Does The Hype Around China Communications Services Corporation Limited’s (HKG:552) Growth Justify Its April Share Price?

Growth expectations for China Communications Services Corporation Limited (HKG:552) are high, but many investors are starting to ask whether its last close at HK$6.78 can still be rationalized by the future potential. Below I will be talking through a basic metric which will help answer this question.

Check out our latest analysis for China Communications Services

Should you get excited about 552’s future?

According to the analysts covering the company, the following few years should bring about good growth prospects for China Communications Services. The consensus forecast from 9 analysts is certainly positive with earnings forecasted to rise significantly from today’s level of CN¥0.419 to CN¥0.602 over the next three years. This results in an annual growth rate of 13%, on average, which signals a market-beating outlook in the upcoming years.

Can 552’s share price be justified by its earnings growth?

China Communications Services is available at a price-to-earnings ratio of 13.83x, showing us it is overvalued compared to the HK market average ratio of 12.12x , and undervalued based on its latest annual earnings update compared to the Telecom average of 14.9x .

SEHK:552 Price Estimation Relative to Market, April 16th 2019
SEHK:552 Price Estimation Relative to Market, April 16th 2019

Given that 552’s price-to-earnings of 13.83x lies below the industry average, this already indicates that the company could be potentially undervalued. But, to be able to properly assess the value of a high-growth stock such as China Communications Services, we must incorporate its earnings growth in our valuation. The PEG ratio is a great calculation to take account of growth in the stock’s valuation. A PE ratio of 13.83x and expected year-on-year earnings growth of 13% give China Communications Services an acceptable PEG ratio of 1.05x. Based on this growth, China Communications Services’s stock can be considered slightly overvalued , based on the fundamentals.

What this means for you:

552’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Financial Health: Are 552’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has 552 been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of 552’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.