Estimation of the intrinsic value of Yuexiu Property Company Limited (HKG:123)

Key findings

• The estimated fair value of Yuexiu Property is HK$5.58 based on the dividend discount model
• Yuexiu Property’s share price of HK$5.47 suggests that the price is at a similar level to the estimated fair value.
• The analyst price target for 123 is CN¥8.18, which is 47% above our fair value estimate.

How far is Yuexiu Property Company Limited (HKG:123) from its intrinsic value? Using the most recent financial data, we will check whether the stock is fairly valued by estimating the company’s future cash flows and discounting them to their current value. This is done using the Discounted Cash Flow (DCF) model. Don’t be put off by the technical jargon, the math behind it is actually quite simple.

We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without its flaws. Anyone interested in learning more about intrinsic value should check out Simply Wall St’s analysis model.

Check out our latest analysis for Yuexiu Property

Is the value of Yuexiu property reasonable?

We need to calculate the value of Yuexiu Property a little differently than other stocks because it’s a real estate company. Rather than using free cash flows, which are difficult to estimate and often unreported by analysts in this industry, it uses dividend payments per share (DPS). This often understates a stock’s value, but can still be good as a comparison to competitors. It uses the “Gordon Growth Model,” which simply assumes that dividend payments will continue to grow forever at a sustainable growth rate. For a number of reasons, it uses a very conservative growth rate that cannot exceed that of a company’s gross domestic product (GDP). In this case, we used the 5-year average of the 10-year Treasury bond yield (2.2%). The expected dividend per share is then discounted to today’s value using a cost of equity of 9.5%. Relative to the current share price of HK$5.5, the company appears to be roughly fairly valued at a discount of 2.0% to the current share price. Since the assumptions of a calculation have a large influence on the valuation, it is better to consider this as a rough estimate rather than accurate to the last cent.

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= 0.4 CN¥ / (9.5% – 2.2%)

= 5.6HK$

The assumptions

We would like to point out that the key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing around with them. DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we consider Yuexiu Property 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 takes debt into account. In this calculation, we used 9.5%, which is based on a leveraged beta of 1.341. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Yuexiu Property

Looking ahead:

Although important, the DCF calculation is just one of many factors you need to evaluate a company. DCF models are not the be-all and end-all of investment valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. For Yuexiu Property, we have compiled three relevant aspects that you should examine in more detail:

1. Risks: Consider, for example, the ever-present specter of investment risk. We have identified 2 warning signs with Yuexiu Property (at least 1 that we don’t like), and understanding them should be part of your investment process.
2. Future income: How does 123’s growth rate compare to its peers and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
3. Other high-quality alternatives: Like a good all-rounder? Explore our interactive list of high-quality stocks to get a sense of what else you might be missing out on!

PS. The Simply Wall St app runs 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.

Do you have feedback on this article? Are you concerned about the content? Get in touch directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We comment solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

Do you have feedback on this article? Are you interested in the content? Contact us directly. Alternatively, send an email to [email protected]