Stock Analysis
An Intrinsic Calculation For WEILONG Delicious Global Holdings Ltd (HKG:9985) Suggests It's 50% Undervalued
Key Insights
- WEILONG Delicious Global Holdings' estimated fair value is HK$15.11 based on 2 Stage Free Cash Flow to Equity
- Current share price of HK$7.61 suggests WEILONG Delicious Global Holdings is potentially 50% undervalued
- Our fair value estimate is 74% higher than WEILONG Delicious Global Holdings' analyst price target of CN¥8.71
Does the October share price for WEILONG Delicious Global Holdings Ltd (HKG:9985) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
See our latest analysis for WEILONG Delicious Global Holdings
Crunching The Numbers
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. 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.
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
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (CN¥, Millions) | CN¥1.20b | CN¥1.26b | CN¥1.31b | CN¥1.36b | CN¥1.40b | CN¥1.45b | CN¥1.48b | CN¥1.52b | CN¥1.56b | CN¥1.60b |
Growth Rate Estimate Source | Est @ 6.35% | Est @ 5.12% | Est @ 4.26% | Est @ 3.66% | Est @ 3.23% | Est @ 2.94% | Est @ 2.73% | Est @ 2.59% | Est @ 2.49% | Est @ 2.42% |
Present Value (CN¥, Millions) Discounted @ 6.2% | CN¥1.1k | CN¥1.1k | CN¥1.1k | CN¥1.1k | CN¥1.0k | CN¥1.0k | CN¥972 | CN¥939 | CN¥906 | CN¥873 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥10b
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 (2.3%) 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 6.2%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥1.6b× (1 + 2.3%) ÷ (6.2%– 2.3%) = CN¥41b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥41b÷ ( 1 + 6.2%)10= CN¥22b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CN¥33b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of HK$7.6, the company appears quite good value at a 50% 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.
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 WEILONG Delicious Global 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 6.2%, 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 WEILONG Delicious Global Holdings
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Dividend is low compared to the top 25% of dividend payers in the Food market.
- Annual earnings are forecast to grow faster than the Hong Kong market.
- Good value based on P/E ratio and estimated fair value.
- Revenue is forecast to grow slower than 20% per year.
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For WEILONG Delicious Global Holdings, we've put together three pertinent items you should assess:
- Risks: For instance, we've identified 1 warning sign for WEILONG Delicious Global Holdings that you should be aware of.
- Future Earnings: How does 9985'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 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!
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 WEILONG Delicious Global 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.
About SEHK:9985
WEILONG Delicious Global Holdings
Weilong Delicious Global Holdings Ltd. produces and sells spicy snack food.