Stock Analysis

Calculating The Fair Value Of Bosideng International Holdings Limited (HKG:3998)

SEHK:3998
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Key Insights

  • The projected fair value for Bosideng International Holdings is HK$4.90 based on 2 Stage Free Cash Flow to Equity
  • Bosideng International Holdings' HK$4.58 share price indicates it is trading at similar levels as its fair value estimate
  • The CN¥4.96 analyst price target for 3998 is 1.3% more than our estimate of fair value

In this article we are going to estimate the intrinsic value of Bosideng International Holdings Limited (HKG:3998) by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. 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.

View our latest analysis for Bosideng International Holdings

Step By Step Through The Calculation

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. 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, 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

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (CN¥, Millions) CN¥3.62b CN¥3.32b CN¥3.55b CN¥3.31b CN¥3.32b CN¥3.35b CN¥3.40b CN¥3.45b CN¥3.51b CN¥3.58b
Growth Rate Estimate Source Analyst x3 Analyst x3 Analyst x3 Analyst x1 Est @ 0.48% Est @ 0.98% Est @ 1.33% Est @ 1.58% Est @ 1.75% Est @ 1.87%
Present Value (CN¥, Millions) Discounted @ 8.3% CN¥3.3k CN¥2.8k CN¥2.8k CN¥2.4k CN¥2.2k CN¥2.1k CN¥1.9k CN¥1.8k CN¥1.7k CN¥1.6k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥23b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 8.3%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥3.6b× (1 + 2.2%) ÷ (8.3%– 2.2%) = CN¥59b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥59b÷ ( 1 + 8.3%)10= CN¥27b

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¥49b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of HK$4.6, the company appears about fair value at a 6.5% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
SEHK:3998 Discounted Cash Flow May 11th 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 Bosideng International 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 8.3%, which is based on a levered beta of 1.127. 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 Bosideng International Holdings

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
  • Earnings growth over the past year is below its 5-year average.
  • Dividend is low compared to the top 25% of dividend payers in the Luxury market.
Opportunity
  • Annual earnings are forecast to grow faster than the Hong Kong market.
  • Current share price is below our estimate of fair value.
Threat
  • Revenue is forecast to grow slower than 20% per year.

Looking Ahead:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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. 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 Bosideng International Holdings, we've put together three important elements you should consider:

  1. Risks: You should be aware of the 2 warning signs for Bosideng International Holdings we've uncovered before considering an investment in the company.
  2. Future Earnings: How does 3998'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 SEHK every day. If you want to find the calculation for other stocks just search here.

Valuation is complex, but we're here to simplify it.

Discover if Bosideng International Holdings might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.