In This Article:
How far off is Meitu Inc (SEHK:1357) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. 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 after June 2018 then I highly recommend you check out the latest calculation for Meitu here.
What’s the value?
I use what is known as the 2-stage model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To start off, I use the analyst consensus forecast of 1357’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.44%. This resulted in a present value of 5-year cash flow of CN¥8.65B. Want to understand how I arrived at this number? Take a look at our detailed analysis here.
In the visual above, we see how how 1357’s earnings are expected to move in the future, which should give you an idea of 1357’s outlook. Next, I calculate the terminal value, which is the business’s cash flow after the first stage. I’ve decided to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes CN¥36.71B.
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¥45.37B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of HK$13.07, which, compared to the current share price of HK$8.31, we find that Meitu is quite undervalued at a 36.40% discount to what it is available for right now.
Next Steps:
Whilst important, DCF calculation 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 1357, I’ve compiled three pertinent aspects you should further examine:
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Financial Health: Does 1357 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.
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Future Earnings: How does 1357’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.
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Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of 1357? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!