CGN New Energy Holdings Co., Ltd. (HKG:1811) shares could be 29% below their estimated intrinsic value

Key findings

• Using the dividend discount model, the fair value of CGN New Energy Holdings is HK$3.37.
• CGN New Energy Holdings is estimated to be undervalued by 29% based on the current share price of HK$2.38.
• The average premium for CGN New Energy Holdings’ competitors is currently 69%

Does CGN New Energy Holdings Co., Ltd. (HKG:1811)’s share price in July reflect its actual value? Today we will estimate the stock’s intrinsic value by taking the expected future cash flows and discounting them to their present value. One way to do this is by applying the Discounted Cash Flow (DCF) model. There’s actually not too much to it, even though it may seem quite complex.

Companies can be valued in many ways, so we would like to point out that a DCF is not perfect for every situation. If you want to learn more about intrinsic value, you should take a look at Simply Wall St’s analysis model.

Check out our latest analysis for CGN New Energy Holdings

Processing the numbers

We need to calculate the value of CGN New Energy Holdings a little differently than other stocks because it’s a renewable energy company. This approach uses dividends per share (DPS) because free cash flow is difficult to estimate and often unreported by analysts. Unless a company pays out the majority of its free cash flow as dividends, this method will typically underestimate the value of the stock. We use the Gordon Growth Model, which assumes the dividend will grow at a sustainable rate over time. The dividend is expected to grow at an annual growth rate equal to the 5-year average 10-year Treasury yield of 2.2%. We then discount this number to today’s value at a cost of equity of 7.3%. Compared to the current share price of HK$2.4, the company appears to be somewhat undervalued at a 29% discount to the current share price. However, keep in mind that this is only an approximate assessment and, as with any complex formula, where garbage comes in, garbage comes out.

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

= 0.02 US dollars / (7.3% – 2.2%)

= 3.4HK$

Important assumptions

We would like to point out that the main 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. The 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 CGN New Energy Holdings as potential shareholders, the cost of equity is used as the discount rate and not the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 7.3%, which is based on a leveraged beta of 0.938. 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 CGN New Energy Holdings

Go on:

While a company’s valuation is important, it is only one of many factors you need to evaluate a company. DCF models are not the be-all and end-all of investment valuation. Rather, they should be viewed as a guide to “what assumptions need to hold for this stock to be under/overvalued.” For example, slightly adjusting the terminal value growth rate can dramatically change the overall outcome. Can we figure out why the company is trading at a discount to intrinsic value? For CGN New Energy Holdings, we’ve compiled three key elements for you to look at:

1. Risks: A typical example: We discovered 2 warning signs for CGN New Energy Holdings You should be aware of this, and one of them is important.
2. Future income: How does 1811’s growth rate compare to its competitors 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 solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for each Hong Kong stock daily, so if you want to find out the intrinsic value of any other stock, 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 the basis of 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]