Yahoo Finance China Sunsine Chemical Holdings Ltd (SGX:CH8) Is Trading At A 49.94% Discount
How far off is China Sunsine Chemical Holdings Ltd (SGX:CH8) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today’s value. This is done using the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in June 2018 so be sure check out the updated calculation by following the link below. View out our latest analysis for China Sunsine Chemical Holdings
Crunching the numbers
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. In the first stage we need to estimate the cash flows to the business over the next five years. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. I then discount the sum of these cash flows to arrive at a present value estimate.
5-year cash flow forecast
2018 | 2019 | 2020 | 2021 | 2022 | |
Levered FCF (CN¥, Millions) | CN¥296.20 | CN¥547.10 | CN¥452.20 | CN¥496.79 | CN¥545.78 |
Source | Analyst x1 | Analyst x1 | Analyst x1 | Extrapolated @ (9.86%) | Extrapolated @ (9.86%) |
Present Value Discounted @ 9.21% | CN¥271.21 | CN¥458.67 | CN¥347.13 | CN¥349.18 | CN¥351.25 |
Present Value of 5-year Cash Flow (PVCF)= S$1.78b
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.6%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 9.2%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = S$545.78m × (1 + 2.6%) ÷ (9.2% – 2.6%) = S$8.41b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = S$8.41b ÷ ( 1 + 9.2%)5 = S$5.41b
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is S$7.19b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value in the company’s reported currency of CN¥14.62. However, CH8’s primary listing is in Singapore, and 1 share of CH8 in CNY represents 0.209 ( CNY/ SGD) share of SGX:CH8, so the intrinsic value per share in SGD is SGD3.06. Compared to the current share price of SGD1.53, the stock is quite undervalued at a 49.94% discount to what it is available for right now.
The assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at China Sunsine Chemical Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 9.2%, which is based on a levered beta of 0.894. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For CH8, I’ve put together three relevant aspects you should look at:
Financial Health: Does CH8 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.
Future Earnings: How does CH8’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: Are there other high quality stocks you could be holding instead of CH8? 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 does a DCF calculation for every SG stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
