Stock Analysis

Are Investors Undervaluing Vinda International Holdings Limited (HKG:3331) By 33%?

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SEHK:3331
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Key Insights

  • Vinda International Holdings' estimated fair value is HK$29.34 based on 2 Stage Free Cash Flow to Equity
  • Current share price of HK$19.54 suggests Vinda International Holdings is potentially 33% undervalued
  • The HK$20.19 analyst price target for 3331 is 31% less than our estimate of fair value

How far off is Vinda International Holdings Limited (HKG:3331) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Vinda International Holdings

Step By Step Through The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of 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) estimate

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (HK$, Millions) HK$1.42b HK$1.54b HK$1.63b HK$1.71b HK$1.78b HK$1.83b HK$1.89b HK$1.94b HK$1.99b HK$2.03b
Growth Rate Estimate Source Analyst x3 Analyst x3 Est @ 5.88% Est @ 4.71% Est @ 3.89% Est @ 3.31% Est @ 2.91% Est @ 2.63% Est @ 2.43% Est @ 2.29%
Present Value (HK$, Millions) Discounted @ 6.7% HK$1.3k HK$1.4k HK$1.3k HK$1.3k HK$1.3k HK$1.2k HK$1.2k HK$1.2k HK$1.1k HK$1.1k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$12b

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 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 6.7%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = HK$2.0b× (1 + 2.0%) ÷ (6.7%– 2.0%) = HK$44b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= HK$44b÷ ( 1 + 6.7%)10= HK$23b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is HK$35b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of HK$19.5, the company appears quite undervalued at a 33% 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.

dcf
SEHK:3331 Discounted Cash Flow December 11th 2023

Important Assumptions

We would point out that 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 Vinda International 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 6.7%, 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 Vinda International Holdings

Strength
  • Debt is well covered by .
Weakness
  • Earnings declined over the past year.
  • Interest payments on debt are not well covered.
  • Dividend is low compared to the top 25% of dividend payers in the Household Products market.
Opportunity
  • Annual earnings are forecast to grow faster than the Hong Kong market.
  • Trading below our estimate of fair value by more than 20%.
  • Significant insider buying over the past 3 months.
Threat
  • Debt is not well covered by operating cash flow.
  • Dividends are not covered by earnings.
  • Annual revenue is forecast to grow slower than the Hong Kong market.

Looking Ahead:

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. 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?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For Vinda International Holdings, we've put together three further aspects you should explore:

  1. Risks: Take risks, for example - Vinda International Holdings has 2 warning signs (and 1 which is a bit concerning) we think you should know about.
  2. Future Earnings: How does 3331'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. 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 helping make it simple.

Find out whether Vinda International 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.

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