Calculating The Fair Value Of Tingyi (Cayman Islands) Holding Corp (HKG:322)
I am going to run you through how I calculated the intrinsic value of Tingyi (Cayman Islands) Holding Corp (HKG:322) by taking the expected future cash flows and discounting them to today’s value. I will use the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in September 2018 so be sure check out the updated calculation by following the link below.
See our latest analysis for Tingyi (Cayman Islands) Holding
Crunching the numbers
I’m using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.
5-year cash flow forecast
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF (CN¥, Millions) | CN¥5.10k | CN¥5.59k | CN¥2.67k | CN¥4.73k | CN¥4.57k |
Source | Analyst x11 | Analyst x10 | Analyst x1 | Analyst x1 | Est @ -3.38% |
Present Value Discounted @ 9.74% | CN¥4.65k | CN¥4.64k | CN¥2.02k | CN¥3.26k | CN¥2.87k |
Present Value of 5-year Cash Flow (PVCF)= CN¥17.44b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.2%. We discount this to today’s value at a cost of equity of 9.7%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = CN¥4.57b × (1 + 2.2%) ÷ (9.7% – 2.2%) = CN¥61.90b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CN¥61.90b ÷ ( 1 + 9.7%)5 = CN¥38.89b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CN¥56.32b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value in the company’s reported currency of CN¥10.03. However, 322’s primary listing is in China, and 1 share of 322 in CNY represents 1.149 ( CNY/ HKD) share of SEHK:322, so the intrinsic value per share in HKD is HK$11.52. Relative to the current share price of HK$13.66, the stock is fair value, maybe slightly overvalued at the time of writing.
The assumptions
Now 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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Tingyi (Cayman Islands) Holding as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 9.7%, which is based on a levered beta of 0.967. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For 322, I’ve put together three key factors you should further examine:
Financial Health: Does 322 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does 322’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of 322? 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 does a DCF calculation for every HK stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
