An Intrinsic Calculation For Tsingtao Brewery Company Limited (HKG:168) Suggests It's 47% Undervalued

Simply Wall St.03-15

Key Insights Using the 2 Stage Free Cash Flow to Equity, Tsingtao Brewery fair value estimate is HK$104 Tsingtao Brewery's HK$54.65 share price signals that it might be 47% undervalued Analyst ...

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We will use the Discounted Cash Flow (DCF) model on this occasion.  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.  For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.  View our latest analysis for Tsingtao Brewery  Is Tsingtao Brewery Fairly Valued?   We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase.  To start off with, we need to estimate the next ten years of cash flows.   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 companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.   A DCF is all about the idea that a dollar in the future is less valuable than a dollar today,  so we need to discount the sum of these future cash flows to arrive at a present value estimate:  10-year free cash flow (FCF) estimate  2024 2025 2026 2027 2028 2029 2030 2031 2032 2033  Levered FCF (CN¥, Millions)  CN¥4.33b CN¥4.97b CN¥5.55b CN¥5.59b CN¥6.10b CN¥6.40b CN¥6.67b CN¥6.90b CN¥7.11b CN¥7.30b Growth Rate Estimate Source Analyst x8 Analyst x8 Analyst x1 Analyst x1 Analyst x1 Est @ 4.95% Est @ 4.08% Est @ 3.47% Est @ 3.04% Est @ 2.74%  Present Value (CN¥, Millions) Discounted @ 6.5%  CN¥4.1k CN¥4.4k CN¥4.6k CN¥4.3k CN¥4.4k CN¥4.4k CN¥4.3k CN¥4.2k CN¥4.0k CN¥3.9k (\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = CN¥43b After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage.  The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 6.5%. Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥7.3b× (1 + 2.0%) ÷ (6.5%– 2.0%) = CN¥165bPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥165b÷ ( 1 + 6.5%)10= CN¥88b The total value, or equity value, is then the sum of the present value of the future cash flows,  which in this case is CN¥130b.  The last step is to then divide the equity value by the number of shares outstanding.  Relative to the current share price of HK$54.7, the company appears   quite good value    at a 47% discount to where the stock price trades currently.   Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. SEHK:168 Discounted Cash Flow March 14th 2024  Important Assumptions  The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows.  Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions.  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 Tsingtao Brewery 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 6.5%, which is based on a levered beta of 0.800. 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 Tsingtao BreweryStrength Currently debt free. Dividends are covered by earnings and cash flows.  Dividend information for 168. Weakness Earnings growth over the past year underperformed the Beverage industry. Dividend is low compared to the top 25% of dividend payers in the Beverage market.Opportunity Annual earnings are forecast to grow for the next 4 years. Trading below our estimate of fair value by more than 20%. Threat  Annual earnings are forecast to grow slower than the Hong Kong market.  What else are analysts forecasting for 168?  Next Steps:  Whilst important, the DCF calculation  is only one of many factors that you need to assess for a company.  It's not possible to obtain a foolproof valuation with a DCF model.  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 discount to intrinsic value?   For Tsingtao Brewery, we've compiled three  relevant  elements  you should consider:   Risks: Case in point, we've spotted   1 warning sign for Tsingtao Brewery  you should be aware of.   Future Earnings: How does 168'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!   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 Tsingtao Brewery 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. Simply Wall St has no position in any stocks mentioned.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.5","shortVersion":"4.22.5","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2419998693"}