- Hong Kong
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- Metals and Mining
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- SEHK:3833
Calculating The Intrinsic Value Of Xinjiang Xinxin Mining Industry Co., Ltd. (HKG:3833)
Key Insights
- The projected fair value for Xinjiang Xinxin Mining Industry is HK$1.13 based on 2 Stage Free Cash Flow to Equity
- Current share price of HK$0.92 suggests Xinjiang Xinxin Mining Industry is potentially trading close to its fair value
- Peers of Xinjiang Xinxin Mining Industry are currently trading on average at a 41% premium
In this article we are going to estimate the intrinsic value of Xinjiang Xinxin Mining Industry Co., Ltd. (HKG:3833) by taking the expected future cash flows and discounting them to today's 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.
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 Xinjiang Xinxin Mining Industry
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. 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, 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 (CN¥, Millions) | CN¥234.5m | CN¥218.4m | CN¥209.3m | CN¥204.4m | CN¥202.3m | CN¥202.2m | CN¥203.3m | CN¥205.3m | CN¥208.0m | CN¥211.1m |
Growth Rate Estimate Source | Est @ -10.68% | Est @ -6.86% | Est @ -4.19% | Est @ -2.32% | Est @ -1.01% | Est @ -0.10% | Est @ 0.54% | Est @ 0.99% | Est @ 1.31% | Est @ 1.53% |
Present Value (CN¥, Millions) Discounted @ 10% | CN¥213 | CN¥180 | CN¥157 | CN¥139 | CN¥125 | CN¥113 | CN¥103 | CN¥94.7 | CN¥87.1 | CN¥80.3 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.3b
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 10%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥211m× (1 + 2.0%) ÷ (10%– 2.0%) = CN¥2.7b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥2.7b÷ ( 1 + 10%)10= CN¥1.0b
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¥2.3b. 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$0.9, the company appears about fair value at a 19% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
The 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 Xinjiang Xinxin Mining Industry 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 10%, which is based on a levered beta of 1.440. 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 Xinjiang Xinxin Mining Industry
- Debt is not viewed as a risk.
- Dividend is in the top 25% of dividend payers in the market.
- Earnings declined over the past year.
- Current share price is below our estimate of fair value.
- Lack of analyst coverage makes it difficult to determine 3833's earnings prospects.
- Dividends are not covered by earnings and cashflows.
Next Steps:
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. 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 Xinjiang Xinxin Mining Industry, we've compiled three additional aspects you should further research:
- Risks: For example, we've discovered 3 warning signs for Xinjiang Xinxin Mining Industry (1 is potentially serious!) that you should be aware of before investing here.
- 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!
- Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!
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.
About SEHK:3833
Xinjiang Xinxin Mining Industry
Engages in mining, ore processing, smelting, refining, and selling of nickel, copper, and other nonferrous metals.
Flawless balance sheet and fair value.