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A Look At The Fair Value Of GreenTree Hospitality Group Ltd. (NYSE:GHG)

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, GreenTree Hospitality Group fair value estimate is US$4.26

  • Current share price of US$4.39 suggests GreenTree Hospitality Group is potentially trading close to its fair value

  • Peers of GreenTree Hospitality Group are currently trading on average at a 19% discount

In this article we are going to estimate the intrinsic value of GreenTree Hospitality Group Ltd. (NYSE:GHG) 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. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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.

View our latest analysis for GreenTree Hospitality Group

The Calculation

We're 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 a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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 (CN¥, Millions)

CN¥236.7m

CN¥252.4m

CN¥265.7m

CN¥277.3m

CN¥287.5m

CN¥296.8m

CN¥305.4m

CN¥313.5m

CN¥321.4m

CN¥329.2m

Growth Rate Estimate Source

Est @ 8.55%

Est @ 6.63%

Est @ 5.28%

Est @ 4.34%

Est @ 3.69%

Est @ 3.22%

Est @ 2.90%

Est @ 2.68%

Est @ 2.52%

Est @ 2.41%

Present Value (CN¥, Millions) Discounted @ 10%

CN¥214

CN¥207

CN¥197

CN¥186

CN¥175

CN¥163

CN¥152

CN¥141

CN¥131

CN¥122

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.7b

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 (2.2%) 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 10%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥329m× (1 + 2.2%) ÷ (10%– 2.2%) = CN¥4.0b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥4.0b÷ ( 1 + 10%)10= CN¥1.5b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥3.2b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$4.4, the company appears around fair value 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.

dcf
dcf

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 GreenTree Hospitality Group 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 10%, which is based on a levered beta of 1.371. 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 GreenTree Hospitality Group

Strength

  • Debt is not viewed as a risk.

  • Dividend is in the top 25% of dividend payers in the market.

Weakness

  • Expensive based on P/E ratio and estimated fair value.

Opportunity

  • Annual earnings are forecast to grow faster than the American market.

Threat

  • Dividends are not covered by cash flow.

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize 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. For GreenTree Hospitality Group, there are three fundamental factors you should look at:

  1. Risks: Take risks, for example - GreenTree Hospitality Group has 2 warning signs (and 1 which is concerning) we think you should know about.

  2. Future Earnings: How does GHG'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 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 NYSE 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.

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