An Intrinsic Calculation For Hangzhou SF Intra-city Industrial Co., Ltd. (HKG:9699) Suggests It's 29% Undervalued

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Hangzhou SF Intra-city Industrial fair value estimate is HK$14.11
• Hangzhou SF Intra-city Industrial is estimated to be 29% undervalued based on current share price of HK$10.04
• Our fair value estimate is 11% higher than Hangzhou SF Intra-city Industrial's analyst price target of CN¥12.66

Today we will run through one way of estimating the intrinsic value of Hangzhou SF Intra-city Industrial Co., Ltd. (HKG:9699) 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. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Hangzhou SF Intra-city Industrial

The Method

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. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥222.0m	CN¥437.1m	CN¥567.8m	CN¥690.6m	CN¥799.7m	CN¥893.6m	CN¥973.1m	CN¥1.04b	CN¥1.10b	CN¥1.15b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 29.92%	Est @ 21.62%	Est @ 15.81%	Est @ 11.74%	Est @ 8.89%	Est @ 6.90%	Est @ 5.51%	Est @ 4.53%
Present Value (CN¥, Millions) Discounted @ 6.6%	CN¥208	CN¥384	CN¥468	CN¥534	CN¥580	CN¥607	CN¥620	CN¥622	CN¥615	CN¥603

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥5.2b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.3%) 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 6.6%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥1.1b× (1 + 2.3%) ÷ (6.6%– 2.3%) = CN¥27b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥27b÷ ( 1 + 6.6%)¹⁰= CN¥14b

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¥19b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of HK$10.0, the company appears a touch undervalued at a 29% discount to where the stock price trades currently. 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

Now 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 Hangzhou SF Intra-city Industrial 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 6.6%, which is based on a levered beta of 0.883. 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 Hangzhou SF Intra-city Industrial

Next Steps:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Hangzhou SF Intra-city Industrial, we've put together three pertinent elements you should further examine:

1. Risks: For example, we've discovered 2 warning signs for Hangzhou SF Intra-city Industrial (1 can't be ignored!) that you should be aware of before investing here.
2. Future Earnings: How does 9699'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 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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SEHK every day. If you want to find the calculation for other stocks 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.