A week ago, Digital China Holdings Limited (HKG:861) came out with a strong set of full-year numbers that could potentially lead to a re-rate of the stock. The company beat both earnings and revenue forecasts, with revenue of HK$18b, some 2.8% above estimates, and statutory earnings per share (EPS) coming in at HK$0.18, 66% ahead of expectations. The analyst typically update their forecasts at each earnings report, and we can judge from their estimates whether their view of the company has changed or if there are any new concerns to be aware of. We've gathered the most recent statutory forecasts to see whether the analyst has changed their earnings models, following these results.
Taking into account the latest results, the most recent consensus for Digital China Holdings from sole analyst is for revenues of HK$20.3b in 2020 which, if met, would be a solid 15% increase on its sales over the past 12 months. Per-share earnings are expected to jump 26% to HK$0.23. Before this earnings report, the analyst had been forecasting revenues of HK$20.0b and earnings per share (EPS) of HK$0.30 in 2020. So there's definitely been a decline in sentiment after the latest results, noting the pretty serious reduction to new EPS forecasts.
It might be a surprise to learn that the consensus price target was broadly unchanged at HK$5.15, with the analyst clearly implying that the forecast decline in earnings is not expected to have much of an impact on valuation.
One way to get more context on these forecasts is to look at how they compare to both past performance, and how other companies in the same industry are performing. For example, we noticed that Digital China Holdings' rate of growth is expected to accelerate meaningfully, with revenues forecast to grow 15%, well above its historical decline of 9.3% a year over the past five years. By contrast, our data suggests that other companies (with analyst coverage) in the industry are forecast to see their revenue grow 11% per year. Not only are Digital China Holdings' revenues expected to improve, it seems that the analyst is also expecting it to grow faster than the wider industry.
The Bottom Line
The biggest concern is that the analyst reduced their earnings per share estimates, suggesting business headwinds could lay ahead for Digital China Holdings. Happily, there were no major changes to revenue forecasts, with the business still expected to grow faster than the wider industry. The consensus price target held steady at HK$5.15, with the latest estimates not enough to have an impact on their price target.
Following on from that line of thought, we think that the long-term prospects of the business are much more relevant than next year's earnings. At least one analyst has provided forecasts out to 2022, which can be seen for free on our platform here.
Even so, be aware that Digital China Holdings is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...
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