Yahoo Finance Crystal International Group Limited (HKG:2232) Is Trading At A 36.15% Discount
I am going to run you through how I calculated the intrinsic value of Crystal International Group Limited (HKG:2232) by projecting its future cash flows and then discounting them to today’s value. I will use 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. Check out our latest analysis for Crystal International Group
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. To start off with we need to estimate the next five years of cash flows. 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. The sum of these cash flows is then discounted to today’s value.
5-year cash flow estimate
2018 | 2019 | 2020 | 2021 | 2022 | |
Levered FCF ($, Millions) | $165.00 | $65.33 | $267.00 | $288.31 | $311.31 |
Source | Analyst x2 | Analyst x3 | Analyst x3 | Extrapolated @ (7.98%) | Extrapolated @ (7.98%) |
Present Value Discounted @ 8.44% | $152.16 | $55.56 | $209.38 | $208.49 | $207.60 |
Present Value of 5-year Cash Flow (PVCF)= HK$833.19m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.2%. We discount this to today’s value at a cost of equity of 8.4%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = HK$311.31m × (1 + 2.2%) ÷ (8.4% – 2.2%) = HK$5.10b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = HK$5.10b ÷ ( 1 + 8.4%)5 = HK$3.40b
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 HK$4.23b. In the final step we 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) or ADR then we use the equivalent number. This results in an intrinsic value in the company’s reported currency of $1.48. However, 2232’s primary listing is in Hong Kong, and 1 share of 2232 in USD represents 7.85 ( USD/ HKD) share of SEHK:2232, so the intrinsic value per share in HKD is HK$11.65. Compared to the current share price of HK$7.44, the stock is quite undervalued at a 36.15% 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. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Crystal International Group 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 8.4%, which is based on a levered beta of 0.800. 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:
Whilst important, DCF calculation 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 2232, I’ve compiled three pertinent aspects you should further examine:
Financial Health: Does 2232 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 2232’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 2232? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the HKG every 6 hours. If you want to find the calculation for other stocks 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.
