Calculating The Intrinsic Value Of Tenfu (Cayman) Holdings Company Limited (HKG:6868)

Key Insights

• Tenfu (Cayman) Holdings' estimated fair value is HK$3.76 based on 2 Stage Free Cash Flow to Equity
• With HK$3.93 share price, Tenfu (Cayman) Holdings appears to be trading close to its estimated fair value
• The average discount for Tenfu (Cayman) Holdings' competitorsis currently 13%

How far off is Tenfu (Cayman) Holdings Company Limited (HKG:6868) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 Tenfu (Cayman) Holdings

What's The Estimated Valuation?

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 begin with, we have to get estimates of 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 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¥236.5m	CN¥220.7m	CN¥211.6m	CN¥206.8m	CN¥204.7m	CN¥204.4m	CN¥205.5m	CN¥207.4m	CN¥210.0m	CN¥213.1m
Growth Rate Estimate Source	Est @ -10.43%	Est @ -6.71%	Est @ -4.11%	Est @ -2.28%	Est @ -1.01%	Est @ -0.11%	Est @ 0.51%	Est @ 0.95%	Est @ 1.25%	Est @ 1.47%
Present Value (CN¥, Millions) Discounted @ 6.8%	CN¥221	CN¥193	CN¥174	CN¥159	CN¥147	CN¥138	CN¥129	CN¥122	CN¥116	CN¥110

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.5b

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 (2.0%) 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)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥213m× (1 + 2.0%) ÷ (6.8%– 2.0%) = CN¥4.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥4.5b÷ ( 1 + 6.8%)¹⁰= CN¥2.3b

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¥3.8b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of HK$3.9, the company appears around fair value at the time of writing. 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 Tenfu (Cayman) 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 0.800. 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.

Moving On:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. 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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Tenfu (Cayman) Holdings, we've compiled three further elements you should consider:

1. Risks: As an example, we've found 2 warning signs for Tenfu (Cayman) Holdings (1 is potentially serious!) 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. 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.