JD Health International Inc.'s (HKG:6618) Intrinsic Value Is Potentially 32% Above Its Share Price

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, JD Health International fair value estimate is HK$70.13
• Current share price of HK$53.30 suggests JD Health International is potentially 24% undervalued
• Our fair value estimate is 7.3% lower than JD Health International's analyst price target of CN¥75.62

In this article we are going to estimate the intrinsic value of JD Health International Inc. (HKG:6618) by estimating the company's future cash flows and discounting them to their present 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.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for JD Health International

The Method

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. 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¥6.54b	CN¥8.66b	CN¥8.04b	CN¥10.7b	CN¥11.8b	CN¥12.7b	CN¥13.4b	CN¥14.1b	CN¥14.6b	CN¥15.1b
Growth Rate Estimate Source	Analyst x9	Analyst x7	Analyst x2	Analyst x2	Est @ 10.27%	Est @ 7.73%	Est @ 5.95%	Est @ 4.71%	Est @ 3.83%	Est @ 3.22%
Present Value (CN¥, Millions) Discounted @ 7.5%	CN¥6.1k	CN¥7.5k	CN¥6.5k	CN¥8.0k	CN¥8.2k	CN¥8.2k	CN¥8.1k	CN¥7.9k	CN¥7.6k	CN¥7.3k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥75b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (1.8%) 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 7.5%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥15b× (1 + 1.8%) ÷ (7.5%– 1.8%) = CN¥268b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥268b÷ ( 1 + 7.5%)¹⁰= CN¥130b

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¥205b. 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$53.3, the company appears a touch undervalued at a 24% 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.

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 JD Health International 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 7.5%, which is based on a levered beta of 0.800. 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 JD Health International

Next Steps:

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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For JD Health International, we've compiled three pertinent items you should look at:

1. Financial Health: Does 6618 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does 6618'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. Simply Wall St updates its DCF calculation for every Hong Kong stock every day, so if you want to find the intrinsic value of any other stock 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.