Stock Analysis

A Look At The Fair Value Of Actions Technology Co., Ltd. (SHSE:688049)

SHSE:688049
Source: Shutterstock

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Actions Technology fair value estimate is CN¥23.99
  • Current share price of CN¥22.08 suggests Actions Technology is potentially trading close to its fair value
  • Actions Technology's peers are currently trading at a premium of 1,417% on average

How far off is Actions Technology Co., Ltd. (SHSE:688049) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Actions Technology

The Method

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Levered FCF (CN¥, Millions) CN¥128.1m CN¥168.6m CN¥207.5m CN¥242.8m CN¥273.8m CN¥300.6m CN¥323.9m CN¥344.2m CN¥362.3m CN¥378.9m
Growth Rate Estimate Source Est @ 44.00% Est @ 31.67% Est @ 23.04% Est @ 17.00% Est @ 12.77% Est @ 9.81% Est @ 7.74% Est @ 6.29% Est @ 5.27% Est @ 4.56%
Present Value (CN¥, Millions) Discounted @ 10% CN¥116 CN¥138 CN¥154 CN¥164 CN¥167 CN¥166 CN¥162 CN¥156 CN¥149 CN¥141

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.5b

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 10%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥379m× (1 + 2.9%) ÷ (10%– 2.9%) = CN¥5.2b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥5.2b÷ ( 1 + 10%)10= CN¥2.0b

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¥3.5b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CN¥22.1, the company appears about fair value at a 7.9% discount to where the stock price trades currently. 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.

dcf
SHSE:688049 Discounted Cash Flow July 15th 2024

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Actions Technology 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 1.324. 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 Actions Technology

Strength
  • Earnings growth over the past year exceeded the industry.
  • Debt is not viewed as a risk.
  • Dividends are covered by earnings and cash flows.
Weakness
  • Dividend is low compared to the top 25% of dividend payers in the Semiconductor market.
Opportunity
  • Annual earnings are forecast to grow faster than the Chinese market.
  • Current share price is below our estimate of fair value.
Threat
  • No apparent threats visible for 688049.

Looking Ahead:

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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Actions Technology, there are three further elements you should explore:

  1. Risks: We feel that you should assess the 2 warning signs for Actions Technology we've flagged before making an investment in the company.
  2. Future Earnings: How does 688049'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: 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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SHSE every day. If you want to find the calculation for other stocks just search here.

New: Manage All Your Stock Portfolios in One Place

We've created the ultimate portfolio companion for stock investors, and it's free.

• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks

Try a Demo Portfolio for Free

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.