Stock Analysis

Are Medlive Technology Co., Ltd. (HKG:2192) Investors Paying Above The Intrinsic Value?

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SEHK:2192
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Key Insights

  • Medlive Technology's estimated fair value is HK$5.64 based on 2 Stage Free Cash Flow to Equity
  • Medlive Technology is estimated to be 26% overvalued based on current share price of HK$7.13
  • Industry average of 218% suggests Medlive Technology's peers are currently trading at a higher premium to fair value

Today we will run through one way of estimating the intrinsic value of Medlive Technology Co., Ltd. (HKG:2192) by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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 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.

Check out our latest analysis for Medlive Technology

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. 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¥130.1m CN¥147.7m CN¥175.5m CN¥219.3m CN¥234.5m CN¥246.0m CN¥255.9m CN¥264.7m CN¥272.5m CN¥279.8m
Growth Rate Estimate Source Analyst x1 Analyst x1 Analyst x1 Analyst x1 Analyst x1 Est @ 4.90% Est @ 4.02% Est @ 3.41% Est @ 2.98% Est @ 2.67%
Present Value (CN¥, Millions) Discounted @ 7.8% CN¥121 CN¥127 CN¥140 CN¥162 CN¥161 CN¥157 CN¥151 CN¥145 CN¥139 CN¥132

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.4b

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 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 7.8%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥280m× (1 + 2.0%) ÷ (7.8%– 2.0%) = CN¥4.9b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥4.9b÷ ( 1 + 7.8%)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¥3.7b. 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$7.1, the company appears slightly overvalued 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.

dcf
SEHK:2192 Discounted Cash Flow January 10th 2024

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Medlive Technology 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 7.8%, which is based on a levered beta of 0.962. 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 Medlive Technology

Strength
  • Earnings growth over the past year exceeded the industry.
  • Currently debt free.
Weakness
  • Dividend is low compared to the top 25% of dividend payers in the Healthcare Services market.
  • Expensive based on P/E ratio and estimated fair value.
Opportunity
  • Annual revenue is forecast to grow faster than the Hong Kong market.
Threat
  • Dividends are not covered by cash flow.

Looking Ahead:

Although the valuation of a company is important, 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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. Can we work out why the company is trading at a premium to intrinsic value? For Medlive Technology, we've put together three important elements you should further examine:

  1. Risks: Take risks, for example - Medlive Technology has 1 warning sign we think you should be aware of.
  2. Future Earnings: How does 2192'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 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. 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.

Valuation is complex, but we're helping make it simple.

Find out whether Medlive Technology 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.

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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.