In This Article:
Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of Zhaojin Mining Industry Company Limited (HKG:1818) as an investment opportunity by estimating the company’s future cash flows and discounting them to their present value. I will be using the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in September 2018 so be sure check out the updated calculation by following the link below.
View our latest analysis for Zhaojin Mining Industry
The model
I’m using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. 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 this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow estimate
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF (CN¥, Millions) | CN¥915.67 | CN¥1.46k | CN¥1.47k | CN¥1.48k | CN¥1.50k |
| Source | Analyst x3 | Analyst x2 | Est @ 0.8% | Est @ 0.8% | Est @ 0.8% |
| Present Value Discounted @ 10.66% | CN¥827.48 | CN¥1.19k | CN¥1.09k | CN¥990.14 | CN¥901.98 |
Present Value of 5-year Cash Flow (PVCF)= CN¥5.00b
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.2%. We discount this to today’s value at a cost of equity of 10.7%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = CN¥1.50b × (1 + 2.2%) ÷ (10.7% – 2.2%) = CN¥18.09b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CN¥18.09b ÷ ( 1 + 10.7%)5 = CN¥10.90b
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¥15.90b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value in the company’s reported currency of CN¥4.94. However, 1818’s primary listing is in China, and 1 share of 1818 in CNY represents 1.143 ( CNY/ HKD) share of SEHK:1818, so the intrinsic value per share in HKD is HK$5.64. Relative to the current share price of HK$6.07, the stock is fair value, maybe slightly overvalued at the time of writing.