Bank stocks such as 3328 are hard to value. This is because the rules banks face are different to other companies, which can impact the way we forecast their cash flows. The tiered capital structure is common for banks to abide by, in order to ensure they maintain a sufficient level of cash for their customers. Looking at data points such as book values, on top of the return and cost of equity, can be practical for estimating 3328’s intrinsic value. Below I’ll look at how to value 3328 in a fairly effective and easy approach. View our latest analysis for Bank of Communications
What Model Should You Use?
Let’s keep in mind two things – regulation and type of assets. Financial firms operating in China face strict financial regulation. Furthermore, banks tend to not have large portions of tangible assets on their books. While traditional DCF models emphasize on inputs such as capital expenditure and depreciation, which is less useful for a financial stock, the Excess Return model focuses on book values and stable earnings.
Calculating 3328’s Value
The key belief for Excess Returns is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns above the cost of equity is known as excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (10.73% – 9.55%) * CN¥9.45 = CN¥0.11
Excess Return Per Share is used to calculate the terminal value of 3328, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= CN¥0.11 / (9.55% – 1.88%) = CN¥1.47
These factors are combined to calculate the true value of 3328’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= CN¥9.45 + CN¥1.47 = HK$13.52
Relative to the present share price of CN¥6.43, 3328 is currently trading below what it’s actually worth. This means 3328 can be bought today at a discount. Pricing is only one aspect when you’re looking at whether to buy or sell 3328. Analyzing fundamental factors are equally important when it comes to determining if 3328 has a place in your holdings.
For banks, there are three key aspects you should look at:
- Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like bad loans and customer deposits.
- Future earnings: What does the market think of 3328 going forward? Our analyst growth expectation chart helps visualize 3328’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether 3328 is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on 3328 here.