Using the 2 Stage Free Cash Flow to Equity, Hua Hong Semiconductor fair value estimate is HK$13.17
Hua Hong Semiconductor is estimated to be 27% overvalued based on current share price of HK$16.72
The US$18.07 analyst price target for 1347 is 37% more than our estimate of fair value
Does the March share price for Hua Hong Semiconductor Limited (HKG:1347) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Is Hua Hong Semiconductor Fairly Valued?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF ($, Millions)
-US$1.15b
-US$796.6m
-US$669.2m
-US$242.4m
US$272.0m
US$413.4m
US$566.3m
US$716.4m
US$853.8m
US$973.5m
Growth Rate Estimate Source
Analyst x7
Analyst x8
Analyst x4
Analyst x2
Analyst x1
Est @ 51.98%
Est @ 37.00%
Est @ 26.51%
Est @ 19.17%
Est @ 14.03%
Present Value ($, Millions) Discounted @ 11%
-US$1.0k
-US$642
-US$484
-US$157
US$159
US$216
US$266
US$302
US$323
US$331
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = -US$718m
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 (2.0%) 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 11%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$11b÷ ( 1 + 11%)10= US$3.6b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$2.9b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of HK$16.7, the company appears slightly overvalued at the time of writing. 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.
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Hua Hong Semiconductor 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 11%, which is based on a levered beta of 1.662. 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 Hua Hong Semiconductor
Strength
Debt is well covered by cash flow.
Balance sheet summary for 1347.
Weakness
Earnings declined over the past year.
Interest payments on debt are not well covered.
Expensive based on P/E ratio and estimated fair value.
Shareholders have been diluted in the past year.
Opportunity
Annual revenue is forecast to grow faster than the Hong Kong market.
Threat
Annual earnings are forecast to grow slower than the Hong Kong market.
What else are analysts forecasting for 1347?
Next Steps:
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a premium to intrinsic value? For Hua Hong Semiconductor, there are three pertinent factors you should further examine:
Risks: Case in point, we've spotted 2 warning signs for Hua Hong Semiconductor you should be aware of.
Future Earnings: How does 1347'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.
上記計算は2つの仮定が大きく依存しています。 1つ目はディスカウント率で、もう1つはキャッシュフローです。これらの入力に同意する必要はありません。自分で計算をやり直して、それらを改変することをお勧めします。DCFは業界のサイクリカル性や企業の将来の資本需要を考慮していないため、企業の全体像を提供しません。この計算では、Hua Hong Semiconductorが潜在的な株主であることを考慮して、ディスカウント率として株式コストを使用しています。これには、債務を調整したベータ値1.662に基づく11%が使用されます。ベータは、市場全体と比較して株式の変動性を測定するものです。グローバルに比較可能な企業の業界平均ベータから取得し、0.8〜2.0の範囲内に制限を設けています。これは安定したビジネスにとって合理的な範囲です。
仮定
上記の計算は、2つの前提条件に非常に依存しています。 1つは財務指標、もう1つはキャッシュフローです。 そして、財務指標やキャッシュフローに同意する必要はありません。 それらを自分で調整して計算し直すことをお薦めします。 なお、DCFを使っても業界のサイクリカリティ、あるいは企業が将来その資本を必要とするかどうか等については計算せず、企業の潜在的なパフォーマンスの全体像を示すことはできません。 Hua Hong Semiconductorを潜在株主として見据えるならば、企業の価値を割引するにあたって、減債を考慮すべきである費用(あるいは加重平均費用)の代わりに、株式に適用されるコストをディスカウント率として採用するべきです。この計算においては、財務指標によって11%のディスカウント率を適用しています。
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オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。