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Hebei Construction Group Corporation Limited (HKG:1727) closed yesterday at HK$4.32, which left some investors asking whether the high earnings potential can still be justified at this price. Let’s look into this by assessing 1727’s expected growth over the next few years.
What can we expect from Hebei Construction Group in the future?According to the analysts covering the company, the following few years should bring about good growth prospects for Hebei Construction Group. Analyst consensus expectation is bullish with earnings per share estimated to rise from today’s level of CN¥0.711 to CN¥0.829 over the next three years. This indicates an estimated earnings growth rate of 11% per year, on average, which indicates a solid future in the near term.
Is 1727’s share price justified by its earnings growth?
Hebei Construction Group is available at a price-to-earnings ratio of 5.22x, showing us it is undervalued relative to the current HK market average of 10.39x , and undervalued based on its latest annual earnings update compared to the Construction average of 11.05x .
Given that 1727’s price-to-earnings of 5.22x lies below the industry average, this already indicates that the company could be potentially undervalued. However, to properly examine the value of a high-growth stock such as Hebei Construction Group, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 5.22x and expected year-on-year earnings growth of 11% give Hebei Construction Group an extremely low PEG ratio of 0.47x. This tells us that when we include its growth in our analysis Hebei Construction Group’s stock can be considered relatively cheap , based on fundamental analysis.
What this means for you:
1727’s current undervaluation could signal a potential buying opportunity to increase your exposure to the stock, or it you’re a potential investor, now may be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Financial Health: Are 1727’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.