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Two important questions to ask before you buy CITIC Telecom International Holdings Limited (HKG:1883) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, 1883 is currently valued at HK$9.5b. Today we will examine 1883’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
View our latest analysis for CITIC Telecom International Holdings
What is free cash flow?
CITIC Telecom International Holdings’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for CITIC Telecom International Holdings to continue to grow, or at least, maintain its current operations.
I will be analysing CITIC Telecom International Holdings’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Although, CITIC Telecom International Holdings generate sufficient cash from its operational activities, its FCF yield of 6.93% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.
Does CITIC Telecom International Holdings have a favourable cash flow trend?
Does 1883’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next couple of years, expected growth for 1883’s operating cash is negative, with operating cash flows expected to decline from its current level of HK$2.0b. This is unfavourable to its future outlook, especially if capital expenditure heads the opposite direction. However, breaking down growth into a year on year basis, 1883 ‘s negative growth rate improves each year, from -19% next year, to 5.5% in the following year.
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CITIC Telecom International Holdings is compensating investors at a cash yield similar to the wider market portfolio, but holding the stock on its own is riskier than investing in the diversified market, which means the yield is not that attractive on a risk-return basis. Furthermore, its declining operating cash flow doesn’t add to the investment case. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research CITIC Telecom International Holdings to get a more holistic view of the company by looking at: