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Estimating The Intrinsic Value Of HBIS Resources Co., Ltd. (SZSE:000923)
Key Insights
- HBIS Resources' estimated fair value is CN¥13.77 based on 2 Stage Free Cash Flow to Equity
- Current share price of CN¥16.36 suggests HBIS Resources is potentially trading close to its fair value
- Analyst price target for 000923 is CN¥23.97, which is 74% above our fair value estimate
Today we will run through one way of estimating the intrinsic value of HBIS Resources Co., Ltd. (SZSE:000923) by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
See our latest analysis for HBIS Resources
The Model
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. 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.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (CN¥, Millions) | CN¥823.0m | CN¥727.3m | CN¥674.4m | CN¥645.9m | CN¥632.4m | CN¥628.7m | CN¥631.6m | CN¥639.1m | CN¥650.0m | CN¥663.4m |
Growth Rate Estimate Source | Est @ -17.86% | Est @ -11.63% | Est @ -7.27% | Est @ -4.22% | Est @ -2.09% | Est @ -0.59% | Est @ 0.46% | Est @ 1.19% | Est @ 1.70% | Est @ 2.06% |
Present Value (CN¥, Millions) Discounted @ 9.1% | CN¥754 | CN¥611 | CN¥520 | CN¥456 | CN¥409 | CN¥373 | CN¥344 | CN¥319 | CN¥297 | CN¥278 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥4.4b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 9.1%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥663m× (1 + 2.9%) ÷ (9.1%– 2.9%) = CN¥11b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥11b÷ ( 1 + 9.1%)10= CN¥4.6b
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¥9.0b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CN¥16.4, the company appears around fair value at the time of writing. 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.
Important Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 HBIS Resources 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 9.1%, which is based on a levered beta of 1.098. 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 HBIS Resources
- Earnings growth over the past year exceeded the industry.
- Currently debt free.
- Dividends are covered by earnings and cash flows.
- Dividend is in the top 25% of dividend payers in the market.
- No major weaknesses identified for 000923.
- Annual revenue is forecast to grow faster than the Chinese market.
- Good value based on P/E ratio compared to estimated Fair P/E ratio.
- Annual earnings are forecast to grow slower than the Chinese market.
Moving On:
Valuation is only one side of the coin in terms of building your investment thesis, and 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For HBIS Resources, there are three additional aspects you should further research:
- Risks: For example, we've discovered 1 warning sign for HBIS Resources that you should be aware of before investing here.
- Future Earnings: How does 000923'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: 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.
Valuation is complex, but we're here to simplify it.
Discover if HBIS Resources might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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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About SZSE:000923
HBIS Resources
Engages in the mining, processing, selling, and servicing of mineral products in Asia, Africa, Europe, and the Americas.
Flawless balance sheet established dividend payer.