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Estimating The Fair Value Of Hengan International Group Company Limited (HKG:1044)

Gavin Beck

How far off is Hengan International Group Company Limited (SEHK:1044) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in April 2018 so be sure check the latest calculation for Hengan International Group here.

Is 1044 fairly valued?

I’ve used the 2-stage growth model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To begin, I pulled together the analyst consensus estimates of 1044’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.38%. This resulted in a present value of 5-year cash flow of CN¥19.01B. Keen to understand how I arrived at this number? Read our detailed analysis here.

SEHK:1044 Future Profit Apr 11th 18

Above is a visual representation of how 1044’s top and bottom lines are expected to move going forward, which should give you an idea of 1044’s outlook. Next, I calculate the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes CN¥62.72B.

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CN¥81.73B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of HK$84.66, which, compared to the current share price of HK$81.5, we see that Hengan International Group is about right, perhaps slightly undervalued at a 3.74% discount to what it is available for right now.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.

For 1044, I’ve put together three key factors you should further examine:

  1. Financial Health: Does 1044 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.
  2. Future Earnings: How does 1044’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: Are there other high quality stocks you could be holding instead of 1044? 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 pass 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.