key insights
- The expected fair value of Geely Automobile Holdings is HK$17.00 based on two-stage free cash flows into shares.
- Current share price of HK$9.48 suggests Geely Automobile Holding may be undervalued by 44%
- The analyst price target for 175 is CA$13.73, 19% below our fair value estimate.
Does the November stock price of Geely Automobile Holding Co., Ltd. (HKG:175) reflect its actual value? Today, we will discount the expected future cash flows to the present value to calculate the stock’s essential Estimate the value. One way to accomplish this is to employ 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.
We generally think of a company’s value as the present value of all the cash it will generate in the future. However, DCF is just one metric among many, and it is not without its flaws. To learn a little more about intrinsic value, read the Simply Wall St analysis model.
Check out our latest analysis for Geely Automobile Holdings.
model
We use a so-called two-stage model. This means that there are two different periods in the growth rate of the company’s cash flow. Generally, the first stage is a higher growth stage and the second stage is a lower growth stage. First, you need to estimate your cash flows for the next 10 years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will see their rate of shrinkage slow, and companies with growing free cash flow will see their growth rate slow over this period. This is to reflect that growth tends to be slower in the early years than in later years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so the sum of these future cash flows must be discounted to arrive at a present value estimate.
Estimated 10-year free cash flow (FCF)
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Leverage FCF (CN¥, million) | 17 billion CN yen | 16.8 billion CN yen | 16.8 billion CN yen | 16.9 billion CN yen | 17.1 billion CN yen | 17.3 billion CN yen | 17.5 billion CN yen | 17.8 billion CN yen | 18.1 billion CN yen | 18.4 billion CN yen |
Growth rate estimation source | Analyst x5 | Analyst x5 | Estimated @ -0.06% | Estimated @ 0.55% | Estimated @ 0.98% | Estimated @ 1.28% | Estimated @ 1.48% | Estimated @ 1.63% | Estimated @ 1.73% | Estimated @ 1.80% |
Present value (CN¥, million) discounted at 12% | CN¥15.2k | CN¥13.4k | CN¥12.0k | CN¥10.8k | CN¥9.7k | CN¥8.8k | CN¥8.0k | CN¥7.3k | CN¥6,600 | CN¥6.0k |
(“Est” = FCF growth rate estimated by Simply Wall St)
Present value of cash flows over 10 years (PVCF) = CAD 98 billion
The second stage is also called the terminal value, which is the cash flow of the business after the first stage. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the five-year average of the 10-year Treasury yield of 2.0%. The final cash flows are discounted to today’s value at a cost of capital of 12%.
Terminal value (TV)=FCF2033 × (1 + g) ÷ (r – g) = 18 billion yen × (1 + 2.0%) ÷ (12% – 2.0%) = 190 billion yen
Present Value of Terminal Value (PVTV)= TV / (1 + r)Ten= 190 billion yen ÷ ( 1 + 12%)Ten= 62 billion yen
The total value, or capital value, is the sum of the present values of future cash flows, which in this case is CN 160 billion. The final step is to divide the stock value by the number of shares outstanding. Compared to the current share price of HK$9.5, the company appears to be significantly undervalued, at a discount of 44% to the current share price. However, evaluation is an imprecise measure and is more like a telescope. After moving a few degrees, you will eventually reach another galaxy. Please keep this in mind.
Important prerequisites
The above calculation relies heavily on two assumptions. One is the discount rate and the other is the cash flow. 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 Geely Automobile 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 12% based on a leverage beta of 1.674. 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 Geely Automobile Holding
- Earnings growth over the past year has outpaced the industry.
- Debt is not considered a risk.
- Dividends are covered by profits and cash flow.
- The dividend is low compared to the top 25% of dividend payers in the auto market.
- Annual revenue is expected to grow at a faster pace than the Hong Kong market.
- Transactions at 20% or more below our estimated fair value.
- Revenue growth is expected to be less than 20% annually.
For the future:
Although important, DCF calculations are only one of many factors that businesses need to evaluate. The DCF model is not a perfect stock valuation tool. Rather, the best use of DCF models is to test certain assumptions and theories to see if a company is undervalued or overvalued. For example, a small adjustment to the terminal value growth rate can dramatically change the overall result. Why is the intrinsic value higher than the current share price? We’ve put together three important aspects to consider for Geely Automobile Holdings.
- risk: For example, I checked the following: 1 warning sign for Geely Automobile Holding What you need to know.
- future earnings: How does 175’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 solid businesses: Low debt, high return on equity, and good past performance are the fundamentals of a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you haven’t considered before?
PS. The Simply Wall St app performs a daily discounted cash flow valuation of all SEHK stocks. If you want to know the calculations for other stocks, please search here.
Valuation is complex, but we help make it simple.
Check out our comprehensive analysis, including below, to see if Geely Automobile Holdings 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.