Estimating The Intrinsic Value Of Changjiu Holdings Limited (HKG:6959)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Changjiu Holdings fair value estimate is HK$8.27
• Changjiu Holdings' HK$7.87 share price indicates it is trading at similar levels as its fair value estimate
• The average premium for Changjiu Holdings' competitorsis currently 560%

In this article we are going to estimate the intrinsic value of Changjiu Holdings Limited (HKG:6959) by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Changjiu Holdings

What's The Estimated Valuation?

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 start off with, we need to estimate 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥79.4m	CN¥77.1m	CN¥76.0m	CN¥75.8m	CN¥76.2m	CN¥77.0m	CN¥78.0m	CN¥79.3m	CN¥80.7m	CN¥82.3m
Growth Rate Estimate Source	Est @ -5.13%	Est @ -2.91%	Est @ -1.37%	Est @ -0.28%	Est @ 0.48%	Est @ 1.01%	Est @ 1.38%	Est @ 1.64%	Est @ 1.82%	Est @ 1.95%
Present Value (CN¥, Millions) Discounted @ 6.8%	CN¥74.3	CN¥67.6	CN¥62.4	CN¥58.3	CN¥54.8	CN¥51.9	CN¥49.2	CN¥46.8	CN¥44.7	CN¥42.6

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥553m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 (2.3%) 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 6.8%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥82m× (1 + 2.3%) ÷ (6.8%– 2.3%) = CN¥1.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥1.8b÷ ( 1 + 6.8%)¹⁰= CN¥958m

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¥1.5b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of HK$7.9, the company appears about fair value at a 4.8% 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

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 Changjiu Holdings 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 6.8%, which is based on a levered beta of 0.914. 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.

Next Steps:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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 Changjiu Holdings, there are three additional items you should further research:

1. Risks: As an example, we've found 2 warning signs for Changjiu Holdings that you need to consider before investing here.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SEHK every day. If you want to find the calculation for other stocks just search here.

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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.