share_log

Chengdu Hongqi Chain Co.,Ltd. (SZSE:002697) Shares Could Be 48% Below Their Intrinsic Value Estimate

成都紅旗チェーン株式会社(SZSE:002697)の株は、その内在価値推定よりも48%低い可能性があります

Simply Wall St ·  2024/12/17 22:40

Key Insights

  • Chengdu Hongqi ChainLtd's estimated fair value is CN¥12.31 based on 2 Stage Free Cash Flow to Equity
  • Chengdu Hongqi ChainLtd's CN¥6.45 share price signals that it might be 48% undervalued
  • Analyst price target for 002697 is CN¥6.46 which is 47% below our fair value estimate

In this article we are going to estimate the intrinsic value of Chengdu Hongqi Chain Co.,Ltd. (SZSE:002697) 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. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Is Chengdu Hongqi ChainLtd Fairly Valued?

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. 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.

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) forecast

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Levered FCF (CN¥, Millions) CN¥765.3m CN¥806.0m CN¥722.8m CN¥766.4m CN¥767.3m CN¥774.3m CN¥785.8m CN¥800.6m CN¥817.8m CN¥837.0m
Growth Rate Estimate Source Analyst x1 Analyst x1 Analyst x1 Analyst x1 Est @ 0.11% Est @ 0.92% Est @ 1.48% Est @ 1.88% Est @ 2.15% Est @ 2.35%
Present Value (CN¥, Millions) Discounted @ 6.8% CN¥717 CN¥707 CN¥594 CN¥589 CN¥553 CN¥522 CN¥496 CN¥474 CN¥453 CN¥434

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥5.5b

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 (2.8%) 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 6.8%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥837m× (1 + 2.8%) ÷ (6.8%– 2.8%) = CN¥22b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥22b÷ ( 1 + 6.8%)10= CN¥11b

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¥17b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥6.5, the company appears quite good value at a 48% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

big
SZSE:002697 Discounted Cash Flow December 18th 2024

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 Chengdu Hongqi ChainLtd 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 6.8%, 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 Chengdu Hongqi ChainLtd

Strength
  • Currently debt free.
  • Dividends are covered by earnings and cash flows.
  • Dividend information for 002697.
Weakness
  • Earnings growth over the past year underperformed the Consumer Retailing industry.
  • Dividend is low compared to the top 25% of dividend payers in the Consumer Retailing market.
Opportunity
  • Annual earnings are forecast to grow for the next 3 years.
  • Trading below our estimate of fair value by more than 20%.
Threat
  • Annual earnings are forecast to grow slower than the Chinese market.
  • What else are analysts forecasting for 002697?

Next Steps:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For Chengdu Hongqi ChainLtd, we've put together three fundamental elements you should further research:

  1. Risks: Be aware that Chengdu Hongqi ChainLtd is showing 1 warning sign in our investment analysis , you should know about...
  2. Future Earnings: How does 002697'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.
  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every Chinese 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.

これらの内容は、情報提供及び投資家教育のためのものであり、いかなる個別株や投資方法を推奨するものではありません。 更に詳しい情報
    コメントする