Investors Are Undervaluing Beijing Enterprises Clean Energy Group Limited (HKG:1250) By 41.26%
Does the December share price for Beijing Enterprises Clean Energy Group Limited (HKG:1250) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value 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! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not December 2018 then I highly recommend you check out the latest calculation for Beijing Enterprises Clean Energy Group by following the link below.
Check out our latest analysis for Beijing Enterprises Clean Energy Group
What’s the value?
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 begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.
5-year cash flow estimate
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF (HK$, Millions) | HK$-4.69k | HK$-3.49k | HK$1.98k | HK$3.77k | HK$4.38k |
Source | Analyst x1 | Analyst x1 | Analyst x1 | Analyst x1 | Est @ 16%, capped from 74.81% |
Present Value Discounted @ 17.8% | HK$-3.98k | HK$-2.52k | HK$1.21k | HK$1.96k | HK$1.93k |
Present Value of 5-year Cash Flow (PVCF)= -HK$1.4b
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. 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 17.8%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = HK$4.4b × (1 + 2.2%) ÷ (17.8% – 2.2%) = HK$29b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = HK$29b ÷ ( 1 + 17.8%)5 = HK$13b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is HK$11b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of HK$0.18. Relative to the current share price of HK$0.10, the stock is quite undervalued at a 41% discount to what it is available for right now.
The assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Beijing Enterprises Clean Energy 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 17.8%, which is based on a levered beta of 2. 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:
Although the valuation of a company is important, 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 1250, there are three pertinent factors you should further research:
Financial Health: Does 1250 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 1250’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 1250? 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
