I am going to run you through how I calculated the intrinsic value of Ajisen (China) Holdings Limited (HKG:538) by estimating the company’s future cash flows and discounting them to their present value. I will use the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in June 2018 so be sure check out the updated calculation by following the link below. See our latest analysis for Ajisen (China) Holdings
Step by step through the calculation
I’m using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To start off with we need to estimate the next five years of cash flows. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. I then discount the sum of these cash flows to arrive at a present value estimate.
5-year cash flow estimate
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| Levered FCF (CN¥, Millions) | CN¥147.08 | CN¥282.88 | CN¥349.85 | CN¥342.85 | CN¥335.99 |
| Source | Analyst x2 | Analyst x2 | Analyst x2 | Extrapolated @ (-2%) | Extrapolated @ (-2%) |
| Present Value Discounted @ 14.75% | CN¥128.17 | CN¥214.84 | CN¥231.54 | CN¥197.74 | CN¥168.88 |
Present Value of 5-year Cash Flow (PVCF)= HK$941.17m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.2%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 14.7%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = HK$335.99m × (1 + 2.2%) ÷ (14.7% – 2.2%) = HK$2.74b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = HK$2.74b ÷ ( 1 + 14.7%)5 = HK$1.38b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is HK$2.32b. 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 in the company’s reported currency of CN¥2.12. However, 538’s primary listing is in Hong Kong, and 1 share of 538 in CNY represents 1.206 ( CNY/ HKD) share of SEHK:538, so the intrinsic value per share in HKD is HK$2.56. Relative to the current share price of HK$3.1, the stock is fair value, maybe slightly overvalued at the time of writing.