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How far off is Lonking Holdings Limited (HKG:3339) 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 projecting its future cash flows and then 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. If you are reading this and its not February 2019 then I highly recommend you check out the latest calculation for Lonking Holdings by following the link below.

See our latest analysis for Lonking Holdings

The calculation

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. 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. The sum of these cash flows is then discounted to today’s value.

5-year cash flow estimate

Present Value of 5-year Cash Flow (PVCF)= CN¥7.1b

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. 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%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 12.3%.

Terminal Value (TV) = FCF₂₀₂₃ × (1 + g) ÷ (r – g) = CN¥2.1b × (1 + 2%) ÷ (12.3% – 2%) = CN¥21b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = CN¥21b ÷ ( 1 + 12.3%)⁵ = CN¥12b

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¥19b. 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$5.17. Relative to the current share price of HK$2.63, the stock is quite undervalued at a 49% discount to what it is available for right now.