- China
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- Specialty Stores
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- SHSE:601888
Is There An Opportunity With China Tourism Group Duty Free Corporation Limited's (SHSE:601888) 45% Undervaluation?
Key Insights
- The projected fair value for China Tourism Group Duty Free is CN¥111 based on 2 Stage Free Cash Flow to Equity
- Current share price of CN¥60.80 suggests China Tourism Group Duty Free is potentially 45% undervalued
- Our fair value estimate is 29% higher than China Tourism Group Duty Free's analyst price target of CN¥86.07
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of China Tourism Group Duty Free Corporation Limited (SHSE:601888) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
View our latest analysis for China Tourism Group Duty Free
Is China Tourism Group Duty Free Fairly Valued?
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. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or 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, 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¥7.95b | CN¥9.60b | CN¥10.9b | CN¥11.9b | CN¥12.9b | CN¥13.7b | CN¥14.4b | CN¥15.1b | CN¥15.7b | CN¥16.2b |
Growth Rate Estimate Source | Analyst x7 | Analyst x7 | Est @ 12.98% | Est @ 9.94% | Est @ 7.81% | Est @ 6.33% | Est @ 5.28% | Est @ 4.55% | Est @ 4.04% | Est @ 3.68% |
Present Value (CN¥, Millions) Discounted @ 8.1% | CN¥7.4k | CN¥8.2k | CN¥8.6k | CN¥8.8k | CN¥8.7k | CN¥8.6k | CN¥8.4k | CN¥8.1k | CN¥7.8k | CN¥7.5k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥82b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.9%) 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 8.1%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥16b× (1 + 2.9%) ÷ (8.1%– 2.9%) = CN¥321b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥321b÷ ( 1 + 8.1%)10= CN¥148b
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¥230b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥60.8, the company appears quite undervalued at a 45% discount to where the stock price trades currently. 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.
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 China Tourism Group Duty Free 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 8.1%, which is based on a levered beta of 1.044. 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 China Tourism Group Duty Free
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Dividend is low compared to the top 25% of dividend payers in the Specialty Retail market.
- Annual revenue is forecast to grow faster than the Chinese market.
- Good value based on P/E ratio and estimated fair value.
- 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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For China Tourism Group Duty Free, we've compiled three fundamental items you should further research:
- Risks: For example, we've discovered 1 warning sign for China Tourism Group Duty Free that you should be aware of before investing here.
- Future Earnings: How does 601888'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.
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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.
About SHSE:601888
China Tourism Group Duty Free
Engages in duty-free travel retail business in China.
Solid track record with excellent balance sheet and pays a dividend.