Key Insights

• China Resources Mixc Lifestyle Services' estimated fair value is HK$32.04 based on 2 Stage Free Cash Flow to Equity

• China Resources Mixc Lifestyle Services' HK$24.90 share price signals that it might be 22% undervalued

• Analyst price target for 1209 is CN¥41.94, which is 31% above our fair value estimate

Today we will run through one way of estimating the intrinsic value of China Resources Mixc Lifestyle Services Limited (HKG:1209) by estimating the company's future cash flows and discounting them to their present value.  Our analysis will employ the Discounted Cash Flow (DCF) model.  Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method.  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.

Step By Step Through The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase.  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.  

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today,  so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥28b

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 8.1%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥5.1b× (1 + 2.0%) ÷ (8.1%– 2.0%) = CN¥86b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥86b÷ ( 1 + 8.1%)10= CN¥40b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value,  which in this case is CN¥67b.  The last step is to then divide the equity value by the number of shares outstanding.  Relative to the current share price of HK$24.9, the company appears   a touch undervalued    at a 22% discount to where the stock price trades currently.   Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

SEHK:1209 Discounted Cash Flow March 13th 2024

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows.  If you don't agree with these result, have a go at the calculation yourself and play with the 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 China Resources Mixc Lifestyle Services 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 8.1%, which is based on a levered beta of 1.079. 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 China Resources Mixc Lifestyle Services

Strength

• Earnings growth over the past year exceeded the industry.

• Currently debt free.

• Dividends are covered by earnings and cash flows.

• Dividend information for 1209.

Weakness

• Earnings growth over the past year is below its 5-year average.

• Dividend is low compared to the top 25% of dividend payers in the Real Estate market.

• What are analysts forecasting for 1209?

Opportunity

• Annual earnings are forecast to grow faster than the Hong Kong market.

• Trading below our estimate of fair value by more than 20%.

Threat

• No apparent threats visible for 1209.

Moving On:

Although the valuation of a company is important, it  ideally won't be the sole piece of analysis you scrutinize for a company.  DCF models are not the be-all and end-all of investment valuation.  Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?"  For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation.   Why is the intrinsic value higher than the current share price?   For China Resources Mixc Lifestyle Services, there are three  fundamental  items  you should further research:

1. Financial Health: Does 1209 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

2. Future Earnings: How does 1209's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.