- The projected fair value for Xinyi Glass Holdings is HK$8.66 based on 2 Stage Free Cash Flow to Equity
- With HK$9.28 share price, Xinyi Glass Holdings appears to be trading close to its estimated fair value
- Analyst price target for 868 is HK$14.73, which is 70% above our fair value estimate
How far off is Xinyi Glass Holdings Limited (HKG:868) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
Check out our latest analysis for Xinyi Glass Holdings
Step By Step Through The Calculation
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
|Levered FCF (HK$, Millions)
|Growth Rate Estimate Source
|Est @ 4.15%
|Est @ 3.50%
|Est @ 3.04%
|Est @ 2.72%
|Est @ 2.49%
|Est @ 2.34%
|Est @ 2.23%
|Est @ 2.15%
|Present Value (HK$, Millions) Discounted @ 9.5%
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = HK$18b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 9.5%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = HK$3.3b× (1 + 2.0%) ÷ (9.5%– 2.0%) = HK$45b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= HK$45b÷ ( 1 + 9.5%)10= HK$18b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is HK$37b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of HK$9.3, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Xinyi Glass Holdings 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 accounts for debt. In this calculation we've used 9.5%, which is based on a levered beta of 1.272. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Xinyi Glass Holdings
- Debt is not viewed as a risk.
- Balance sheet summary for 868.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Building market.
- Expensive based on P/E ratio and estimated fair value.
- Shareholders have been diluted in the past year.
- Annual earnings are forecast to grow faster than the Hong Kong market.
- Significant insider buying over the past 3 months.
- Dividends are not covered by cash flow.
- Annual revenue is forecast to grow slower than the Hong Kong market.
- See 868's dividend history.
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Xinyi Glass Holdings, there are three relevant factors you should explore:
- Risks: For instance, we've identified 3 warning signs for Xinyi Glass Holdings that you should be aware of.
- Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for 868's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SEHK every day. If you want to find the calculation for other stocks just search here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.