Hla Group's estimated fair value is CN¥11.51 based on 2 Stage Free Cash Flow to Equity
With CN¥9.51 share price, Hla Group appears to be trading close to its estimated fair value
Our fair value estimate is 23% higher than Hla Group's analyst price target of CN¥9.38
Does the June share price for Hla Group Corp., Ltd. (SHSE:600398) 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. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
The Model
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF (CN¥, Millions)
CN¥4.87b
CN¥3.76b
CN¥3.66b
CN¥3.63b
CN¥3.64b
CN¥3.68b
CN¥3.74b
CN¥3.81b
CN¥3.90b
CN¥4.00b
Growth Rate Estimate Source
Analyst x2
Analyst x2
Analyst x2
Est @ -0.82%
Est @ 0.30%
Est @ 1.08%
Est @ 1.63%
Est @ 2.01%
Est @ 2.28%
Est @ 2.46%
Present Value (CN¥, Millions) Discounted @ 8.8%
CN¥4.5k
CN¥3.2k
CN¥2.8k
CN¥2.6k
CN¥2.4k
CN¥2.2k
CN¥2.1k
CN¥1.9k
CN¥1.8k
CN¥1.7k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥25b
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 (2.9%) 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 8.8%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥70b÷ ( 1 + 8.8%)10= CN¥30b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CN¥55b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥9.5, the company appears about fair value at a 17% 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.
Important 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. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Hla Group 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 8.8%, which is based on a levered beta of 1.047. 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 Hla Group
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 is in the top 25% of dividend payers in the market.
Dividend information for 600398.
Weakness
Shareholders have been diluted in the past year.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Good value based on P/E ratio and estimated fair value.
Threat
Annual earnings are forecast to grow slower than the Chinese market.
What else are analysts forecasting for 600398?
Next Steps:
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Hla Group, we've compiled three pertinent aspects you should consider:
Risks: We feel that you should assess the 2 warning signs for Hla Group we've flagged before making an investment in the company.
Future Earnings: How does 600398'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 SHSE 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.
主要見解
Hla集團基於2階段自由現金流至股權的估價爲CN¥11.51。
以CN¥9.51的股價,Hla集團的估值接近其預估的公平價值。
我們的公平價值估計比Hla集團分析師預估的CN¥9.38的目標更高23%。
6月份Hla Group Corp., Ltd. (SHSE:600398) 的股價是否反映了其真實價值?今天我們將通過預測未來現金流並將其貼現至今天的價值來估算該股票的內在價值,這次我們將使用貼現現金流(DCF)模型。請不要因術語而感到困擾,這背後的數學實際上非常簡單。