The projected fair value for H World Group is US$55.87 based on 2 Stage Free Cash Flow to Equity
H World Group's US$30.12 share price signals that it might be 46% undervalued
Analyst price target for HTHT is CN¥44.68 which is 20% below our fair value estimate
How far off is H World Group Limited (NASDAQ:HTHT) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
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 Calculation
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.
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
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (CN¥, Millions)
CN¥5.73b
CN¥7.27b
CN¥8.04b
CN¥8.70b
CN¥9.27b
CN¥9.76b
CN¥10.2b
CN¥10.6b
CN¥11.0b
CN¥11.3b
Growth Rate Estimate Source
Analyst x4
Analyst x3
Est @ 10.63%
Est @ 8.19%
Est @ 6.48%
Est @ 5.29%
Est @ 4.45%
Est @ 3.87%
Est @ 3.46%
Est @ 3.17%
Present Value (CN¥, Millions) Discounted @ 9.4%
CN¥5.2k
CN¥6.1k
CN¥6.1k
CN¥6.1k
CN¥5.9k
CN¥5.7k
CN¥5.4k
CN¥5.2k
CN¥4.9k
CN¥4.6k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥55b
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 (2.5%) 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 9.4%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥169b÷ ( 1 + 9.4%)10= CN¥69b
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¥124b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$30.1, the company appears quite undervalued at a 46% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
Important Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 H World 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 9.4%, which is based on a levered beta of 1.380. 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 H World 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 information for HTHT.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Hospitality market.
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 American market.
What else are analysts forecasting for HTHT?
Moving On:
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 H World Group, there are three additional aspects you should further examine:
Risks: To that end, you should be aware of the 1 warning sign we've spotted with H World Group .
Future Earnings: How does HTHT'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. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock 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.
關鍵見解
根據兩階段股權自由現金流,H World集團的預計公允價值爲55.87美元
H World Group的30.12美元股價表明其估值可能被低估了46%
分析師對htHT的目標股價爲44.68元人民幣,比我們的公允價值估計低20%
H World Group Limited(納斯達克股票代碼:HTHT)距離其內在價值有多遠?我們將使用最新的財務數據,通過計算預期的未來現金流並將其折現爲現值,來研究股票的定價是否合理。在這種情況下,我們將使用折扣現金流(DCF)模型。在你認爲自己無法理解之前,請繼續閱讀!實際上,它沒有你想象的那麼複雜。
公司可以在很多方面得到估值,因此我們要指出,DCF並不適合所有情況。如果你對這種估值還有一些迫切的問題,可以看看 Simply Wall St 分析模型。
就建立投資論點而言,估值只是硬幣的一面,理想情況下,它不會是你爲公司仔細研究的唯一分析內容。使用DCF模型不可能獲得萬無一失的估值。最好你運用不同的案例和假設,看看它們將如何影響公司的估值。例如,公司權益成本或無風險利率的變化會對估值產生重大影響。股價低於內在價值的原因是什麼?對於 H World Group 來說,您還需要進一步研究另外三個方面: