Is It Too Late To Consider Buying Shenzhen Investment Limited (HKG:604)?

Shenzhen Investment Limited (HKG:604), might not be a large cap stock, but it saw a double-digit share price rise of over 10% in the past couple of months on the SEHK. As a mid-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, what if the stock is still a bargain? Today I will analyse the most recent data on Shenzhen Investment’s outlook and valuation to see if the opportunity still exists.

View our latest analysis for Shenzhen Investment

What is Shenzhen Investment worth?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 5.78x is currently trading slightly below its industry peers’ ratio of 8.46x, which means if you buy Shenzhen Investment today, you’d be paying a decent price for it. And if you believe Shenzhen Investment should be trading in this range, then there isn’t much room for the share price to grow beyond the levels of other industry peers over the long-term. Furthermore, Shenzhen Investment’s share price also seems relatively stable compared to the rest of the market, as indicated by its low beta. This may mean it is less likely for the stock to fall lower from natural market volatility, which suggests less opportunities to buy moving forward.

What kind of growth will Shenzhen Investment generate?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. Though in the case of Shenzhen Investment, it is expected to deliver a negative earnings growth of -16%, which doesn’t help build up its investment thesis. It appears that risk of future uncertainty is high, at least in the near term.

What this means for you:

Are you a shareholder? Currently, 604 appears to be trading around industry price multiples, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on 604, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping tabs on 604 for a while, now may not be the most advantageous time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. In addition to this, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help crystallize your views on 604 should the price fluctuate below the industry PE ratio.

So while earnings quality is important, it's equally important to consider the risks facing Shenzhen Investment at this point in time. For example, we've found that Shenzhen Investment has 3 warning signs (2 can't be ignored!) that deserve your attention before going any further with your analysis.

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This article by Simply Wall St is general in nature. 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.
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