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Capital market firms such as 1359 are hard to value. This is because the rules they face are different to other companies, which can impact the way we forecast their cash flow. Maintaining a certain level of cash capital ratio is common for these financial firms to abide by, in order to minimize risks to their shareholders. Emphasizing data points such as book values, with the return and cost of equity, is appropriate for gauging 1359’s valuation. Below we will look at how to value 1359 in a fairly accurate and simple method. Check out our latest analysis for China Cinda Asset Management
Why Excess Return Model?
There are two facets to consider: regulation and type of assets. 1359 operates in China which has stringent financial regulations. Furthermore, capital markets generally don’t possess substantial amounts of tangible assets as part of total assets. Therefore the Excess Returns model is appropriate for deriving the true value of 1359 as opposed to the traditional model, which puts weight on factors such as capital expenditure and depreciation.
Deriving 1359’s Intrinsic Value
The key assumption for Excess Returns is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. The returns in excess of cost of equity is called excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (13.44% – 11.06%) * CN¥4.34 = CN¥0.1
Excess Return Per Share is used to calculate the terminal value of 1359, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= CN¥0.1 / (11.06% – 1.88%) = CN¥1.13
Combining these components gives us 1359’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= CN¥4.34 + CN¥1.13 = HK$6.81
Compared to the current share price of CN¥2.8, 1359 is currently priced below its intrinsic value. This means 1359 can be bought today at a discount. Valuation is only one side of the coin when you’re looking to invest, or sell, 1359. There are other important factors to keep in mind when assessing whether 1359 is the right investment in your portfolio.
Next Steps:
For capital markets, there are three key aspects you should look at:
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Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
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Future earnings: What does the market think of 1359 going forward? Our analyst growth expectation chart helps visualize 1359’s growth potential over the upcoming years.
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Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether 1359 is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on 1359 here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.