Are Investors Undervaluing Ascentage Pharma Group International (HKG:6855) By 40%?

Key Insights

• Ascentage Pharma Group International's estimated fair value is HK$41.62 based on 2 Stage Free Cash Flow to Equity
• Current share price of HK$24.85 suggests Ascentage Pharma Group International is potentially 40% undervalued
• The CN¥32.30 analyst price target for 6855 is 22% less than our estimate of fair value

In this article we are going to estimate the intrinsic value of Ascentage Pharma Group International (HKG:6855) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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 Ascentage Pharma Group International

Is Ascentage Pharma Group International Fairly Valued?

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

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	-CN¥810.0m	-CN¥684.5m	-CN¥486.0m	-CN¥126.0m	CN¥260.0m	CN¥410.9m	CN¥580.5m	CN¥751.6m	CN¥911.4m	CN¥1.05b
Growth Rate Estimate Source	Analyst x2	Analyst x2	Analyst x1	Analyst x1	Analyst x1	Est @ 58.06%	Est @ 41.25%	Est @ 29.49%	Est @ 21.25%	Est @ 15.49%
Present Value (CN¥, Millions) Discounted @ 7.2%	-CN¥756	-CN¥596	-CN¥394	-CN¥95.4	CN¥184	CN¥271	CN¥357	CN¥431	CN¥487	CN¥525

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥413m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 7.2%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥1.1b× (1 + 2.0%) ÷ (7.2%– 2.0%) = CN¥21b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥21b÷ ( 1 + 7.2%)¹⁰= CN¥10b

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¥11b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of HK$24.9, the company appears quite good value at a 40% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important Assumptions

Now 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 Ascentage Pharma Group International 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 7.2%, which is based on a levered beta of 0.918. 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 Ascentage Pharma Group International

Moving On:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching 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 discount to intrinsic value? For Ascentage Pharma Group International, there are three additional aspects you should look at:

1. Risks: You should be aware of the 1 warning sign for Ascentage Pharma Group International we've uncovered before considering an investment in the company.
2. Future Earnings: How does 6855'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.

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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.