Estimating The Fair Value Of China Resources Beer (Holdings) Company Limited (HKG:291)
- The projected fair value for China Resources Beer (Holdings) is HK$68.64 based on 2 Stage Free Cash Flow to Equity
- With HK$61.70 share price, China Resources Beer (Holdings) appears to be trading close to its estimated fair value
- The CN¥70.09 analyst price target for 291 is 2.1% more than our estimate of fair value
How far off is China Resources Beer (Holdings) Company Limited (HKG:291) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
See our latest analysis for China Resources Beer (Holdings)
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.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
|Levered FCF (CN¥, Millions)||CN¥3.54b||CN¥6.44b||CN¥6.40b||CN¥8.53b||CN¥10.0b||CN¥11.3b||CN¥12.3b||CN¥13.2b||CN¥13.9b||CN¥14.5b|
|Growth Rate Estimate Source||Analyst x9||Analyst x9||Analyst x1||Analyst x1||Est @ 17.33%||Est @ 12.65%||Est @ 9.38%||Est @ 7.09%||Est @ 5.48%||Est @ 4.36%|
|Present Value (CN¥, Millions) Discounted @ 7.3%||CN¥3.3k||CN¥5.6k||CN¥5.2k||CN¥6.4k||CN¥7.0k||CN¥7.4k||CN¥7.5k||CN¥7.5k||CN¥7.4k||CN¥7.2k|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥65b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 1.7%. We discount the terminal cash flows to today's value at a cost of equity of 7.3%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = CN¥15b× (1 + 1.7%) ÷ (7.3%– 1.7%) = CN¥265b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥265b÷ ( 1 + 7.3%)10= CN¥131b
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¥195b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of HK$61.7, the company appears about fair value at a 10% 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.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 China Resources Beer (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 7.3%, 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 China Resources Beer (Holdings)
- Debt is not viewed as a risk.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Beverage market.
- Annual earnings are forecast to grow faster than the Hong Kong market.
- Current share price is below our estimate of fair value.
- Revenue is forecast to grow slower than 20% per year.
Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for 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?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For China Resources Beer (Holdings), we've put together three fundamental aspects you should assess:
- Financial Health: Does 291 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.
- Future Earnings: How does 291'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.
- 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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Find out whether China Resources Beer (Holdings) is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
China Resources Beer (Holdings)
China Resources Beer (Holdings) Company Limited, an investment holding company, manufactures, distributes, and sells beer products.
Excellent balance sheet with reasonable growth potential.