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Let's talk about the popular Guangzhou Automobile Group Co., Ltd. (HKG:2238). The company's shares received a lot of attention from a substantial price increase on the SEHK over the last few months. With many analysts covering the large-cap stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. However, could the stock still be trading at a relatively cheap price? Let’s examine Guangzhou Automobile Group’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
Check out our latest analysis for Guangzhou Automobile Group
What's the opportunity in Guangzhou Automobile Group?
The stock seems fairly valued at the moment according to my relative valuation model. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Guangzhou Automobile Group’s ratio of 7.37x is trading slightly below its industry peers’ ratio of 9.96x, which means if you buy Guangzhou Automobile Group today, you’d be paying a reasonable price for it. And if you believe Guangzhou Automobile Group should be trading in this range, then there isn’t much room for the share price grow beyond where it’s currently trading. So, is there another chance to buy low in the future? Given that Guangzhou Automobile Group’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.
Can we expect growth from Guangzhou Automobile Group?
Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. Guangzhou Automobile Group’s earnings over the next few years are expected to increase by 23%, indicating a highly optimistic future ahead. This should lead to more robust cash flows, feeding into a higher share value.
What this means for you:
Are you a shareholder? It seems like the market has already priced in 2238’s positive outlook, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the track record of its management team. Have these factors changed since the last time you looked at 2238? Will you have enough conviction to buy should the price fluctuate below the true value?