Underestimate investors Ping an Healthcare and Technology Company Limited (HKG: 1833) by 43%?

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<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "We are going to use a method today to estimate the intrinsic value of ping An Healthcare & Technology Company Limited (HKG: 1833) by discounting the expected future cash flows to their present value. I will use the Discounted Cash Flow (DCF) model. Don't be put off by the jargon, the math behind it is actually quite simple. "Data-reactid =" 27 "> Today we're going to use a method to estimate the intrinsic value of Ping An Healthcare & Technology Company Limited (HKG: 1833) by taking the expected future cash flows at their present value and discounting them Use the Cash Flow (DCF) model. Don't be put off by the technical language, the math behind it is actually quite simple.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "We generally believe that the value of a company is the present is worth all the money it will generate in the future, but one DCF is just one valuation metric among many and it is not without errors. If you want to know more about the discounted cash flow, the reasons for this calculation can be Read in detail Simply Wall St analysis modelEmagazine.credit-suisse.com/app/art…1007 & lang = DE We generally believe that the value of a company is the present value of all cash it will generate in the future. However, a DCF is only one valuation metric among many and not without errors: If you want to learn more about the discounted cash flow, you can read the reasons for this calculation in detail in the analysis model Simply Wall St.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = " Check out our latest analysis on Ping An Healthcare and Technology "data-reactid =" 29 "> Check out our latest analysis on Ping An Healthcare and Technology

Step by step through the calculation

We use the two-stage growth model, which means that we only consider two stages of company growth. In the initial phase, the company may have a higher growth rate, and in the second phase it is usually assumed that the growth rate will be stable. First, we need to get estimates of the cash flows over the next ten years. Wherever possible, we use analyst estimates. However, if these are not available, we extrapolate the previous free cash flow (FCF) from the most recent estimate or the most recently reported value. We expect companies with shrinking free cash flow to slow down their rate of shrinkage and that companies with growing free cash flow will slow down their growth rate during this period. We do this to take into account that growth tends to slow down more in the early years than in later years.

In general, we assume that a dollar is more valuable today than a dollar in the future, and therefore the sum of these future cash flows is discounted to today's value:

10-year free cash flow (FCF) forecast

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Leverage FCF (CN ¥, million) CN ¥ 55.0 million CN ¥ 1.10b CN ¥ 1.99b ¥ 3.14 billion CN ¥ 4.41b ¥ 5.68 billion CN ¥ 6.86b CN ¥ 7.88 billion CN ¥ 8.75b CN ¥ 9.45b
Growth rate Estimated source Analyst x2 Analyst x2 Est @ 81.19% Estimate at 57.3% Est @ 40.58% Est @ 28.87% Est @ 20.67% Est @ 14.94% Est @ 10.92% Estimate at 8.11%
Present value (CN ¥, million) discounted at 8.0% CN ¥ 50.9 944 CN ¥ CN ¥ 1.6k CN ¥ 2.3k CN ¥ 3.0k CN ¥ 3.6k CN ¥ 4.0k CN ¥ 4.3k CN ¥ 4.4k CN ¥ 4.4k

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "("Est" = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = CN ¥ 28b data-reactid = "36">("Est" = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = CN ¥ 28b

We now have to calculate the final value, which takes into account all future cash flows after this ten-year period. The Gordon growth formula is used to calculate the final value at a future annual growth rate that corresponds to the 10-year government bond rate of 1.6%. We discount the terminal cash flows with an equity cost rate of 8.0% to today's value.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Terminal value (TV)= FCF2029 × (1 + g) ÷ (r – g) = CN ¥ 9.5b × (1 + 1.6%) ÷ 8.0% – 1.6%) = CN ¥ 149b Data React = "38">Terminal value (TV)= FCF2029 × (1 + g) ÷ (r – g) = CN ¥ 9.5b × (1 + 1.6%) ÷ 8.0% – 1.6%) = CN ¥ 149b

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Present value of the final value (PVTV)= TV / (1 + r)10= CN ¥ 149b ÷ (1 + 8.0%)10= CN ¥ 69b data-reactid = "39">Present value of the final value (PVTV)= TV / (1 + r)10= CN ¥ 149b ÷ (1 + 8.0%)10= CN ¥ 69b

The total value or equity value is then the total of the present value of future cash flows, which in this case is CN ¥ 97 billion. The final step is to divide the equity value by the number of shares issued. Compared to the current share price of HK $ 58.4, the company appears relatively cheap at a discount of 43%. The assumptions in each calculation have a major impact on the rating. It is therefore better to consider this as a rough estimate that is not accurate to the last cent.

SEHK: 1833 intrinsic value, January 12, 2020

Important assumptions

The most important parameters for a discounted cash flow are now the discount rate and, of course, the actual cash flows. If you disagree with this result, try the calculation yourself and play with the assumptions. The DCF also does not take into account the potential cyclicality of an industry or the future capital requirements of a company and therefore does not provide a complete overview of a company's potential performance. Given that we consider Ping An Healthcare and Technology to be potential shareholders, the cost of equity is used as the discount rate, not the cost of capital (or weighted average cost of capital, WACC) that make up debt. We used 8.0% in this calculation, based on a debt beta of 1.020. Beta is a measure of the volatility of a share compared to the overall market. We get our beta from the industry-standard beta of globally comparable companies with a defined limit between 0.8 and 2.0, which is an appropriate range for stable business.

Next Steps:

While evaluating a company is important, it shouldn't be the only metric you look for when researching a company. The DCF model is not a perfect tool for stock valuation. Rather, it should serve as a guide to "What assumptions must be made for this stock to be under or overvalued?" If a company grows at a different growth rate or if the cost of equity or risk-free interest rates changes significantly, the output can look very different. What is the reason why the stock price differs from the intrinsic value? There are three relevant aspects to Ping An Healthcare and Technology that you should investigate further:

  1. Financial health: Does 1833 have a healthy record? Take a look at our free balance sheet analysis with six simple reviews of key factors like debt and risk.
  2. Future result: What is the 1833 growth rate compared to its competitors and the broader market? Find out more about analyst consensus numbers for the coming years by accessing our free graph of analyst growth expectations.
  3. Other high quality alternatives: Are there any other high quality stocks you could hold instead of 1833? Check out our interactive list of high quality stocks to get an idea of ​​what else is missing!

<p class = "canvas-atom canvas-text MB (1.0em) MB (0) – SM MB (0.8em) – SM" type = "text" content = "PS. Simply Wall St updates its DCF calculation for each HK stock every day, so if you just want to find the intrinsic value of another stock Search here, "data-reactid =" 65 "> PS. Simply Wall St updates its DCF calculation for each HK share daily, so if you want to determine the intrinsic value of another share, just search here.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com, This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading."data-reactid =" 66 ">If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com. This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.