Estimating The Fair Value Of Vinda International Holdings Limited (HKG:3331)

Simply Wall St.

Thu, Sep 27, 2018, 9:09 PM

Does the share price for Vinda International Holdings Limited (HKG:3331) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by estimating the company’s future cash flows and discounting them to their present value. I will use 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 September 2018 then I highly recommend you check out the latest calculation for Vinda International Holdings by following the link below.

View our latest analysis for Vinda International Holdings

The method

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.

5-year cash flow estimate

	2019	2020	2021	2022	2023
Levered FCF (HK$, Millions)	HK$643.85	HK$1.03k	HK$1.10k	HK$1.21k	HK$1.40k
Source	Analyst x6	Analyst x7	Analyst x1	Analyst x1	Est @ 16%, capped from 17.05%
Present Value Discounted @ 8.44%	HK$593.73	HK$878.93	HK$859.48	HK$875.02	HK$936.02

Present Value of 5-year Cash Flow (PVCF)= HK$4.14b

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. 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 8.4%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = HK$1.40b × (1 + 2.2%) ÷ (8.4% – 2.2%) = HK$23.00b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = HK$23.00b ÷ ( 1 + 8.4%)⁵ = HK$15.34b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is HK$19.48b. The last step is to then 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) then we use the equivalent number. This results in an intrinsic value of HK$16.31. Compared to the current share price of HK$13.62, the stock is about right, perhaps slightly undervalued at a 16.5% discount to what it is available for right now.

SEHK:3331 Intrinsic Value Export September 28th 18

Important assumptions

I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Vinda International Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.4%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For 3331, I’ve put together three important factors you should look at:

Financial Health: Does 3331 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does 3331’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of 3331? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the HKG every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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