A Look At The Intrinsic Value Of Litian Pictures Holdings Limited (HKG:9958)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Litian Pictures Holdings fair value estimate is HK$2.65
• Litian Pictures Holdings' HK$3.07 share price indicates it is trading at similar levels as its fair value estimate
• Litian Pictures Holdings' peers seem to be trading at a higher premium to fair value based onthe industry average of -181%

In this article we are going to estimate the intrinsic value of Litian Pictures Holdings Limited (HKG:9958) by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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. 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 Litian Pictures Holdings

The Method

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, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥20.4m	CN¥28.0m	CN¥35.5m	CN¥42.3m	CN¥48.3m	CN¥53.4m	CN¥57.6m	CN¥61.2m	CN¥64.2m	CN¥66.8m
Growth Rate Estimate Source	Est @ 52.41%	Est @ 37.30%	Est @ 26.72%	Est @ 19.32%	Est @ 14.13%	Est @ 10.51%	Est @ 7.97%	Est @ 6.19%	Est @ 4.94%	Est @ 4.07%
Present Value (CN¥, Millions) Discounted @ 8.7%	CN¥18.8	CN¥23.7	CN¥27.6	CN¥30.3	CN¥31.8	CN¥32.4	CN¥32.1	CN¥31.4	CN¥30.3	CN¥29.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥287m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 8.7%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥67m× (1 + 2.0%) ÷ (8.7%– 2.0%) = CN¥1.0b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥1.0b÷ ( 1 + 8.7%)¹⁰= CN¥445m

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¥732m. 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$3.1, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

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. 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 Litian Pictures 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 8.7%, which is based on a levered beta of 1.182. 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 Litian Pictures Holdings

Moving On:

Although the valuation of a company is important, 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. 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Litian Pictures Holdings, we've put together three fundamental factors you should look at:

1. Risks: For example, we've discovered 3 warning signs for Litian Pictures Holdings (2 are significant!) that you should be aware of before investing here.
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for 9958's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
3. 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!

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.