Key Insights
- Chow Sang Sang Holdings International's estimated fair value is HK$9.88 based on Dividend Discount Model
- Chow Sang Sang Holdings International's HK$8.18 share price indicates it is trading at similar levels as its fair value estimate
- Analyst price target for 116 is HK$11.77, which is 19% above our fair value estimate
In this article we are going to estimate the intrinsic value of Chow Sang Sang Holdings International Limited (HKG:116) by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don't get put off by the jargon, the math behind it is actually quite straightforward.
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.
The Method
We have to calculate the value of Chow Sang Sang Holdings International slightly differently to other stocks because it is a luxury company. Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used. This often underestimates the value of a stock, but it can still be good as a comparison to competitors. The 'Gordon Growth Model' is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. For a number of reasons a very conservative growth rate is used that cannot exceed that of a company's Gross Domestic Product (GDP). In this case we used the 5-year average of the 10-year government bond yield (2.0%). The expected dividend per share is then discounted to today's value at a cost of equity of 9.1%. Relative to the current share price of HK$8.2, the company appears about fair value at a 17% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)
= HK$0.7 / (9.1% – 2.0%)
= HK$9.9
The 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 Chow Sang Sang Holdings International 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 9.1%, which is based on a levered beta of 1.279. 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 Chow Sang Sang Holdings International
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings.
- Dividend is in the top 25% of dividend payers in the market.
- Dividend information for 116.
- No major weaknesses identified for 116.
- Annual earnings are forecast to grow faster than the Hong Kong market.
- Good value based on P/E ratio and estimated fair value.
- Debt is not well covered by operating cash flow.
- Revenue is forecast to grow slower than 20% per year.
- Is 116 well equipped to handle threats?
Looking Ahead:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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 Chow Sang Sang Holdings International, we've compiled three pertinent elements you should explore:
- Risks: You should be aware of the 1 warning sign for Chow Sang Sang Holdings International we've uncovered before considering an investment in the company.
- Future Earnings: How does 116'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.
- 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. Simply Wall St updates its DCF calculation for every Hong Kong stock every day, so if you want to find the intrinsic value of any other stock 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.