Dongyue Group Limited (HKG:189) Shares Could Be 28% Above Their Intrinsic Value Estimate

Simply Wall St.01-16

Key Insights Using the Dividend Discount Model, Dongyue Group fair value estimate is HK$4.66 Dongyue Group is estimated to be 28% overvalued based on current share price of HK$5.95 Industry ...

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Using the most recent financial data, we'll take a look at whether the stock is fairly priced  by estimating the company's future cash flows and discounting them to their present value.  We will take advantage of the Discounted Cash Flow (DCF) model for this purpose.  Don't get put off by the jargon, the math behind it is actually quite straightforward.  Remember though, that there are many ways to estimate a company's value, and a DCF is just one method.  If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.  See our latest analysis for Dongyue Group  What's The Estimated Valuation?   As Dongyue Group operates in the chemicals sector, we need to calculate the intrinsic value slightly differently.  Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used.  Unless a company pays out the majority of its FCF as a dividend, this method will typically underestimate the value of the stock.  We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained.  The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We then discount this figure to today's value at a cost of equity of 8.7%.  Relative to the current share price of HK$6.0, the company appears   slightly overvalued    at the time of writing.   Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out. Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)= CN¥0.3 / (8.7% – 2.0%)= HK$4.7SEHK:189 Discounted Cash Flow January 15th 2024  The Assumptions  Now the most important 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 redoing the calculations yourself and playing with them.  The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance.  Given that we are looking at Dongyue Group 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 accounts for debt.  In this calculation we've used 8.7%, which is based on a levered beta of 1.101. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.  SWOT Analysis for Dongyue GroupStrength Currently debt free. Dividend is in the top 25% of dividend payers in the market.  Dividend information for 189. Weakness Earnings declined over the past year. Expensive based on P/E ratio and estimated fair value. Opportunity  189's financial characteristics indicate limited near-term opportunities for shareholders.Threat Dividends are not covered by cash flow.  See 189's dividend history.  Next Steps:  Whilst important, the DCF calculation  shouldn't be the only metric you look at when researching a company.  The DCF model is not a perfect stock valuation tool.  Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation.  For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result.   Can we work out why the company is trading at a premium to intrinsic value?   For Dongyue Group, we've put together three  important  factors  you should further research:   Risks: We feel that you should assess the 3 warning signs for Dongyue Group (1 is a bit unpleasant!) we've flagged before making an investment in the company.  Future Earnings: How does 189'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: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!   PS. Simply Wall St updates its DCF calculation for every Hong Kong stock every day, so if you want to find the intrinsic value of any other stock just search here.Valuation is complex, but we're helping make it simple.Find out whether Dongyue Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free AnalysisHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. 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