Estimating The Fair Value Of Beijing Capital International Airport Company Limited (HKG:694)

Key Insights

• The projected fair value for Beijing Capital International Airport is HK$2.84 based on 2 Stage Free Cash Flow to Equity
• With HK$2.82 share price, Beijing Capital International Airport appears to be trading close to its estimated fair value
• Our fair value estimate is similar to Beijing Capital International Airport's analyst price target of CN¥2.83

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Beijing Capital International Airport Company Limited (HKG:694) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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.

Check out our latest analysis for Beijing Capital International Airport

The Method

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥1.64b	CN¥1.44b	CN¥1.33b	CN¥1.27b	CN¥1.24b	CN¥1.23b	CN¥1.23b	CN¥1.24b	CN¥1.25b	CN¥1.27b
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ -7.58%	Est @ -4.57%	Est @ -2.47%	Est @ -1.00%	Est @ 0.03%	Est @ 0.76%	Est @ 1.26%	Est @ 1.61%
Present Value (CN¥, Millions) Discounted @ 12%	CN¥1.5k	CN¥1.2k	CN¥952	CN¥812	CN¥708	CN¥626	CN¥560	CN¥504	CN¥457	CN¥415

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥7.7b

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 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 12%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥1.3b× (1 + 2.4%) ÷ (12%– 2.4%) = CN¥14b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥14b÷ ( 1 + 12%)¹⁰= CN¥4.5b

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¥12b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of HK$2.8, the company appears about fair value at a 0.7% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

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. 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 Beijing Capital International Airport 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 12%, which is based on a levered beta of 1.792. 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.

Looking Ahead:

Whilst important, the DCF calculation 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Beijing Capital International Airport, there are three important factors you should assess:

1. Risks: You should be aware of the 1 warning sign for Beijing Capital International Airport we've uncovered before considering an investment in the company.
2. Future Earnings: How does 694'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.