HUYA Inc (NYSE:HUYA) Is Trading At A 30% Discount

Simply Wall St.

Mon, Oct 1, 2018, 5:34 AM

I am going to run you through how I calculated the intrinsic value of HUYA Inc (NYSE:HUYA) by taking the expected future cash flows and discounting them to today’s value. I will use the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! 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 October 2018 so be sure check out the updated calculation by following the link below.

View our latest analysis for HUYA

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. 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 forecast

	2019	2020	2021	2022	2023
Levered FCF (CN¥, Millions)	CN¥1.48k	CN¥2.08k	CN¥2.72k	CN¥3.18k	CN¥3.69k
Source	Analyst x2	Analyst x2	Analyst x1	Est @ 17%, capped from 74.2%	Est @ 16%, capped from 74.2%
Present Value Discounted @ 9.41%	CN¥1.35k	CN¥1.74k	CN¥2.07k	CN¥2.22k	CN¥2.35k

Present Value of 5-year Cash Flow (PVCF)= CN¥9.73b

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond 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 2.9%. We discount this to today’s value at a cost of equity of 9.4%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = CN¥3.69b × (1 + 2.9%) ÷ (9.4% – 2.9%) = CN¥58.69b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = CN¥58.69b ÷ ( 1 + 9.4%)⁵ = CN¥37.43b

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¥47.15b. 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¥231.38. However, HUYA’s primary listing is in China, and 1 share of HUYA in CNY represents 0.146 ( CNY/ USD) share of NYSE:HUYA, so the intrinsic value per share in USD is $33.68. Relative to the current share price of $23.58, the stock is about right, perhaps slightly undervalued at a 30.0% discount to what it is available for right now.

NYSE:HUYA Intrinsic Value Export October 1st 18

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at HUYA 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 9.4%, which is based on a levered beta of 0.917. 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:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For HUYA, I’ve compiled three pertinent factors you should further research:

Financial Health: Does HUYA 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 HUYA’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 HUYA? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock 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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