Hlavní práce73637_damx00.pdf, 7.1 MB Stáhnout

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Prague University of Economics and Business

Faculty of Informatics and Statistics

F ^INANCIAL , T ECHNICAL AND S ^TRATEGIC A ^NALYSIS : M ^ETHODS

AND T ECHNIQUES FOR A ^NALYZING B ^USINESS E NVIRONMENT AND C OMPETITION FOR O PTION TRADING

[MASTER THESIS]

Study programme: Quantitative Methods in Economics Field of study: Quantitative Economic Analysis

Author: Damini

Supervisor: Ing. Adam Čabla, Ph.D Prague, December, 2021

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Acknowledgement

I would like to thank my supervisor Mr Adam Čabla for his continuous support, guidance and feedback throughout my whole work, without it this thesis would not be the same. And also special thanks to my friend for providing wise guidance and effort during data collection and for providing useful information.

Also I would like to thanks to my parents who supported me financially during the pandemic times, but to parents I’m not only thankful for finance but grateful for all the support and trust they have shown in me to carry out the mammoth task of Master’s program specially during the tough times of pandemic.

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Abstract

Since the dawn of stock market which is said to be started approximately in 17th Century in Amsterdam, one thing which everyone wants to know is the end result of the Option Trading. Option Trading is a very complicated field, where no matter how many no. of parameters or indicators are taken into consideration it can pull the direction and can take even a highly knowledgeable to surprise. Although centuries after centuries, decades after decades still we try to analyse it to make condition under our favour & predict the market. In this paper we have tried a investigative approach to land up an conclusion after analysing a Czech Republic based company listed on Prague Stock Exchange. For analysis we will use the age-old tool of fundamental/financial analysis which will involve various financial ratios taking into consideration the sentiment of the market & company’s nature and investment. We will further try to do technical analysis of the company which will involve use of python programming & will involve the use of machine learning specifically regression & classification (Supervised learning). Technical Analysis is the new age tool evolved in last decade due to advent of programming tool in field of data engineering which have enable the industry to do analysis on large data source which ever not imaginable before by anyone. Technical Analysis has its own requirement and work on certain indicator to get started its analysis, so that we have to looked out for as is Prague Stock Exchange is capable of provide such high rich data for the analysis? In this paper by implementing both the fundamental & technical analysis, we will try to figure the comparison between both the analysis & reach an particular conclusion in two parts-(i)First what are the issues the trader of Czech republic are facing while investing and simultaneously find out how data rich is Prague Stock Exchange & (ii)Secondly -will in future will be really able to predict the market correctly which the Machine learning strategies claim & have huge hype to their name.

Keywords

Option Trading, Financial Analysis, Technical Analysis, Algorithm& Qualitative Analysis, Machin Learning Based Trades Strategies, Regression, Classification, Supervised Learning, Stock Market, Portfolio Rebalancing Performance Indicators, MACD, RSI, CCI, Time Series, Pandas.

JEL Classification

❖ B26: Financial Economics

❖ G11: Portfolio Choice • Investment DecisionsC38: Classification Methods

❖ B27: International Trade and Finance

❖ C15: Statistical Simulation Methods: General

❖ C22: Time-Series Models

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List of program´s codes

Code 1.1 Trading Strategies (II) powered by Machine Learning – Regression………85 Code 1.2 Trading Strategies (III) powered by Machine Learning - Classification………….….…91 Code 1.3 MACD, RSI, CCI………..………...…92 Code 1.4 Trading Strategies (I) Portfolio Re-balancing……….93

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List of abbreviations

MACD Moving average convergence divergence RSI Relative strength index

ADX Average directional movement index KPI Key performance indicator

FXCM Forex Capital Markets ML Machine Learning

API Application programming interface CAGR Compound Annual Growth Rate BAC Back testing

CCI Commodity Channel Index IPO Initial public offering M&A Mergers and acquisitions

SWOT Strengths, Weaknesses, Opportunities, and Threats NPAT Net Profit after Tax

P/E Price-to-earnings ratio

EBITA Earnings before interest, taxes, and amortization CAPEX Capital Expenditure

OHLCV Open-high-low-close

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1. Introduction

Recently discovered options trading within this year. It's been a fun experience and learning something new each time I delve into other topics within the financial trading world. So, this also motivates me to do my thesis in the field of option trading as my work will be turned into my favourite fun time. As I learn options and allow me to dive deep into the world merging between financial and data analysis.

Coming to the thesis, will be an investment analysis of a Czech company listed on Prague Stock Exchange. During this analysis we will try to present we the analysis in two major parts i.e. – our traditional old age 1) Financial Analysis, 2) Secondly, we will make use of latest tools available in python to do the Technical Analysis which will also implement the machine learning as without it the technical analysis is incomplete as this tool are must in the algorithm trading as these deals with the huge data of file for the prediction.

We could have gone with the American companies like Apple or Tesla but as we know the stock exchange company “New York Stock Exchange” or “Nasdaq” are advance and have all the data any trader wishes for; but as being a student of Prague school of Economics situated in Czech Republic, I wanted to discover how the trader in country is dealing with Prague Stock exchange.

We have enough practiced with data of American companies so we will discover the advantages and limitations of trading on Czech Republic companies listed on Prague Stock Exchange. So, keeping all this in mind, we decided on a company named “Česká zbrojovka Group”, because wanted something challenging as this type of company are rarely in interest of investors, so wanted to do the analysis for the company whose data are not so easily available.

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2. Literature Review

Option trading is an vast topic to learn from, so we have to go through some of the paper mentioned below to make sure the fundamentals are solid to tackle our thesis. Investment choices are one of the three main stakes of corporate financial policy in any organization or business. Its importance is also obvious from the wide body of empirical texts and literature available on different aspects of investment judgments.

2.1 Capital Budgeting

Construction of a new data centre or cloud platform or a big investment in an outside endeavour are cases of projects that would need capital budgeting before they are rejected or approved. (Hayes, 2021). According to (Yee, 2006)there are some major and takeaways of capital budgeting such as this process includes examining a project’s cash inflows and outflows to regulate whether the expected return meets a set benchmark. Capital budgeting key approaches contain discounted payback, cash flow, and throughput analyses. Enormously, businesses would chase any projects and all opportunities that improve shareholder value and profit. Inversely, because the amount of money or capital any business has manageable new projects is inadequate, management uses capital budgeting methods to regulate which projects will produce the best return over an applicable period (Segelod, 2002). First set of readings include capital budgeting studies approved and carried out in the developed economies. These comprise studies led in the USA (Lawrence J. Gitman and John R. Forrester, 2014) the UK, Australia (Truong, 2007), Canada (Srivastava, 2006), Spain (Lam, 2007) and Hong Kong (Pike, 2014). The other studies conducted on capital budgeting contains studies from emerging/developing economies. For example, research directed in Malaysia (Kwong, 1986), India (Babu Prabhakara, 1996), Argentina (Pereiro, 2006), South Africa (Correia, 2008) Brazil (De Souza, 2016), Kuwait (AlKulaib, 2016)and Morocco (Baker, 2017)

2.2 The origins and evolution of real options theory Option pricing theory

Fundamentally, option pricing theory delivers an evaluation of a selection's fair value, which buyers include in their strategies (Ganti, 2021). Option Pricing Models are mathematical models that practice certain variables to compute the theoretical value of an option. The theoretical value of an option is an approximation of what an option should be valued using all identified inputs. In other words, option pricing models deliver a reasonable value of an option.

3.Company – ““Česká zbrojovka Group”

Česká Zbrojovka Group is located in Uherský Brod, Czech Republic, it is a manufacturer of firearms products. Its firearms serve military and law enforcement as well as civilian market sectors are accessible globally, with the most significant markets is the United States

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represented 66% share of 2020 revenue, followed by Czech Republic with the 4.8% share, and Europe (excluding Czech Republic) 14% share (CZG, 2021).

The firm is planning to increase its businesses in the US by constructing a new manufacturing unit in Little Rock, Arkansas, US.

3.1 BUSINESS DESCRIPTION

Commonly known as CZG is a firearms producer based in Uherský Brod, Czech Republic. It is started in 1936 and has grown significantly, especially later its 1992 privatization, having extended its manufacturing facilities overseas and currently employing over 2000 workers in the Czech Republic. The group Members include Brno Rifles, Česká zbrojovka a.s, CZ-USA, Dan Wesson, or 4M SYSTEMS.

Figure 1: Product mix, Source-CZG (CZG, 2021)

1. Product:

CZG product collection comprises personal defense, firearms for military and law enforcement, sport shooting, hunting, and other public use. The individual shares of the group’s sales are confidential due to the nature of the product, apart from the military and law enforcement market which contributed around 40% of the combined sales between 2017 and 2019. Last year 374,276 firearms thee sold globally, while shotguns represented 5.3% of total revenues.

2. Geographical breakdown of sales:

CZG Products thee sold in a total of 90 countries internationally in 2019. The highest 50.7% of these revenues thee generated from the United States, 22.9% from the Czech Republic, and 14.0% from the EU (excluding the Czech Republic).

3. Major investment project:

Česká Zbrojovka Group is planning to set a new manufacturing plant in Little Rock, Arkansas, United States. The foremost reason for undertaking the IPO in October 2020 was raising funds for this project. The planned amount ranges from 60.0 million USD to 70.0 USD million, representing approximately 25% and 30% of its 2019 sales revenue. In total, they accumulated CZK 8I2 million at the IPO. According to the group, the unit is set for inaugural as late 2021 with full manufacture capacity reached early in the year after, producing semi-

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automatic and fully automatic firearms, pistols, and employing up to 300 employees in the next five years.

3.2 INDUSTRY OVERVIEW & COMPETITIVE POSITIONING

1. KEY PRODUCTS & MARKETS

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The most important amongst all CZG products are small firearms.

CZG manufactures a wide range of firearms including revolvers, pistols, assault rifles, grenade launchers, submachine guns, sniper rifles, shotguns, and centrefire and rimfire rifles as well as spare parts for firearms, additional accessories, and a wide series of appropriate accessories. These products are intended both for citizens and military and law enforcement use.

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Advantage on small guns.

Regarding the current instability on global markets, the feature of the market for the short/small guns is that it is more constant as the demand is more steadily dispersed over the year in contrast to other gun market sections, to which CZG may produce a benefit between its competitors that are dependent on more unpredictable markets.

2.MARKET DRIVERS

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The USA civilians held half of all guns.

The citizen market section includes hunting, personal defense, sport shooting, and other public use. In 2017, the United States civilian had nearly 46% of firearms. (CZG, 2021). The most inhabited Asian countries, China and India, represent global civilian firearms holdings of 8.3% and 5.8%, respectively.

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Before the pandemic the military and law enforcement section thee anticipated to grow.

According to the BIS Small Arms Market Statement, the military and law enforcement market section will be expected to

(1) increasing demand for law enforcement handguns with a high influence over the next one to five years and

(2) Growth in defense expenditures with a medium effect over the subsequent one to two years and a great impact over the next three to five years. Additionally, an increase in the complete defense expenditure of various countries globally. Worldwide military expenditure is projected to have touched USD 1,922.10 billion in 2019 as most countries start to update their defense abilities.

3. COMPETITIVE POSITION AND COMPETITORS

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CZG engages in a very tough competitive market.

Currently, the civilian market is involved by a huge number of firms. A large competitive force formed after the acquisition by smaller producers, despite having insignificant market shares independently. Consequently, there is huge pressure on successful research

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development activities & aggressive competition on price. Also, given the configuration of the industry and market in general, there is a greater chance of M&A and reformation activities. Main events that happened in that area include:

(1) In June 201, Colt Defense LLC filed for insolvency after losing the agreement to supply to the US Army.

(2) Remington Outdoor Co. in 2018 and 2020 filed for bankruptcy in a response resulting reputation damage and a high drop in sales.

(3) Between 2016 and 2018, Heckler & Koch faced three consecutive years of losses and the auditor's remark suggests that the business might not be feasible in the approaching years.

Presently, Heckler & Koch AG is marketing the main stake of its entity. This proves that even the rank of the pioneers of the business is not constant and after some shock, the business can respond with reformation on a big scale. Between 2013 to 2020, there was at least one M&A noteworthy operation that happened per year.

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CZG should face big as well as small competitors.

Apart from small manufacturers, CZG is still competing with large competitors on the market.

Specifically, we recognized the following competitors: Sturm Ruger & Company Inc, American firearms Brands Inc; Chemring Group PLC; Vista Outdoor Inc; Smith &

Wesson Brands Inc. In contrast to the registered corporations, CZG is holding a reasonable benefit with respect to its prices, products, and financial performance.

(CZG, 2021) However, with increased contact to the US market and burdens to its margins, we assume the position to decline.

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In the US important levels of competition are especially noteworthy.

Apart from small manufacturers, CZG is still competing with large competitors on the market. With respects to the development plans of CZG, the most significant contestants will be the ones working on the US ground – selling especially guns – there are four major names:

(1) Ruger- It sells a huge majority of its guns in the US. The firm mostly focuses on self- defence and hunting/sports shooting.

(2) Smith & Wesson characterizes a noteworthy hindrance for CZG in its efforts of attaining military and law enforcement contracts. S&W manufactured 1.4 million handguns in 2018 and besides self-defence, it is also dynamic in military and law enforcement sections (CZG, 2021). As a corporation with a considerable legacy and some earlier ground-breaking modernizations (Model 19, Model 1 Revolver, .38 Police

& Military revolver), it can characterize a tough competitor.

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(3) Remington and Vista Outdoor- signifies the residual two competitors but they are typically active in the hunting& sport shooting section.

3.3 Market strategy

The CZG tries to increase in penetration of military and law execution markets. The group concentrates especially on opportunities in Western Europe, the United States, and selected markets in Asia in hope of greater advance chances than in the civilian market due to existing political and safety conditions, and improved recognition of products (European, 2021).

In order to fulfil this purpose, the Group promotions its product contribution and intends to strengthen its firearms and accessories sales and marketing labours, including holding presentations and testing measures for particular customers. CZG also employed new senior salespersons to reinforce its position in Germany and Western Europe. To support the attainment of the goal new tender provision department was established in charge of monitoring and evaluating opportunities within the marketplace. (CZG, 2021). CZG collaborates with external government agencies, associates, and specialists in the field and aggressively seeks new cooperation. (CZG, 2021). As specified by CZG, generating progress by growing its existence in the U. S. and the EU is an additional focus of the corporation. CZG strives to establish itself as a top brand in the U.S. by strengthening acknowledgment of its brand by military and law implementation customers, increasing the volume of produced firearms, and broadening the product range. CZG plans to stay with advancing its production facilities in the Czech Republic to raise its production proficiency and improve key developments in order to attain higher organic growth of the group. (CZG, 2021). CZG is also creating a new industrial plant in Little Rock, Arkansas (USA) with the promise of growing production volume and broadening possibilities such as competition in more tender processes with U.S. law enforcement and military customs as its products will be qualified for attention under the Buy America Laws. The group also collaborates with other corporations, such as HM Arzenál which has been approved a license to produce and sell certain types of CZ handguns.

General, CZG progresses wider portfolio of products with further focus on optics and optoelectronics and strategies to deliver services such as field training programs for law enforcement agencies, etc. Growth through opportunistic acquisitions.

CZG pursues opportunistic achievements primarily amongst its competitors in the field, largely with important sales and knowledge with military and law and enforcement clients. Due to likely changes in the requirements of its customers CZG also emphasizes on attainments of producers and designers of optics and optoelectronics. The ammunition producers and designers may also come to attention. CZG finds the perfect value of possible acquisition goals to be among 50 to 300 million euros, yet the worth of the enterprise itself is extremely reliant on the applicable market and its location there. (CZG, 2021) To confirm a positive level of transparency and a well-organized approach to processes the group formed an acquisition board.

3.4 Financial, operational and Market

Most of the weapons traded by CZG comprise handguns or revolvers which make up approximately 62 %, the segment of long guns is only around 38 % in 2019. In the initial 9

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months of 2020, the part of sold handguns was augmented by about 2 % (Technology, 2021).

As CZG´s main competence lies in the design and detailed machining and production of weapons, the maximum of the production of planned accessories has been outsourced by external suppliers mainly from the Czech Republic, the Socialist Republic of Vietnam, the People's Republic of China, and the Republic of Korea. CZG has launched some new products to the market this year (2020) counting the CZ P-10 Micro pistol, the CZ TS 2 sport pistol series, three new CZ 457 rimfire rifles, and other products projected for Military and Law Enforcement (noviny, 2021).

3.5 Porter’s 5 forces

Porter’s Five Forces analysis is a framework that assistances in examining the level of opposition and competition within a certain industry. It is particularly useful when opening a new business. Rendering to Porter’s Five Forces framework, competitiveness does not only come from opponents. Reasonably, the state of rivalry in an industry be contingent on five basic forces:

1. Threat of new entrants

2. Bargaining power of the of suppliers 3. Bargaining power of the of buyers

4. Threat of substitute products or services 5. Existing industry rivalry

Figure 2:Porter's 5 forces model

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New participants in a business bring the desire to gain market share and new capacity. The significance of the threat depends on the obstructions to enter a certain business. The complex these fences are to entry, the lesser the threat for existing players. This force analyses how much power and control a company’s merchant has over the potential to upsurge its prices or to decline the quality of purchased goods or services, which in turn would lothe a production’s profitability potential. Consumers have a lot of power when there exist numerous of them and when the consumers have many alternatives to buy from. Furthermore, it should be easy for consumers to switch from one business to another. Buying power is little however when consumers purchase products in small volumes, act individually and when the supplier’s product is very dissimilar from any of its opponents. The internet has endorsed consumers to become more knowledgeable and therefore more empowered. Consumers can easily match prices online, get info about an extensive variety of goods and services, and get access to offers from other companies rapidly. Companies can take processes to decrease buyer power by differentiating their products and services or by implementing loyalty programs. The last force of Porter’s Five Forces inspects how strong the current competition is in the market, which is determined by the number of current opponents and what each opponent is capable of doing.

A good sign of viable rivalry is the concentration ratio of an industry. The lothe this portion, the stronger rivalry will probably be. When competition is high, competitors are expected to be actively involved in price and advertising wars, which can upset a business’s bottom line. In accumulation, competition will be stronger when barriers to exit are high, compelling companies to remain in the industry even though profit margins are decreasing. These obstacles to exit can for example be high fixed costs and long-term loan agreements.

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Threat of new entrants: Low

We consider the threat of new entrants is low. Firstly, loads of financial expenditures are required to attain and keep plant and equipment. We also need to add investments that might be required in the future. Secondly, expenditure on research and development is also moderately high as it is essential to innovate products to be able to contest with other businesses. Furthermore, the barrier of entry might be robust connections of corporations with markets and suppliers, which means that other companies can barely break in. For companies like firearms, it is also certain to have expert labour and machinery which is another high expenditure. Additionally, a strong force of loyalty of buyers comes as causing new entrants’

difficulties with entering the market. Customers who trust the brand are more likely to favour that firm than small unfamiliar enterprises. Due to the risky nature of the products, We consider regulations that firms need to fulfil as the major barrier. To overcome this barrier, the only way is they would not contend alone, they should undergo an acquisition or connect into a group by a bigger corporation. We expect that maybe there will be some small businesses entering the market, but we also assume they will be formed by some holdings.

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Exiting industry rivalry: High

Firearms businesses comply with a lot of restrictions and regulations, which is creating a high pressure that results in high competition. Only the firms that abide by the guidelines can compete and there are only some of them that accomplish the terms, competition is hard. The only way to win over rivalries is to offer products of high quality and at low prices.

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Bargaining power of suppliers: Moderate

Businesses operating in the defense sector are manufacturing relatively alike products, which means, that suppliers can find other buyers in the market. As a group, Zbrojovka has a slightly good position than businesses that work alone. Zbrojovka also works on many markets and even during the COVID-19 pandemic, it was able to keep production up. They buy products and commodities from many suppliers so thanks to sourcing they can alleviate the risk of not being able to reduce the influence of supplier power.

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Bargaining power of buyers: High

The US has only one main buyer in the defense industry – the Department of Defense (DoD) that contains the US military and law enforcement. DoD is the only foremost buyer it can effortlessly force prices down and demand only superior products. European market military is also in a similar position and if competition is high, firms are likely to decrease their price so they can get higher revenue and win the contract.

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Threat of substitute products or services: Low

Guns are a very precise product that is not easy to substitute. Due to patented products and high entry barriers, there are just a few quality alternatives. Similarly, there are just a few replacements for guns in general. If we take guns as a means of self-protection for the ordinary users, they can be replaced by tactical or pens tasers. On the other hand, it is practically impossible to substitute guns in military or law enforcement, as they are an important part of their use. For this reason, the threat of possible alternates can be considered as low.

3.6 SWOT analysis

SWOT analysis is a method for measuring the competition, performance, risk, and potential of a business, as well as part of a business such as a division or product line, an industry, or other entity (K, 2021)

Strengths define what a business excels at and what distinguishes it from the race: a loyal customer base, a strong brand, unique technology, a strong balance sheet, and so on. For instance, a hedge fund may have advanced a proprietary trading plan that returns market- beating outcomes. It must then choose how to use those outcomes to appeal to new shareholders.

Weaknesses stop a business from executing at its optimal level. They are ranges where the industry needs an improvement to continue competitive: higher-than-average turnover, a weak brand, an inadequate supply chain, high levels of debt, or lack of capital.

Opportunities denote positive external aspects that could give an association a competitive gain. For instance, if a country cuts tariffs, a car company can distribute its cars into a new marketplace, increasing transactions and market share.

Threats refer to aspects that have the potential to harm a business. For instance, a drought is a risk to a wheat-producing firm, as it may abolish or decrease the crop yield.

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STRENGTHS

❖ Strong financial position

❖ Vertical integration of production process

❖ Experienced management loyal to the company

❖ Exporter on a global scale with long history

❖ Diversification of products. market segments and geography

❖ High-quality price-efficient products WEAKNESSES

❖ Highly regulated market

❖ Strong dependence on one production plant in Uherský Brod

❖ Potentially smaller base of investors due to the nature of the product

❖ Uncertainly in terms of winning public tenders OPPORTUNITIES

❖ Active M&A strategy

❖ Ambition to increase share of military & law enforcement sales

❖ Growth opportunities thanks to planned expansion to the US THREATS

❖ Exchange rate volatility

❖ Further delays in the Little Rock project and the expansion in the US

❖ Shortage of skilled labour

❖ Highly competitive market

3.7 Business Cycle

Threats refer to aspects, subsequently, the last recession in 2009 American economy was in a development stage for almost eleven years, except the Covid-19 epidemic formed a recession in February 2020. As Česká Zbrojovka Group SE has 69,5% of revenues in the United States the influence of the alteration in the business cycle is prime on the US market. (CZG, 2021).

Overall, according to the stockholders, defense stocks are a border against economic depression, which means that stocks of companies functioning within the defensive industry, which is securely connected with the gun industry, should act counter-cyclical.

Despite the adverse effect of the Covid-19 epidemic on much of the world, CZG succeeded to adjust to the unanticipated state positively and in the first six months of 2020 listed record working performance. But, Covid-19 is not the only thing that affected the market in the US.

Countrywide protests thee also the cause why the FBI managed 3,7 million firearm background checks in March and noted a peak of 3,9 million background checks in June. If we take a closer look at the consumers from law and military enforcement groups protected by the US Department of Defence, we can say that DoD is confirming that there will be slight interruptions amidst the epidemics and at least a serious defense problem will be integral.

Though supply chains might be interrupted, this problem can be varied, like in the case of CZG.

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As Guns and Ammunitions manufacturing in the US is part of the serious infrastructure, profits from this business are likely to increase by 7,5% in 2020. To safeguard demand for guns will be satisfied, services and suppliers stay open even throughout lockdowns. According to the Defense business view after five years of development, we can imagine spending’s flattening.

Another reason that might distress the course of action in defense business is the outcome of the US election. Inclusive, constitutionalists do not support weapons spending too much and they rather emphasize other things. Even though the main influence of this event cannot be seen previous to 2022, it is convinced that weapons accounts will be cut at least to a certain level as the budget burden arises and money is required to fund job creation.

The condition in Europe is very close to the condition in the US. According to the Aerospace and Defense Industries Association of Europe (ASD) Defense industry is one of the areas that succeed as planned sectors in their Regaining Plan. Its main anxiety is to assure the defense sector will continue working throughout the crisis and improve when the epidemic is over.

Short-term goals are to hold functionality and steadiness, prevent the removal of employees and guarantee financial constancy. Long-term goals are primarily associated with the funding of research and development or upgrade of the value chain.

3.8 COMPETITORS

Even though CZG is functioning within the Aerospace and Defence Industry its entrants are also from the Recreational Products industry. The diagram below displays just a small share of competitors grouped into 3 main groups. The first group comprises just hunting and sport gunmakers. Those gunmakers also classically produce ammunition required for the selected gun type they manufacture, but only as a side product. The second group comprises companies that emphasize hunting and sport guns and guns for military and law enforcement. The third group comprises companies that function on all possible markets and firms that concentrate solely on ammunition manufacturing.

This competition seems clear how competitors like Ruger and S&W increased their sales in FY 2020, where the growth rate for Ruger is 53.4% and S&W is 118.7%, in comparison with CZG which has an only growth rate of 9.1% in the same financial year. The Group is exposed to the risk of inadequate future research and resources as well as the risk of inadequate future R&D resources. Errors or flaws in new versions of its products or the possibility that the Group will not be able to forecast new versions in a timely manner. Technological developments, both of which may delay the capability of the Group to sell its products or give rise to post-sales obligations, may result in costs that the Group may not be able to recover from. 2) New investments to increase sales and to meet the anticipated demand CZG had a problem of volume constrain due to surge in demand which encouraged the Group to invest between

$60m to $70m in the Little Rock project to placate this increase. This step gave us the inspiration the expect an increase in sales growth rate in comparison to the industry average between 2021 to 2023. However, this investment is incorporated with the rise of CAPEX which will lead to a slow rise in NPAT, as a result, we expect the return on equity may decrease in FY 2021 to 15% in comparison to 22% in 2019.

3.9 Environment, Social and Governance (ESG)

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This segment should comprise information on how the business manages the dealings related to Ecological, Social and, Authority. Below are some illustrations within these three ranges that can have a long-term impact on the business’s short- and long-term scenarios. Environmental – how is the business working towards the preservation of the natural world? This can comprise climate transformation and, carbon releases, air and water pollution, energy efficiency, waste management and many more.

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Social

– how does the business consider persons and relations? This can comprise community relations, gender and diversity, human rights, labour standards, consumer satisfaction, and employee engagement.

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Governance

– what are the ethics for running the business? This can comprise succession planning, board composition, audit committee structure, leadership experience, executive compensation, and bribery and corruption strategies.

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Environmental-

CZG’s one of main aims in R&D is to strive for sustainability, in hand with production mechanization and modernization, and operations digitalization.

The Business’s SHE (Safety, Health, Environment) strategy contains an obligation not only to conserve protection but also to the recognition of possible OSH risks, management of workers’ environmental effects, and open and clear communication with investors and employees alike. The right functioning of the executed SHE system was established in 2019, again, by the absence of any fears to any of the environmental elements that would stem from the actions of Česká zbrojovka, a. s. Česká zbrojovka, a.

s., received an unrestricted distribution of production authorizations for the emission trading period from 2013 to 2020. The emission authorization distribution covers the capacity of greenhouse gas emissions formed by the Business’s operations with around 1,000 permits lasting unused on the Business’s account at the end of each year. The size of emissions is balanced to the consumption of natural gas in the Business’s boiler room. Wastewater and rainwater, which the Business uses groundwater for its industrial courses, are treated at the Business’s biological handling plant and are then free in agreement with the appropriate permit into a definite channel. Wastewater from the Metallurgy procedure passes through an initial neutralization action. Despite the Firm’s increasing manufacture, the volume of harmful leftover remains constant over the long term, due to the high-degree categorization of the produced waste. The volume of scrap metal is balanced to production volumes. Česká zbrojovka, a. s., is involved in waste assortment schemes EKO-KOM, REMA System and Ekolamp. This participation makes the schemes reachable also to the Corporation’s workers.

3.10 Corporate Governance

Corporate governance fundamentally contains balancing the interests of an industry's many stakeholders, such as shareholders, customers, senior management executives, financiers, suppliers, the government, and the community (James, 2021). Meanwhile, corporate governance also delivers the framework for achieving a company's objectives, it includes practically every sphere of management, from internal controls and action, plans to corporate disclosure and performance measurement (James, 2021)

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Corporations in the world have traditionally adopted voluntary corporate governance by creating their own codes of business conduct. The corporate governance idea has advanced from debates on its significance to how best to safeguard investors’ interests while bearing in mind the interests of other stakeholders (e.g., customers, suppliers, employees, creditors).

Corporate governance discourses the agency issues elevated by the parting of control and ownership of corporations.

Communicating a company's corporate governance is an important component of investor relations and community. On Apple Inc.'s investor relations site, for instance, the business summaries its executive team— its corporate leadership, its corporate governance, and its board of directors, including its governance documents and committee charters, such as stock ownership guidelines, by-laws, and articles of incorporation (Apple, 2021). For many stockholders, it is not sufficient for a company to purely be profitable; it also desires to validate good corporate citizenship through ethical behaviour, environmental awareness, and sound corporate governance practices (James, 2021).

Corporate governance is the process by which a corporation is monitored and managed. It controls a power-sharing relationship between corporation executives and investors by providing a structure through which, the purposes are defined, policies and procedures are conventional to defend achievement of these objectives, and performance is monitored (Razaee, 2004). Corporate governance specifies the division of responsibilities and authorities of different applicants in the corporation. Under effective corporate governance, management is responsible to the board of directors and the board of directors is anstheable to the shareholders with the determination of generating shareholder value. Three important aspects of corporate governance are shareholder, fiduciary, and stakeholder. Corporate governance structure contains both external and internal mechanisms for monitoring and managing corporate activities to upsurge shareholder value. Corporate governance is observed as connections among participants in the oversight function (audit committee and the board of directors), the audit function (internal auditors), the managerial function (management), the assurance function (external auditors), the advisory function (financial advisors, legal counsels), the compliance function (the SEC, regulators, standard setters, organized stock exchanges), and the monitoring function (investors, financial analysts, creditors, and other stakeholders) in the governance system of corporations (Razaee, 2004).

3.11 MITIGATION

Emphasis on creating contracts with military and industries rather than end customers. RR 2- EU action plan to implement control over the gun market [MEDIUM; HIGH]: The EU is planning to tackle a problem of firearms trading by suggesting a 2020-2025 EU action plan on weapons trafficking, which will bound the firearm market and impose stricter control.

MITIGATION: Follow up with the legislation and apply precise gun control/identification on the produced products. RR 3- Partial limits of firearms in CZ [HIGH; MEDIUM]: In 2022 will come changes to the Czech Republic legal outline, in the stance of amendments to the legal context governing firearms, which will bound the R-2 category weapons and excessive-capacity magazines availability, as well as supplementary changes. Mitigation: regulate to the new chances earlier, change the product line and effort on the open sale channels.

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4. METHODOLOGY

Our method is very clear. We will make use of traditional methods of financial analysis and also make use of current techniques making use of Python. As the traditional method is common and has now ceased to expand so we will be covering all the techniques of it but with technical analysis there is no stagnancy now, so each day new concepts are coming up to showcase their ability.

The whole financial analysis will be done using Companies officially available yearly financial statement but the technical analysis Czech selected companies cannot be carried out due to following reason:

1)Low Volatility as it is Over the Counter based so most of it share are sold as preferred share to the know entity.

2) If we even try to carry out its technical analysis it will cause slippage,

3) The Prague Stock Exchange deals in certificates & Bonds but the data required for technical analysis is derivation or option chain.

So, this all factors force us to use - US dollar currency data to showcase technical analysis in Machine Learning based strategy while in Portfolio based, I have taken “Tech giants of USA market” to back test the strategies.

Also, I recently discovered an article called Technical Analysis — Options Trading for Beginners by Option Alpha (Alpha, 2021). The host mentions three technical analysis indicators that are perfect for student like me. These indicators include (Investopedia, 2021)MACD, CCi and RSI. Here is the only scenario where we could implement it for Czech company, we made a decision to program them into Python to further understand how these indicators work. It mentions that each one three should be employed in conjunction so as to determine what direction the stock goes. Apart from indicators have made use of various Machine Learning libraries specifically from Supervised learning like Regression &

Classification.

So, we favour creating a rough draft of what we want before we start coding. we came up with a year’s worth of stock data. So, we only want data that's a year’s worth from the present date. We will use datetime and “pandas_datareader” (pandas-datareader, 2021)for this. We will also act and use a technical analysis library which will do all the calculations on behalf of us, called ta. Then as a plus, we will be able to also use matplotlib (MATPLOT, 2021) to visualize all this data.

4.1 Data Collection

The first step of performing any analysis or building any financial or algorithmic trading system is to get data.

❖

Yahoo Finance (finance, 2021)

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Typically, Yahoo Finance has been the best source of getting data. So, for example, if we want to get stock data for any stock, we will go and search for that stock. In the Yahoo finance rate, we will click on the ticker and then go to the historical data section and try to see what was the open, high, low, close.

We just close and volume information for a given stock rate. If one wants to get data for more than one month, then we will go and change the time period ahead and we will download the data in a CSV and we'll get that.

This is one way of getting data. However, as we can figure out, this is not a very efficient way because we have to open the website. We will have to search for the ticker, then we'll have to wait for the page to be rendered. Then we will have to decide what time period we want to, we know, choose and then download the data. The ticker for the company being analysed is

”CZG.PR”

It's not a very optimum way and using this method, we can only do one stock at a time. So, we want a programmatic way to extract this data and this is where APIs come in really handy.

There are a lot of Python packages that provide we API and what is API? So just think of API as a pipeline rate, a pipeline that is not visible. So, for example, if we create a website, one way to access that website is to type in the UI trail and hit in there and then wait for the Web page to be rendered and then get the information right. However, some websites provide just think of it as a pipeline by which we can connect to that pipe and get the data using a code or a script Panda's data reader had been the most preferred source of getting data from Yahoo! Finance and a number of sources using APIs. However, Panda's data that has been now rendered useless because it had stopped supporting Yahoo! Finance. So, we cannot get Yahoo Finance data from Pandora anymore. There had been significant changes in the Yahoo Finance API framework as a result, Panda's data that is no longer supporting Yahoo! Finance data on it.

However, now we have a better source to get data from Yahoo finance. So why Yahoo finance?

Is a new library that was created, it was created as a fix to kind of get around the problems we cannot get? But now this library has become pretty much the most favoured library to get data from Yahoo!

These are the requirements that we need-We want the Python version to be more than two point seven or above.

❖

Other sources -Financialmodelingprep.com

– Excellent resource to get stock information and financial information of US stocks. Also provides key ratios, DCF etc. (modeling, 2021)

❖

Stockrow.com

(stockrow, 2021)– Provides financial information, key stats, historical data on ratios etc. Also provides a very good screener

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5. Analysis and Results

We will carry out two type of analysis here, i.e. : 1)Fundamental/Financial Analysis

2)Technical Analysis

5.1 Financial analysis

Here various financial parameters & ratios has been discussed. For reference in annex required data like balance sheet, income model and other data has been attached.

1. Profitability and its potential growth

In Most of the analysing years, the profitability ratios of the CZG thee higher in comparison with the industry median. Though, it can be said that all the ratios had an increasing growth.

From 2016 to 2019 all the ratios thee altered by 1-2% on average. The maximum values thee mostly touched in 2017, then it somewhat reduced, and after that in 2019 again improved for a little. In 2019, the EBITA margin touched 23,2% which is almost 13% higher than the manufacturing median. Furthermore, the EBITA margin is anticipated to reach 20.4% in FY 2020 and FY 2021 on average which will be less than FY 2019 by 3.2%. Also, CZG touched 40,2% of gross margin in 2019, however, this value was higher in 2017 and 2016. Clearly, in 2020 such factors as the COVID crisis will impact a lot of business operations. Since pandemic is impulsive and extraordinary, the estimation of the impact of COVID could be challenging.

However, in our analysis we do not assume the big effect of COVID on CZG, cause the industry where the company is functioning has no important changes because of COVID crises.

2. DuPont analysis

CZG has the same inclination as with profitability ratios because all the values which are associated with DuPont analysis thee higher than the industry median. For example, there was a progressively increase in the return on equity of the firm, which finally touched to 21,6% in 2019, which is almost 3 times higher than the average industry value. (CZG, 2021). This ratio evidently shows how well the firm is functioning with the equity to create profit.

3. Liquidity (investopedia, 2021)

Concerning liquidity, the firm also displayed a good performance. There thee some undesirable sides as the gradual decrease of times interest earned (interest coverage ratio). It declined by almost 6% from 17,6% in 2016 to 11,3% in 2019 (CZG, 2021). It is significant to mention that despite this 4- years decrease, the ratio is still higher than the average industry one, however, if the tendency will continue the same, it can be lothe in the next few years. At the same time, there was a growth in the cash cycle (in days), and in this case, the value became minor than the industry average with respect to around 9 days (finance, 2021). To recover from this

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situation, businesses can ask consumers to pay sooner and inspire them by providing discounts for advanced payments or creating a special offer that will speed up the payment method.

4. Leverage (investopedia, 2021)

Analyzing the leverage values, it was found that the CZG has a vast percentage of debt to total capital in comparison with the average value in the industry. In 2019, this ratio was 39,7%

which is almost 20 times bigger than the average one in the industry (CZG, 2021). Also, the ratio of debt to equity is pointedly higher than the average industry one, this rate we expect to be 58% in FY 2021 which displays a little improvement. But companies should control the debt structure to avoid some problems in the future.

5. ^Operating

It is significant to mention that the value which shows the average account receivables days is 3 times smaller than the industry medium, and in 2019 it was almost 53 days. (CZG, 2021). It is a positive side because it means that consumers of CZG are paying quicker their bills in comparison with other firms. Also, during the analysing period, it was found that the revenue per employee gradually grew, which means that the firm has a chance in the future to increase the operating and surge the profit.

6. EBITA forecasting and potential profitability

During our analysis, we made an estimate for the EBITA of the CZG, which displayed a steady development in the next few years. Based on our expectations, EBITA in 2023 will be around 1,623,290 CZK (CZG, 2021). As for gross margin, which is advanced than the industry average value, but it varied during analysing period and reached 40,2% in 2019 (finance, 2021). We also assume that the gross margin will rise, and it already has potential for future growth.

7. Forecasting cash flow-

To predict the future cash-flow statement of the firm for the next 4 years, we decided to choose one of the values which will be the benchmark and will be the key value to compare former years and estimate future years. In our case, the benchmark is the sales of the firm. For each item in the cash flow statement, we projected how much each value is out of sales and then calculated the average rate for the analysing period. After that, we multiplied this average number for predicted sales of 2020 to see how much each item will be. We used the same methods to estimate forecasted value for the next years.

8. Macroanalysis of the USA, EU and the CR: forecasting inflation

Despite the fact, that year 2020 brought one of the biggest crises for the economy all over the world, we do not expect that it will meaningfully impact the market in the relation to CZG. As for the macro analysis of the USA, the calculations displayed that the inflation is expected to be around 2%. It will reach the highest value of 2,765% in 2021, and then will gradually go down by 2,093 in 2022 (finance, 2021). Concerning conditions in the European Union, the inflation rate will be less than 2%, keeping on a level around 1,5% (exchange, 2021). The Czech

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inflation rate is expected to be higher in 2020 – 3,2%, but after that year it will go down, having the target of 2% annual inflation (finance, 2021).

9. Macroanalysis of the USA, EU and the CR: forecasting of potential growth

Even though the COVID crises in 2020 did not impact a lot to the expected inflation and the industry where the CZG functions, it significantly impacted the growth rate. During the macroeconomic analysis of the USA, it was found that the growth rate of 2020 is expected to be negative: -4,3% (finance, 2021). Though, it will stabilize in 2021 and become around 3,1%.

After that, the progress will somewhat decrease and will be around 2% in the next few years.

Based on our prediction model, the condition with the growth rate in the European Union will be worse in comparison with the USA. By 2020, the European growth rate is expected to be - 7,6% (exchange, 2021). Despite this fact, this year is going to be so worst one, after 2020 - the situation will recover, and the growth rate will return to 5,04% in 2021 and 3,31% in 2022. The situation in the Czech Republic with the growth rate has the same tendency as the previous ones. The growth rate of 2020 is anticipated to be -6,5%, in 2021 – 5,1% and 4,3% in 2022 (exchange, 2021).

Our target price of 215.77 CZK was the weighted average of a combination of intrinsic and relative valuation procedures including the residual income model [30%], and relative valuation [70%] (exchange, 2021).

10. Residual Income Model

Our Residual Income model determined a target price of CZK 91.5 per share, by using the estimated cost of capital of 2.65%, Terminal growth rate of 2.49% (CZG, 2021). We focused on our model to determine the targeted price using four years of estimation. Residual income represents the excess return that can be produced by the firm’s invested capital above the cost of capital itself and was calculated by forecasting cash earnings and deducting capital charges by multiplying the cost of equity by the book value of equity in each period. NPAT: we estimated NPAT based on the growth of sales which followed the average growth of the Global firearm market. Though, we expect that the firm’s growth will be increased faster than the average due to the new investment of the business in the little Rock factory which will increase the sales. Therefore, we expect the sales growth will be 12.27% in FY 2021, 12.6% in FY 2022, and 12.9% in FY 2023.

❖ Residual Income

:

Therefore, we expect the Annual capital charges thee calculated by applying a cost of equity of 2.54% and 3.21%, forecast and terminal respectively. It was then derived for each period by subtracting each year’s capital charge from NPAT. The terminal value of residual income was estimated using the perpetuity growth formula assuming a terminal growth rate of 2.49%. By dividing the implied equity value of the firm by 29840 m the number of shares outstanding, we arrived at an equity valuation of CZK 91.5 per share (CZG, 2021).

❖ Relative valuation: Our multiples analysis yielded a relative valuation of CZK 295.78 per share derived from analysis of P/E, EV/EBITDA, and EV/Sales

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multiples of the comparable set. Sturm, Ruger & Co., Inc., Smith & Wesson Brands, Inc., and Vista Outdoor Inc. thee selected as suitable comparable given the fairly homogenous operating models and capital structures. CZG trades at a forward P/E of 11.48 to the comparable set median of 7.3x which implies a share price of CZG 179.6. EV/EBITDA was given 45% weighting, EV/EBITDA is estimated to be 7.39x to the comparable set median of 4.85x which implies a share price of CZG 98.09.

EV/Sales was given 45% weighting, EV/Sales is estimated to be 1.71x to the comparable set median of 2x which implies a share price of CZG 399.41. (CZG, 2021)

11. INVESTMENT SUMMARY

The business is aiming to expand its market in the US, thus exchanging higher customs duties and transportation costs for more personnel costs. Though, there are some key factors undesirably affecting the overall share price as well as the growth. Initially, Biden’s administration brings a substantial risk of larger firearms control and regulation, whereas the uncertainties thereof will drive the demand upwards, CZG presently lacks adequate capacity to satisfy more demands. Furthermore, the opening of the production plant in Little Rock is expected to be delayed while putting additional costs in a new plan, which CZG has no experience with, irrespective of the additional difficulties and risks inflicted upon by the worldwide COVID- 19 pandemic. Expanding through military contracts is not without difficulties, that CZG as a business without an adequate track record in the field outside the Czech Republic will struggle to overcome.

1. BIDEN’ S PROMISES OF STRICTER GUN CONTROL LOOM AHEAD

❖

President Biden and gun violence opposition.

In the 1990s, President Biden was the important character behind reforms that thee passed, for instance- Brady Handgun Violence Prevention Act in 1993, creating the background checks system, the ban of 10- years on attack weapons, and high-capacity magazines, active between 1994 and 2004. Also, in the Sandy Hook Elementary School shooting case of 2012, the Obama-Biden direction took a number of decisions, including tightening the alleged “gun show loophole,” expanding funding for mental health facilities, and increasing the number of records in the background check system.

❖ Biden’s present platform contains a number of actual measures.

These include recreating the 1994 ban on high-capacity magazines and assault weapons, holding gun producers responsible for their products, or putting the US on the track to safeguarding that 100% of sold weapons are smart handguns, all of which affect serious harm to CZG’s existing business plan. Biden’s upcoming path towards limiting firearm sales could be missing an outdated opponent of such efforts – specifically the impact of the National Rifle Association, because of its financial struggles and continuing legal proceedings. The new guideline could really hamper the civilian gun market in CZG’s major export country and at the same time put the burden on research & development, specifically in the smart guns division.

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❖

Risks of stricter control move sales higher.

Since 2000, there have been three significant growths in the sales of guns. the Sandy Hook Elementary School shooting in 2013 resulted in many new stricter regulations of gun control, the risks of which moved the sales of both long-guns and handguns to then unexpected heights. Since Obama’s first term the capacity of trade in the gun business grew gradually and touched its second significant height before the 2016 election in anticipation of the government of Hillary Clinton and further restrictions. The re- awakening of the Black Lives Matter movement, fears of the pandemic, social unrest, and together the expectation of the presidential election all resulted in never before seen demand for firearms.

❖

High Public support for gun control.

In the US 57% of citizens want strict gun laws. Freshly, there has been a significant change in the first-time demographic of buyers which now comprises more public who conventionally oppose guns.

However, the alteration in preferences is not important as five million new gun holders denote only 2% of the weng US population; thus, support for gun control remains high.

❖

Increased alertness of deaths by gun suicides could added public opinion.

Public support for gun control is mainly affected by the occurrence of mass shootings, the COVID-19 effects could affect it in a different way. In 2020 the highest rates of suicide and depression recorded, suicide prevention associated with gun control is becoming ever- frequently.

2. THE LITTLE ROCK PROJECT IS LIKELY TO ATTRACT DELAYS AND FURTHER COSTS

❖

CZG has inadequate experience in structuring a new production facility.

For over 80 years, the firm’s main production site in Uherský Brod has been in process, and its global expansion has been determined through either spreading the production volume in Uherský Brod, or the acquisition of new organizations. CZG has almost no experience of this scale of developing a project from zero. So, delays and additional costs both are to be anticipated.

❖

Further delay to be expected in opening.

Investment in the American market is a major expenditure and the main reason for conducting the IPO. According to CZG, In 2021the plant in Little Rock is set for opening with full manufacture capacity.

HoweverKomerční banka reports anticipated that full operation capacity and opening a full year later. Therefore, we assume the opening to be planned for 2023. (Komerční banka, 2020)

❖

The pandemic also affects in shortage of labour and materials.

Factories and mines in the United States thee closed during the first wave of the COVID-19 pandemic. An acute shortage of ammunition in all of the United States due to the abnormal demand for firearms. Among all occupations, construction workers

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had the highest rate of infections. Despite the continuing circulation of vaccines, the growth of the Little Rock manufacturing plant could be more delayed due to a shortage of labor or materials.

3.

EXPANSION INTO MILITARY WILL BE DIFFICULT

❖

Due to the pandemic Military budgets worldwide are expected to be hit.

In most advanced countries, military expenditure will likely be side-tracked in service of austerity measures, as is happening in the Czech Republic. On one hand, authorities say that worldwide armed tension is expected to occur in the future, mainly due to conflict becoming more common for resolving conflicts, in contrast to a dialogue.

In contrast, it is unlikely to take place in Europe or in the US where CZG supplies most of its firearms.

❖

Effective delivery is another problem with cancellations and postponement.

As noted by Meopta (a Czech optical devices manufacturer), orders can sometimes be canceled or postponed, it claims that despite its growing sales curtailing from the military section, it is still below the mark precisely due to cancellations and postponements. Additionally, risk arises from gaining the obligatory certification, as experienced in the case of the failed supply of ballistic vests.

❖

Refining its standing in the field through the acquisition of Colt can prove problematic.

In November 2020, CZG declared its time-limited individuality for leading due diligence to obtain a 100% stake at Colt Holding LLC, an American firearms manufacturer founded in 1855. One of the inspiring factors for the attainment is Colt’s track record in the military and law enforcement section.

We distributed a sell reference on CZG. Our estimate is based o a 70%/30% blend of a residual income model and a relative valuation analysis. Our recommendation is based on the analysis of the firearm market and the firm financial position. The aggressive competition due to the new technology and new innovations are being continuously developed by the small firearms business. The use of non -traditional resources, such as polymers, greater use of electronics for monitoring and control, the application of modularity in the design of guns, improved laser targeting systems, and the mechanization of the manufacturing process are significant current trends in the small firearms industry. CZG spent severely on R&F to survive with the fast development in the industry as we mentioned above.

5.2 Technical Analysis

1. What's technical analysis and what's the goal of technical analysis?

We use historical price and volume data to partly forecast future prices and future price directions. We try to find patterns and trends in financial markets and the goal is to exploit those patterns, to make abnormal profits and returns, and therefore to use a commonly used for our index rating and to flag rhythmic trading.