Intrinsic Calculation For Wisdom Education International Holdings Company Limited (HKG:6068) Shows Investors Are Overpaying

Simply Wall St.

Mon, Nov 12, 2018, 5:16 PM

In this article I am going to calculate the intrinsic value of Wisdom Education International Holdings Company Limited (HKG:6068) by projecting its future cash flows and then discounting them to today’s value. I will be using 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 November 2018 then I highly recommend you check out the latest calculation for Wisdom Education International Holdings by following the link below.

See our latest analysis for Wisdom Education International Holdings

Step by step through the calculation

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 the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

	2019	2020	2021	2022	2023
Levered FCF (CN¥, Millions)	CN¥356.19	CN¥509.00	CN¥542.53	CN¥729.50	CN¥832.45
Source	Analyst x8	Analyst x7	Analyst x3	Analyst x2	Analyst x2
Present Value Discounted @ 13.18%	CN¥314.70	CN¥397.34	CN¥374.19	CN¥444.54	CN¥448.19

Present Value of 5-year Cash Flow (PVCF)= CN¥2.0b

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 (2.2%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 13.2%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = CN¥832m × (1 + 2.2%) ÷ (13.2% – 2.2%) = CN¥7.7b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = CN¥7.7b ÷ ( 1 + 13.2%)⁵ = CN¥4.2b

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¥6.2b. 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¥3.01. However, 6068’s primary listing is in China, and 1 share of 6068 in CNY represents 1.126 ( CNY/ HKD) share of SEHK:6068, so the intrinsic value per share in HKD is HK$3.39. Compared to the current share price of HK$4.08, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

SEHK:6068 Intrinsic Value Export November 13th 18

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Wisdom Education 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 13.2%, which is based on a levered beta of 1.408. 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 6068, I’ve compiled three fundamental factors you should further research:

Financial Health: Does 6068 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 6068’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 6068? 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 HK 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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