An Intrinsic Calculation For C&D International Investment Group Limited (HKG:1908) Suggests It's 39% Undervalued

Key Insights

• The projected fair value for C&D International Investment Group is HK$26.45 based on 2 Stage Free Cash Flow to Equity
• C&D International Investment Group is estimated to be 39% undervalued based on current share price of HK$16.14
• The CN¥21.74 analyst price target for 1908 is 18% less than our estimate of fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of C&D International Investment Group Limited (HKG:1908) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

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Is C&D International Investment Group Fairly Valued?

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. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (CN¥, Millions)	CN¥11.4b	CN¥8.28b	CN¥6.77b	CN¥5.96b	CN¥5.51b	CN¥5.27b	CN¥5.15b	CN¥5.12b	CN¥5.13b	CN¥5.19b
Growth Rate Estimate Source	Est @ -40.17%	Est @ -27.27%	Est @ -18.24%	Est @ -11.93%	Est @ -7.50%	Est @ -4.41%	Est @ -2.24%	Est @ -0.72%	Est @ 0.34%	Est @ 1.09%
Present Value (CN¥, Millions) Discounted @ 13%	CN¥10.1k	CN¥6.5k	CN¥4.7k	CN¥3.7k	CN¥3.0k	CN¥2.5k	CN¥2.2k	CN¥1.9k	CN¥1.7k	CN¥1.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥38b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 13%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = CN¥5.2b× (1 + 2.8%) ÷ (13%– 2.8%) = CN¥52b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥52b÷ ( 1 + 13%)¹⁰= CN¥15b

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¥53b. 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$16.1, the company appears quite good value at a 39% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The 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. 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 C&D International Investment 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 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.

Check out our latest analysis for C&D International Investment Group

SWOT Analysis for C&D International Investment Group

Next Steps:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For C&D International Investment Group, we've put together three additional aspects you should look at:

1. Risks: As an example, we've found 2 warning signs for C&D International Investment Group that you need to consider before investing here.
2. Future Earnings: How does 1908'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.