Stock Analysis

Calculating The Fair Value Of C&D International Investment Group Limited (HKG:1908)

SEHK:1908
Source: Shutterstock

Key Insights

  • The projected fair value for C&D International Investment Group is HK$19.61 based on 2 Stage Free Cash Flow to Equity
  • Current share price of HK$19.38 suggests C&D International Investment Group is potentially trading close to its fair value
  • The CN¥28.49 analyst price target for 1908 is 45% more than our estimate of fair value

How far off is C&D International Investment Group Limited (HKG:1908) 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 forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 C&D International Investment Group

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. 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¥3.66b CN¥3.86b CN¥4.03b CN¥4.17b CN¥4.30b CN¥4.42b CN¥4.53b CN¥4.63b CN¥4.74b CN¥4.83b
Growth Rate Estimate Source Est @ 6.92% Est @ 5.41% Est @ 4.35% Est @ 3.61% Est @ 3.09% Est @ 2.73% Est @ 2.47% Est @ 2.30% Est @ 2.17% Est @ 2.08%
Present Value (CN¥, Millions) Discounted @ 14% CN¥3.2k CN¥3.0k CN¥2.7k CN¥2.5k CN¥2.3k CN¥2.0k CN¥1.8k CN¥1.7k CN¥1.5k CN¥1.3k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥22b

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. 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 (1.9%) 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 14%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥4.8b× (1 + 1.9%) ÷ (14%– 1.9%) = CN¥42b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥42b÷ ( 1 + 14%)10= CN¥12b

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¥34b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of HK$19.4, the company appears about fair value at a 1.2% 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.

dcf
SEHK:1908 Discounted Cash Flow September 15th 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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 C&D International Investment Group 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 14%, 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 C&D International Investment Group

Strength
  • Earnings growth over the past year exceeded the industry.
  • Debt is well covered by earnings.
  • Dividends are covered by earnings and cash flows.
Weakness
  • Earnings growth over the past year is below its 5-year average.
  • Dividend is low compared to the top 25% of dividend payers in the Real Estate market.
  • Shareholders have been diluted in the past year.
Opportunity
  • Annual earnings are forecast to grow faster than the Hong Kong market.
  • Good value based on P/E ratio and estimated fair value.
  • Significant insider buying over the past 3 months.
Threat
  • Debt is not well covered by operating cash flow.
  • Revenue is forecast to grow slower than 20% per year.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. 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. For C&D International Investment Group, we've put together three additional elements you should consider:

  1. Risks: To that end, you should be aware of the 2 warning signs we've spotted with C&D International Investment Group .
  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for 1908'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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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:1908

C&D International Investment Group

An investment holding company, engages in the property development, real estate industry chain investment services, and industry investment activities in Mainland China, Hong Kong, Macau, Taiwan, and internationally.

Very undervalued with adequate balance sheet and pays a dividend.