The projected fair value for WEILONG Delicious Global Holdings is HK$7.69 based on 2 Stage Free Cash Flow to Equity
WEILONG Delicious Global Holdings' HK$5.66 share price signals that it might be 26% undervalued
The CN¥7.53 analyst price target for 9985 is 2.0% less than our estimate of fair value
Does the May share price for WEILONG Delicious Global Holdings Ltd (HKG:9985) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Is WEILONG Delicious Global Holdings Fairly Valued?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF (CN¥, Millions)
CN¥845.6m
CN¥829.3m
CN¥823.4m
CN¥824.7m
CN¥830.9m
CN¥840.6m
CN¥852.9m
CN¥867.2m
CN¥882.9m
CN¥899.8m
Growth Rate Estimate Source
Est @ -3.67%
Est @ -1.93%
Est @ -0.70%
Est @ 0.15%
Est @ 0.75%
Est @ 1.17%
Est @ 1.46%
Est @ 1.67%
Est @ 1.81%
Est @ 1.91%
Present Value (CN¥, Millions) Discounted @ 6.7%
CN¥793
CN¥729
CN¥679
CN¥637
CN¥602
CN¥571
CN¥543
CN¥518
CN¥494
CN¥472
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥6.0b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.7%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥20b÷ ( 1 + 6.7%)10= CN¥11b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥17b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of HK$5.7, the company appears a touch undervalued at a 26% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at WEILONG Delicious Global Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.7%, which is based on a levered beta of 0.800. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for WEILONG Delicious Global Holdings
Strength
Earnings growth over the past year exceeded the industry.
Debt is not viewed as a risk.
Dividends are covered by earnings and cash flows.
Dividend information for 9985.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Food market.
Opportunity
Annual earnings are forecast to grow faster than the Hong Kong market.
Good value based on P/E ratio and estimated fair value.
Threat
Revenue is forecast to grow slower than 20% per year.
What else are analysts forecasting for 9985?
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For WEILONG Delicious Global Holdings, there are three essential items you should consider:
Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with WEILONG Delicious Global Holdings , and understanding this should be part of your investment process.
Future Earnings: How does 9985's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SEHK every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
主要见解
WEILONG Delicious Global Holdings的预计公允价值为HK$7.69,基于两阶段自由现金流至股权
WEILONG Delicious Global Holdings的HK$5.66股价表明其可能被低估了26%。
9985的CN¥7.53分析师目标价比我们的公允价值估计低2.0%。
WEILONG Delicious Global Holdings Ltd (HKG:9985) 5月份的股价反映出它真正价值吗?今天,我们将通过预测其未来现金流并将它们打折到今天的价值来估计该股票的内在价值。达成这一目标的一种方法是使用贴现现金流量(DCF)模型。难以置信,跟随我们的示例,这并不太难!
我们要指出,折现现金流最重要的输入是折现率和实际现金流。如果您不同意这些结果,请自行计算并修改假设。DCF模型还没有考虑到行业可能的周期性或公司未来资本需求,因此并不能全面展示公司的潜在绩效。鉴于我们正在考虑WEILONG Delicious Global Holdings作为潜在股东,因此使用股本成本作为折现率,而非考虑负债的资本成本(或者加权平均资本成本,WACC)。在此计算中,我们使用了6.7%,这是基于0.800的负债贝塔(levered beta)的。贝塔是衡量股票波动性的指标,与整个市场相比。我们从全球可比公司的行业平均贝塔获得我们的贝塔,限制范围为0.8至2.0,这是稳定业务的合理区间。
估值仅仅只是建立您的投资论点的一面,也不应是您进行公司研究时了解的唯一度量标准。DCF模型并不是投资估值的全部,而是用于检测某些假设和理论是否会导致公司被低估或高估的最佳工具。例如,公司股本成本或无风险利率的变动会对估值产生重大影响。为什么股价低于内在价值?对于WEILONG Delicious Global Holdings,有三个必要的项目需要您考虑: