In This Article:
Two important questions to ask before you buy Shenzhou International Group Holdings Limited (HKG:2313) 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, 2313 is currently valued at HK$141b. Today we will examine 2313’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.
Check out our latest analysis for Shenzhou International Group Holdings
Is Shenzhou International Group Holdings generating enough cash?
Shenzhou International Group Holdings generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
I will be analysing Shenzhou International Group 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
Along with a positive operating cash flow, Shenzhou International Group Holdings also generates a positive free cash flow. However, the yield of 0.13% is not sufficient to compensate for the level of risk investors are taking on. This is because Shenzhou International Group Holdings’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does Shenzhou International Group Holdings have a favourable cash flow trend?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at 2313’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 50%, ramping up from its current levels of CN¥3.9b to CN¥5.8b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, 2313’s operating cash flow growth is expected to decline from a rate of 24% next year, to 21% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.