How far is China Guangguang Environmental Group Co., Ltd. (HKG:257) from its intrinsic value? Using the latest financial data, discounting expected future cash flows to its current value, the stock price is Check whether it is appropriate. The discounted cash flow (DCF) model is the tool we apply to do this. Please read it before you think you don’t understand it. It’s actually much less complicated than you might imagine.
Keep in mind that there are many different ways to value a company, and as with DCFs, each method has advantages and disadvantages in certain scenarios. To learn a little more about intrinsic value, read the Simply Wall St analysis model.
Check out our latest analysis for China Light Environment Group.
China Everbright Environmental Group operates in the commercial services sector, so we have to calculate its intrinsic value a little differently. This approach uses dividends per share (DPS) because free cash flow is difficult to estimate and is often not reported by analysts. Unless the company pays out a significant portion of its FCF as dividends, this method typically results in the stock being undervalued. The “Gordon Growth Model” is used, which simply assumes that dividend payments continue to increase at a sustainable growth rate forever. Dividends are expected to grow at an annual growth rate equivalent to the five-year average 10-year Treasury yield of 2.0%. This number is then discounted to its current value at a cost of capital of 7.6%. Compared to the current share price of HK$2.5, the company appears to be significantly undervalued, at a 49% discount to the current share price. However, keep in mind that this is just a rough estimate and, like any complex formula, there is garbage in and garbage out.
Value per share = Expected dividend per share / (discount rate – perpetual growth rate)
= 0.3 HKD / (7.6% – 2.0%)
= 4.8 Hong Kong Dollar
The above calculation relies heavily on two assumptions. One is the discount rate and the other is the cash flow. Part of investing is making your own assessment of a company’s future performance. So check your assumptions by doing your own calculations. Additionally, DCF does not give a complete picture of a company’s potential performance because it does not take into account the cyclicality of the industry or the company’s future capital requirements. Given that we are considering China Everbright Environmental Group as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital taking into account debt (or weighted average cost of capital, WACC). For this calculation, we used 7.6% based on a leverage beta of 0.951. Beta is a measure of a stock’s volatility compared to the market as a whole. Beta values are derived from industry average beta values for globally comparable companies and are constrained to a range of 0.8 to 2.0, which is a reasonable range for stable businesses.
SWOT analysis of China Light Environment Group
- Debts are fully covered by income.
- The dividend is in the top 25% of dividend payers on the market.
- Revenues have declined over the past year.
- Annual revenue is expected to increase over the next three years.
- Excellent value based on P/E and estimated fair value.
- Debt is not fully covered by operating cash flow.
- Dividends are not included in cash flow.
- Annual profit growth is expected to be slower than the Hong Kong market.
While a company’s valuation is important, ideally it is not the only analysis that scrutinizes a company. The DCF model is not a perfect stock valuation tool. If possible, it’s a good idea to apply different cases and assumptions and see how they affect the company’s valuation. For example, changes in a company’s cost of equity or risk-free rate can have a significant impact on valuations. Why is the stock price below its intrinsic value?For China Guangguang Environmental Group, we have put together his three additional items that need further consideration.
- risk: for that purpose, two warning signs We collaborated with the China Guangguang Environmental Group to discover (including one important one).
- future earnings: How does 257’s growth rate compare to its peers and the broader market? Explore the analyst consensus numbers for the coming years in more detail by interacting with the free Analyst Growth Expectations chart.
- Other solid businesses: Low debt, high return on equity, and good past performance are the fundamentals of a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you haven’t considered before?
PS. Simply Wall St updates DCF calculations for all Hong Kong stocks daily, so if you want to know the intrinsic value of other stocks, search here.
Valuation is complex, but we help make it simple.
Check out our comprehensive analysis of whether China Guangguang Environmental Group is potentially overvalued or undervalued. Fair value estimates, risks and caveats, dividends, insider trading, and financial health.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.