An Intrinsic Calculation For Hangzhou Binjiang Real Estate Group Co.,Ltd (SZSE:002244) Suggests It's 49% Undervalued

Key Insights

• The projected fair value for Hangzhou Binjiang Real Estate GroupLtd is CN¥20.93 based on 2 Stage Free Cash Flow to Equity
• Hangzhou Binjiang Real Estate GroupLtd is estimated to be 49% undervalued based on current share price of CN¥10.60
• The CN¥10.89 analyst price target for 002244 is 48% less than our estimate of fair value

In this article we are going to estimate the intrinsic value of Hangzhou Binjiang Real Estate Group Co.,Ltd (SZSE:002244) by projecting its future cash flows and then discounting them to today's value. Our analysis will employ 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.

See our latest analysis for Hangzhou Binjiang Real Estate GroupLtd

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 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.

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

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥2.15b	CN¥3.57b	CN¥4.74b	CN¥5.88b	CN¥6.91b	CN¥7.82b	CN¥8.61b	CN¥9.29b	CN¥9.88b	CN¥10.4b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 32.93%	Est @ 23.90%	Est @ 17.59%	Est @ 13.17%	Est @ 10.07%	Est @ 7.91%	Est @ 6.39%	Est @ 5.33%
Present Value (CN¥, Millions) Discounted @ 13%	CN¥1.9k	CN¥2.8k	CN¥3.3k	CN¥3.6k	CN¥3.8k	CN¥3.8k	CN¥3.7k	CN¥3.5k	CN¥3.3k	CN¥3.1k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥33b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 13%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥10b× (1 + 2.9%) ÷ (13%– 2.9%) = CN¥107b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥107b÷ ( 1 + 13%)¹⁰= CN¥32b

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¥65b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥10.6, the company appears quite good value at a 49% 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.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Hangzhou Binjiang Real Estate GroupLtd 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 13%, 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 Hangzhou Binjiang Real Estate GroupLtd

Moving On:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. Why is the intrinsic value higher than the current share price? For Hangzhou Binjiang Real Estate GroupLtd, there are three further items you should explore:

1. Risks: You should be aware of the 3 warning signs for Hangzhou Binjiang Real Estate GroupLtd (1 shouldn't be ignored!) we've uncovered before considering an investment in the company.
2. Future Earnings: How does 002244'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 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 Chinese 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.