key insights
- The expected fair value of China Yongda Automotive Service Holdings is HK$4.55 based on the dividend discount model.
- Current share price of HKD2.95 suggests that China Yongda Automobile Service Holdings may be undervalued by 35%
- 3669’s analyst price target of C$4.92 is 8.2% above our fair value estimate.
In this article, we estimate China Yongda Automotive Service Holding Co., Ltd.’s (HKG:3669) future cash flows and discount them to their present value to estimate their intrinsic value. Our analysis uses a discounted cash flow (DCF) model. Please read it before you think you don’t understand it. It’s actually much less complicated than you might imagine.
However, keep in mind that there are many ways to estimate a company’s value, and a DCF is just one method. If you still have doubts about this type of valuation, take a look at the Simply Wall St analysis model.
Check out our latest analysis for China Yongda Automobile Service Holdings.
calculation
China Yongda Automobile Service Holdings is a specialty retailer, so we need to calculate its value a little differently than other stocks. This approach uses dividends per share (DPS) because free cash flow is difficult to estimate and is often not reported by analysts. Unless the company pays out a significant portion of its FCF as dividends, this method typically results in the stock being undervalued. The ‘Gordon Growth Model’ is used, which simply assumes that dividend payments continue to increase at a sustainable growth rate forever. For various reasons, a very conservative growth rate is used that cannot exceed the company’s gross domestic product (GDP). This time, we used the 5-year average (2.0%) of the 10-year government bond yield. The expected dividend per share is discounted to its current value at a cost of capital of 9.5%. Compared to the current share price of HKD3.0, the company looks like very good value at a 35% discount to the current share price. However, keep in mind that this is just a rough estimate and like any complex formula, garbage goes in and garbage goes out.
Value per share = Expected dividend per share / (discount rate – perpetual growth rate)
= CN¥0.3 / (9.5% – 2.0%)
= 4.5 HKD
Prerequisites
It is important to point out that the most important input to discounted cash flows is the discount rate, which is, of course, the actual cash flows. Part of investing is making your own assessment of a company’s future performance. So check your assumptions by doing your own calculations. Additionally, DCF does not give a complete picture of a company’s potential performance because it does not take into account the cyclicality of the industry or the company’s future capital requirements. Given that we are considering China Yongda Automotive Service Holdings as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital taking into account debt (or weighted average cost of capital, WACC). For this calculation, we used 9.5% based on a leverage beta of 1.239. Beta is a measure of a stock’s volatility compared to the market as a whole. Beta values are derived from industry average beta values for globally comparable companies and are constrained to a range of 0.8 to 2.0, which is a reasonable range for stable businesses.
SWOT analysis of China Yongda Automobile Service Holdings
- Debt is not considered a risk.
- Dividends are covered by profits and cash flow.
- Revenues have declined over the past year.
- The dividend is low compared to the top 25% of dividend payers in the specialty retail market.
- Annual revenue is expected to grow at a faster pace than the Hong Kong market.
- Excellent value based on P/E and estimated fair value.
- Annual revenue is expected to grow more slowly than the Hong Kong market.
For the future:
Valuation of a company is important, but it is only one of many factors that should be used to evaluate a company. The DCF model is not the ultimate in investment valuation. Rather, it should be viewed as a guide to “What assumptions need to hold true for this stock to be undervalued/overvalued?” For example, a small adjustment to the terminal value growth rate can dramatically change the overall result. Can you uncover why the company is trading at a discount to its intrinsic value? We’ve summarized 3 important aspects of China Yongda Automobile Service Holdings to look at.
- risk: Case in point, we found 2 warning signs for China Yongda Automobile Service Holdings you should know.
- future earnings: How does 3669’s growth rate compare to its peers and the broader market? Explore the analyst consensus numbers for the coming years in more detail by interacting with the free Analyst Growth Expectations chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of quality stocks to figure out what else you’re missing.
PS. Simply Wall St updates DCF calculations for all Hong Kong stocks daily, so if you want to know the intrinsic value of other stocks, search here.
Valuation is complex, but we help make it simple.
Check out our comprehensive analysis of China Yongda Automobile Service Holdings to see if it is potentially overvalued or undervalued. Fair value estimates, risks and caveats, dividends, insider trading, and financial health.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.