Is China Jinmao Holdings Group Limited (HKG:817) Trading At A 36% Discount?

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, China Jinmao Holdings Group fair value estimate is HK$1.73
• China Jinmao Holdings Group is estimated to be 36% undervalued based on current share price of HK$1.10
• Analyst price target for 817 is CN¥0.83 which is 52% below our fair value estimate

In this article we are going to estimate the intrinsic value of China Jinmao Holdings Group Limited (HKG:817) by estimating the company's future cash flows and discounting them to their present 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.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for China Jinmao Holdings Group

The Method

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥13.4b	CN¥4.90b	CN¥2.00b	CN¥1.19b	CN¥858.7m	CN¥697.4m	CN¥610.4m	CN¥561.3m	CN¥533.4m	CN¥518.5m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ -59.06%	Est @ -40.67%	Est @ -27.79%	Est @ -18.78%	Est @ -12.47%	Est @ -8.05%	Est @ -4.96%	Est @ -2.80%
Present Value (CN¥, Millions) Discounted @ 12%	CN¥11.9k	CN¥3.9k	CN¥1.4k	CN¥750	CN¥483	CN¥349	CN¥273	CN¥223	CN¥189	CN¥164

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥20b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.3%) 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 12%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥518m× (1 + 2.3%) ÷ (12%– 2.3%) = CN¥5.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥5.3b÷ ( 1 + 12%)¹⁰= CN¥1.7b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥21b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of HK$1.1, the company appears quite good value at a 36% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

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. 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 China Jinmao Holdings Group 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 12%, which is based on a levered beta of 2.000. 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 Jinmao Holdings Group

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Jinmao Holdings Group, we've compiled three additional factors you should further research:

1. Risks: For example, we've discovered 3 warning signs for China Jinmao Holdings Group (2 are concerning!) that you should be aware of before investing here.
2. Future Earnings: How does 817'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.

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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.