How far off is Haier Electronics Group Co Ltd (HKG:1169) 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! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not August 2018 then I highly recommend you check out the latest calculation for Haier Electronics Group by following the link below.
See our latest analysis for Haier Electronics Group
Crunching the numbers
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. To begin with we have to get estimates of the next five years of cash flows. 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
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| Levered FCF (CN¥, Millions) | CN¥1.23k | CN¥3.35k | CN¥4.92k | CN¥5.10k | CN¥5.29k |
| Source | Analyst x2 | Analyst x3 | Analyst x3 | Est @ 3.68% | Est @ 3.68% |
| Present Value Discounted @ 8.9% | CN¥1.13k | CN¥2.82k | CN¥3.81k | CN¥3.63k | CN¥3.45k |
Present Value of 5-year Cash Flow (PVCF)= CN¥14.84b
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 8.9%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = CN¥5.29b × (1 + 2.2%) ÷ (8.9% – 2.2%) = CN¥80.66b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CN¥80.66b ÷ ( 1 + 8.9%)5 = CN¥52.65b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CN¥67.49b. 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¥24.05. However, 1169’s primary listing is in Hong Kong, and 1 share of 1169 in CNY represents 1.147 ( CNY/ HKD) share of OTCPK:HREL.F, so the intrinsic value per share in HKD is HK$27.57. Relative to the current share price of HK$21.25, the stock is about right, perhaps slightly undervalued at a 22.93% discount to what it is available for right now.