A Look At The Intrinsic Value Of Sinolink Worldwide Holdings Limited (HKG:1168)

Key Insights

• The projected fair value for Sinolink Worldwide Holdings is HK$0.075 based on 2 Stage Free Cash Flow to Equity
• With HK$0.082 share price, Sinolink Worldwide Holdings appears to be trading close to its estimated fair value
• Sinolink Worldwide Holdings' peers seem to be trading at a lower premium to fair value based onthe industry average of -7.4%

In this article we are going to estimate the intrinsic value of Sinolink Worldwide Holdings Limited (HKG:1168) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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.

View our latest analysis for Sinolink Worldwide Holdings

The Model

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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (HK$, Millions)	HK$86.0m	HK$70.1m	HK$61.5m	HK$56.6m	HK$53.8m	HK$52.2m	HK$51.5m	HK$51.3m	HK$51.5m	HK$51.9m
Growth Rate Estimate Source	Est @ -27.20%	Est @ -18.43%	Est @ -12.29%	Est @ -7.99%	Est @ -4.98%	Est @ -2.87%	Est @ -1.40%	Est @ -0.37%	Est @ 0.35%	Est @ 0.86%
Present Value (HK$, Millions) Discounted @ 13%	HK$76.1	HK$54.9	HK$42.6	HK$34.7	HK$29.2	HK$25.1	HK$21.9	HK$19.3	HK$17.1	HK$15.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$336m

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 13%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = HK$52m× (1 + 2.0%) ÷ (13%– 2.0%) = HK$484m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= HK$484m÷ ( 1 + 13%)¹⁰= HK$142m

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 HK$479m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of HK$0.08, the company appears around fair value at the time of writing. 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. 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 Sinolink Worldwide 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 13%, which is based on a levered beta of 2.000. 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 Sinolink Worldwide 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Sinolink Worldwide Holdings, we've put together three pertinent factors you should assess:

1. Risks: Be aware that Sinolink Worldwide Holdings is showing 1 warning sign in our investment analysis , you should know about...
2. 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!
3. 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.