In this article I am going to calculate the intrinsic value of YiChang HEC ChangJiang Pharmaceutical Co Ltd (SEHK:1558) 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 December 2017 then I highly recommend you check out the latest calculation for YiChang HEC ChangJiang Pharmaceutical here.
Is 1558 fairly valued?
We are going to use a two-stage DCF model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To start off, I pulled together the analyst consensus estimates of 1558’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.38%. This resulted in a present value of 5-year cash flow of CN¥2,071.4M. Keen to know how I arrived at this number? Read our detailed analysis here.
The infographic above illustrates how 1558’s top and bottom lines are expected to move in the future, which should give you an idea of 1558’s outlook. Secondly, I calculate the terminal value, which accounts for all the future cash flows after the five years. 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. Discounting the terminal value back five years gives us a present value of CN¥7,804.6M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CN¥9,876.0M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of HK$52.32, which, compared to the current share price of HK$26.35, we find that YiChang HEC ChangJiang Pharmaceutical is quite undervalued at a 49.64% discount to what it is available for right now.
Next Steps:
Although the valuation of a company is important, it 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 1558, I’ve compiled three essential aspects you should further research:
PS. Simply Wall St does a DCF calculation for every HK stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.