Today we’re going to review one way to estimate the intrinsic value of Sinic Holdings (Group) Company Limited (HKG: 2103) by estimating the company’s future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There really isn’t much to it, although it might seem quite complex.

Remember, however, that there are many ways to estimate the value of a business, and a DCF is just one method. If you want to know more about discounted cash flows, the rationale for this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Sinic Holdings (Group)

Crunch the numbers

As Sinic Holdings (Group) operates in the real estate industry, we have to calculate intrinsic value in a slightly different way. In this approach, dividends per share (DPS) are used because free cash flow is difficult to estimate and often not reported by analysts. Unless a company pays out the majority of its FCF as a dividend, this method will generally underestimate the value of the stock. We use Gordon’s growth model, which assumes that the dividend will grow in perpetuity at a rate that can be sustained. For a number of reasons, a very conservative growth rate is used that cannot exceed that of a company’s gross domestic product (GDP). In this case, we used the 5-year average of the 10-year government bond yield (1.5%). The expected dividend per share is then discounted to its current value at a cost of equity of 9.4%. Compared to the current share price of HK $ 4.2, the company looks reasonably expensive at the time of writing. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= CN ¥ 0.2 / (9.4% – 1.5%)

= HK $ 3.1

SEHK: 2103 Discounted cash flow June 12, 2021

Important assumptions

We emphasize that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with these results, try the calculation yourself and play with the assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we consider Sinic Holdings (Group) as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes into account the debt. In this calculation, we used 9.4%, which is based on a leveraged beta of 1.468. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta from globally comparable companies, with a limit imposed between 0.8 and 2.0, which is a reasonable range for a stable business.

Looking forward:

While important, calculating DCF is just one of the many factors you need to assess for a business. It is not possible to achieve a rock-solid valuation with a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. Why is intrinsic value lower than the current share price? For Sinic Holdings (Group), we have compiled three relevant aspects that you need to assess:

  1. Risks: For example, we discovered 2 warning signs for Sinic Holdings (Group) (1 doesn’t suit us very well!) Which you should be aware of before investing here.
  2. Future benefits: How does 2103’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth expectations chart.
  3. Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what else you might be missing!

PS. The Simply Wall St app performs a daily discounted cash flow assessment for each SEHK share. If you want to find the calculation for other actions, do a search here.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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