the main ideas
- The expected fair value of Labixiaoxin Snacks Group is HK$0.19 based on two-stage free cash flow to equity
- With a share price of HK$0.19, Labixiaoxin Snacks Group appears to be trading close to its estimated fair value
- The average discount for Labixiaoxin Snacks Group’s competitors is currently 30%
Today we will do a simple demonstration of the valuation method used to estimate the attractiveness of Labixiaoxin Snacks Group Limited HKG:1262 as an investment opportunity by taking the expected future cash flows and discounting them to their present value. We will make use of the discounted cash flow (DCF) model for this purpose. Don’t be put off by the jargon, the math behind it is quite clear.
Companies can be valued in many ways, so we point out that DCF is not ideal for every situation. For those who are keen on learning stock analysis, the Simple Wall St analysis model here might be of interest to you.
View our latest analysis for Labixiaoxin Snacks Group
What is an estimated rating?
We use a two-stage growth model, which simply means that we take into account two stages of a 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. First, we need to get estimates of the next 10 years of cash flows. Since we don’t have analyst estimates for free cash flow, we have extrapolated the previous free cash flow (FCF) from the company’s last reported value. We assume that 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 in later years.
In general, 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 discounted to today’s value:
Estimate 10-year free cash flow (FCF).
| 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
| Leveraged FCF (CN¥, millions) | CNY 16.0 million | Chinese yuan 16.7 million | CN¥17.3m | Chinese yuan 17.8 million | CN¥18.3m | Chinese yuan 18.7 million | Chinese yuan 19.2 million | Chinese yuan 19.6 million | CNY 20.0 million | Chinese yuan 20.4 million |
| Growth rate estimation source | is @5.39% | by 4.34% | @ 3.60% | @ 3.08% | @ 2.72% | by 2.47% | @ 2.29% | @ 2.17% | @ 2.08% | @ 2.02% |
| Current value (RMB, millions) discounted by 9.1% | Chinese yuan 14.6 | Chinese Yuan 14.0 | Chinese Yuan 13.3 | CNY 12.5 | Chinese Yuan 11.8 | Chinese Yuan 11.1 | Chinese Yuan 10.4 | 9.7 Chinese yuan | 9.1 Chinese yuan | 8.5 Chinese yuan |
(“Est” = FCF growth rate estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 115 million Chinese yuan
The second stage is also known as the terminal value, which is the company’s cash flow after the first stage. For a number of reasons, a very conservative growth rate is used that cannot exceed the growth rate of a country’s GDP. In this case, we used the average 5-year government bond yield (1.9%) 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 9.1%.
Final value (TV)=FCF2033 × (1 + g) ÷ (y – g) = 20 million CNY × (1 + 1.9%) ÷ (9.1% – 1.9%) = 286 million CNY
Terminal Present Value (PVTV)= tv / (1 + r)10= CN¥286m÷ (1 + 9.1%)10= 119 million Chinese yuan
Total value, or equity value, is the sum of the present value of future cash flows, which in this case is RMB234 million. The final step is to divide the value of the shares by the number of shares outstanding. Compared to the current share price of HK$0.2, the company appears around fair value at the time of writing. However, remember that this is just a rough assessment, and like any complex formula – garbage in, garbage out.
Assumptions
We point out that the most important inputs to discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try doing the math yourself and check your own assumptions. DCF also does not take into account the potential cyclicality of the industry, or the future capital requirements of the company, so it does not give a complete picture of the company’s likely performance. Given that we view Labixiaoxin Snacks 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 represents debt. For this calculation, we used 9.1%, which is based on a leverage beta of 1.197. Beta is a measure of a stock’s volatility, compared to the market as a whole. We obtain the beta from the industry average beta for globally comparable companies, with an imposed bound between 0.8 and 2.0, which is a reasonable range for stable businesses.
SWOT Analysis of Labixiaoxin Snacks Group
- The main strengths of 1262 have not been identified.
- The current stock price is higher than our fair value estimate.
- It has enough cash runway for more than 3 years based on current free cash flows.
- The lack of analyst coverage makes it difficult to determine 1262’s earnings forecasts.
- Debt is not well covered by operating cash flow.
I look forward:
Despite its importance, the discounted cash flow calculation is only one of many factors that a company needs to evaluate. The DCF model is not a perfect tool for valuing stocks. Rather, it should be viewed as a guide to “What assumptions would have to be true for this stock to be under/overvalued?” If the company were growing at a different rate, or if the cost of equity or risk-free rate changed sharply, the output could look very different. For the Labixiaoxin Snacks Group, we have compiled three relevant items that you should consider:
- Risks:We feel you should evaluate 1 warning sign for Labixiaoxin Snacks Group We have set a mark before making an investment in the company.
- Other solid works: Low debt, high returns on equity, and good past performance are essential for a strong business. Why not explore our interactive list of stocks with strong business fundamentals to see if there are other companies you might not have considered!
- Other environmentally friendly companies: Are you concerned about the environment and believe that consumers will buy more and more environmentally friendly products? Browse our interactive list of companies considering a greener future to discover some stocks you may not have thought of!
note. Simply Wall St updates its discounted cash flow (DCF) calculation for each Hong Kong stock every day, so if you want to find the intrinsic value of any other stock, just look here.
Evaluation is complex, but we help simplify it.
Find out if Labixiaoxin Snacks Group may be overvalued or undervalued by checking out our comprehensive analysis, which includes: Fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This article written by Simply Wall St is general in nature. We provide comments based on historical data and analyst forecasts only using 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 into account your objectives or financial situation. We aim to offer you focused, long-term analysis driven by fundamental data. Note that our analysis may not take into account a company’s most recent price-sensitive announcements or qualitative materials. Simply put, Wall St has no position in any of the stocks mentioned.