical Analysis of Cryptocurrency Exchanges

Today I want to introduce a valuation method called relative market value valuation, which I have named. First, I want to clarify that this valuation method is an auxiliary tool in valuation, not a primary or mainstream method, nor is it a fundamentally essential valuation approach. It is simply a method I am sharing to broaden your thinking. Additionally, this auxiliary method can be combined with other valuation methods, such as cash flow valuation, price-to-earnings ratio, or return on equity. You can use these methods to estimate the so-called intrinsic value of a company. From the company’s perspective, valuation based on fundamentals has been the mainstream approach. This market value valuation method essentially does not focus on the company itself but compares it relative to other companies to give an estimate.

This valuation method is a form of cross-verification. In investing, when making a decision—whether to invest or not—if multiple subsystems produce the same judgment and conclusion, the correctness of that conclusion is likely to be high, increasing the probability of accuracy. I have also mentioned in other programs the approach of cross-verification from multiple perspectives. Just like humans—why do we have two eyes and not just one? Looking at the world with one eye limits your perspective. Even if your eyes are highly capable or insightful, they still have limitations. Similarly, from the mainstream cash flow valuation approach, understanding the company’s essence, or using P/E ratios from various angles, applying another valuation method only has benefits and no drawbacks.

Let me reiterate: this method is optional. If you are a beginner, you can choose not to learn it. Experienced investors are advised to consider it alongside their own methods. Why did I wait until after episode 800 to introduce this method? Because investing requires a gradual, step-by-step process. I was concerned that discussing these early on might mislead beginners, which is why I hesitated. Today, I will share the reasoning behind this auxiliary valuation method and will provide some examples later.

This method essentially does not evaluate the company from its own internal perspective but rather from an external viewpoint—somewhat like viewing flowers through fog. It is understood from the entrepreneur’s perspective; entrepreneurs often like to use this method to value their own companies. When entrepreneurs build their businesses, many do not focus solely on profits but rather on how large the business can become—what the market value could be in ten years, or how big their sales volume can grow, which involves the idea that the purpose of doing business is to make money. Entrepreneurs often understand that accounting profits are not necessarily true profits. As value investors, we should not be blinded by profits, at least not by temporary profits. This is why, in many cases, we do not rely on P/E ratios—because every industry has its cycle, and a company’s profits are also subject to many variables, which is why sometimes companies fudge their accounts or, even if they do not, industry cycles or investment cycles differ.

In some cases, companies invest heavily early on, resulting in lower profits initially. Later, as they stop investing, the assets they built earlier start generating profits, causing profits to surge. This demonstrates that profits can lag behind expenses, depending on the industry—some lag significantly. For example, advertising this year might lead to increased sales only next year, making current profits look poor.

I give these examples to illustrate that from an entrepreneur’s perspective, profits are not the main focus; rather, they care more about how big the business can grow. The relative market value method somewhat reflects this mindset. For instance, Amazon has also invested heavily in research, hiring, and developing new products. Its profits in the first 20 years were poor. Investors expected it to make a lot of money in the future, which is similar to Pinduoduo—initially losing money but continuously increasing revenue through subsidies. Pinduoduo’s revenue kept growing, but it was not profitable, with negative earnings, yet investors assigned it a high P/E ratio—though technically it has no P/E because it is not profitable. You cannot say the company has no value; you can only say it may have no value at the moment.

If you evaluate based on P/E ratios, it might seem worthless, but clearly it has value and vitality. Whether to add to your holdings is subjective—different investors see different things, including China National Petroleum Corporation (PetroChina). For example, PetroChina has been building oil pipelines and gas fields over the past 20 years along China’s coast, which has resulted in low profits. These pipelines could last for the next 100 years, but depreciation might be completed in 15-20 years, so early expenses are high. Construction involves significant costs, labor, and other factors, making current profits look poor, but this may change in the future.

From an entrepreneur’s perspective, current profits are not the main concern. As investors, we do not know the company’s strategy; most people do not. We only look at the current P/E ratio, assuming future profits will be similar to this year’s, which is a simplification. From a valuation perspective, we can adopt a different approach—consider what the entrepreneur’s revenue might reach in the future and estimate the company’s future market value.

I have discussed another method called the economic scale approach, similar to Pinduoduo. For example, what market share will it have in ten years? How large will China’s e-commerce market be in ten years? Using industry data, we can estimate its revenue in ten years. If the profit margin is, say, 10%, then we can calculate its annual profit in ten years and estimate its valuation accordingly. This method compares the company to others—domestic or foreign—and uses their market data as references. Foreign industries tend to be more stable, providing a perspective. I repeat: this valuation method is not a fundamentally intrinsic approach; it is an external, auxiliary method, not a core valuation technique. It is meant to share ideas and broaden thinking.

In fact, China’s stock market legend Lin Yuan has used a similar approach as an auxiliary method. He said he is interested in pharmaceutical stocks. He pointed out that a pharmaceutical stock in the US can have a market value of over ten trillion RMB, while China’s best pharmaceutical stocks are only a few hundred billion RMB. He believes there is great potential for growth in China’s pharma sector, given China’s large population. He estimates that China’s pharma market could expand tenfold, and catching up with foreign companies might take 20-30 years. During this process, he believes Chinese pharma stocks could increase by several times, while foreign pharma stocks are still growing. If foreign pharma stocks grow at 10% annually, their market value could multiply 20-30 times over 30 years, reaching trillions. China’s market is about ten times smaller, so to catch up, it would need to grow similarly—by 200-300 times, considering the 10-fold difference and the 20-30 times growth.

Another fundamental approach is to focus on the actual growth of the company. Due to China’s aging population, pharmaceutical stocks have enormous long-term growth potential over the next 30-40 years, as it takes decades for people to pass away, and the number of elderly is increasing. The industry is a light asset industry, and a return on assets of 18% annually is feasible, with consistent 15-20% margins. Using the 72 rule, this could lead to a 200-300 times increase over decades, aligning with the relative valuation estimates. Both methods—internal growth and external comparison—suggest that the company could grow 200-300 times.

For example, using the relative valuation method, compare China National Petroleum with a foreign oil company. Many investors have lost money on PetroChina, buying at high prices years ago. Now, I compare PetroChina with a foreign company. I won’t discuss P/E ratios here because they are imperfect; instead, I use a different approach for valuation. I emphasize that I am not suggesting replacing P/E ratios with this method. Both methods are useful: the traditional P/E approach is good but not perfect, and the external comparison provides additional perspective.

In China, when evaluating companies, one should not rely solely on one correct answer. It’s like doing multiple-choice questions—over time, one might develop the habit of thinking there is only one correct answer. I am not claiming one method is better; I am offering an alternative to supplement existing methods. The reason for this is that existing methods are not perfect and need further refinement or additional perspectives. Think of it as broadening your thinking, not sticking rigidly to one approach.

Like I mentioned earlier, the economic scale method is similar—it looks from outside to inside. Many times, an outsider’s perspective offers a different way of thinking. It’s not meant to replace P/E ratios or discounted cash flow methods but to complement them.

Take PetroChina as an example. It is an energy company producing commodities with strong cyclical characteristics, heavily influenced by the economy. It has long investment cycles—over the past 20 years, it has built pipelines and refineries, leading to large initial investments and relatively low profits. It also suffers from inefficiency due to being a state-owned enterprise. I will share my thoughts and open up other ideas, but my conclusions are not necessarily correct—just my perspective.

How does PetroChina compare to foreign companies? It might be one of the most complete energy companies globally, from upstream exploration and development to transportation pipelines, refining, and retail sales. Such integrated companies are rare; in the US, there are almost none. The US equivalent would be splitting China National Petroleum into two companies—one similar to ExxonMobil, covering exploration, refining, and retail.

Based on market share, ExxonMobil holds about 20% in the US market, which is similar to PetroChina’s share of about 20% of China’s oil retail network. PetroChina’s market value is around $230 billion, roughly 1.6 trillion RMB. Despite similar market shares, their profitability might differ. I checked their gross margins and net profit margins; they are roughly comparable. I imagine splitting PetroChina into two parts—one as a transportation company, the other as an upstream exploration and refining company—similar to ExxonMobil. Their market shares are comparable, and China’s future energy consumption will be similar in scale to the US. So, their profit margins are similar, and their earnings are comparable. I did a rough calculation, and you can also use a calculator for a more precise estimate.

This is to illustrate my previous point—it’s not a definitive conclusion but a way to demonstrate the thought process and calculation method. There may be errors in the numbers, but this is the estimate I arrived at. ExxonMobil is undervalued; despite the US being a bull market, oil prices have been low, but relative valuation suggests it is undervalued. I add that market value methods should not be used during industry bubbles for comparison because comparing during a bubble can lead to underestimation. If the entire industry is overvalued, it becomes risky with systemic risks. Therefore, the premise of using this method is that the industry is undervalued. Currently, US oil companies have a market value of about $1.6 trillion, while PetroChina’s is around 600-700 billion RMB.

Another aspect is PetroChina’s pipelines and gas pipelines, which US oil companies do not have. There is a foreign comparable company called Kinder Morgan, which mainly provides pipelines for US oil companies. Its market value is about $35 billion, with a market share of roughly 6-7% in the pipeline industry. China’s pipelines account for nearly 50% of the country’s oil pipeline network, but the newly established China Oil & Gas Pipeline Company only accounts for about 30%. So, China’s pipeline share is about 30%, while the US pipeline company’s market share is about 6%, with a market value of $35 billion. This means China’s pipelines are about five times larger than the US pipeline company—roughly 4-5 times. Calculating this, it’s about $150 billion, which converts to at least 800 billion RMB. Currently, PetroChina’s market value is only around 600-700 billion RMB. The pipeline and transportation segment of PetroChina is seriously undervalued compared to US counterparts.

If PetroChina were split into two companies—one for transportation, the other for exploration, refining, and sales—then buying PetroChina at the current price would effectively mean valuing these two parts together—adding 1.6 trillion plus 800 billion RMB. In comparison with US oil companies, PetroChina should be worth about 2.4 trillion RMB. But its current market value is less than 800 billion RMB, so it is clearly severely undervalued. Many say that China’s state-owned enterprises are inefficient—they do employ many people, which lowers efficiency. But regardless of efficiency, this reflects in costs and expenses. I previously mentioned that, compared to US companies like ExxonMobil, their operating profit margins and gross margins are similar.

This indicates that despite low efficiency, the state’s monopoly grants it certain profits. This is a good aspect, and I won’t elaborate further. These factors may offset each other, resulting in similar profit margins and earnings. I reiterate: I roughly estimated that by comparing with similar foreign companies, China’s PetroChina could be valued at about 2.4 trillion RMB, while its current market cap is less than 800 billion RMB. This is just a comparative example; my judgment and calculations may be wrong. Please do not copy my work—I am only sharing this method.

This relative market value approach cannot replace P/E ratios. It is used because, in cyclical industries like oil and energy, P/E ratios are heavily influenced by commodity prices, which fluctuate greatly. Under fixed cost conditions, profits can swing significantly. Comparing P/E ratios during such times can be misleading—businesses might appear cheap when profits are low or expensive when profits are high, often coinciding with cyclical reversals. Commodity prices are cyclical, and their fluctuations make P/E ratios unreliable. Since commodities are not controllable through branding or other qualitative factors, using P/E ratios in such industries has limitations.

Furthermore, energy industries have long investment cycles, and China is currently undergoing an energy transition—moving away from coal and heavy oil, building extensive pipelines, and making strategic investments. This has led to years of heavy investment, impacting profits, but this situation is expected to improve in the future.

I am not recommending stocks or urging everyone to buy any particular stock. I want to avoid misunderstandings—sometimes words are imperfect. When discussing stocks, I try to avoid mentioning specific stocks but use examples to illustrate ideas. So, I am just using PetroChina as an example. Please do not buy PetroChina, especially the A-shares; they might be somewhat overvalued. The Hong Kong stocks are somewhat better.

That’s all for today. I briefly discussed the relative market value method, which is somewhat similar to the economic scale method. The economic scale method uses future market value and future profitability to estimate value and revenue, an external approach. It is not about comparing over time but comparing across space—benchmarking against similar foreign companies to see their valuation and market cap. The premise is that foreign industries are not in a bubble; comparing bubbles with bubbles is meaningless and lacks real comparability.