In This Article:
How far off is Chinasoft International Limited (HKG:354) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the foreast future cash flows of the company and discounting them back to today’s value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not November 2018 then I highly recommend you check out the latest calculation for Chinasoft International by following the link below.
View our latest analysis for Chinasoft International
The model
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow forecast
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF (CN¥, Millions) | CN¥597.57 | CN¥625.91 | CN¥738.58 | CN¥864.14 | CN¥1.00k |
| Source | Analyst x4 | Analyst x5 | Est @ 18%, capped from 24.27% | Est @ 17%, capped from 24.27% | Est @ 16%, capped from 24.27% |
| Present Value Discounted @ 10.32% | CN¥541.65 | CN¥514.26 | CN¥550.05 | CN¥583.34 | CN¥613.35 |
Present Value of 5-year Cash Flow (PVCF)= CN¥2.8b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.2%. We discount this to today’s value at a cost of equity of 10.3%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = CN¥1.0b × (1 + 2.2%) ÷ (10.3% – 2.2%) = CN¥13b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CN¥13b ÷ ( 1 + 10.3%)5 = CN¥7.7b
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is CN¥11b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of HK$4.89. Relative to the current share price of HK$4.52, the stock is about right, perhaps slightly undervalued at a 7.5% discount to what it is available for right now.