A Look At The Intrinsic Value Of China Lesso Group Holdings Limited (HKG:2128)

Simply Wall St.06-10

Key Insights The projected fair value for China Lesso Group Holdings is HK$3.62 based on Dividend Discount Model China Lesso Group Holdings' HK$3.74 share price indicates it is trading at similar ...

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We will take advantage of the Discounted Cash Flow (DCF) model for this purpose.  It may sound complicated, but actually it is quite simple!  Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation.  If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.  Check out our latest analysis for China Lesso Group Holdings  Is China Lesso Group Holdings Fairly Valued?   As China Lesso Group Holdings operates in the building sector, we need to calculate the intrinsic value slightly differently.  In this approach dividends per share (DPS) are used, as free cash flow is difficult to estimate and often not reported by analysts.  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.  For a number of reasons a very conservative growth rate is used 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 government bond yield (2.2%). The expected dividend per share is then discounted to today's value at a cost of equity of 9.5%.  Compared to the current share price of HK$3.7, the company appears   around fair value    at the time of writing.   The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)= CN¥0.2 / (9.5% – 2.2%)= HK$3.6SEHK:2128 Discounted Cash Flow June 10th 2024  The Assumptions  We would point out that 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 China Lesso Group Holdings 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 9.5%, which is based on a levered beta of 1.299. 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 China Lesso Group HoldingsStrength Debt is well covered by earnings and cashflows. Dividends are covered by earnings and cash flows.  Dividend information for 2128. Weakness Earnings declined over the past year. Dividend is low compared to the top 25% of dividend payers in the Building market.Opportunity Annual revenue is forecast to grow faster than the Hong Kong market. Good value based on P/E ratio compared to estimated Fair P/E ratio.  Significant insider buying over the past 3 months.Threat  Annual earnings are forecast to grow slower than the Hong Kong market.  What else are analysts forecasting for 2128?  Looking Ahead:  Whilst important, the DCF calculation  ideally won't be the sole piece of analysis you scrutinize for a company.  It's not possible to obtain a foolproof valuation with a DCF model.  Rather it should be seen as a guide to \"what assumptions need to be true for this stock to be under/overvalued?\"  If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different.  For China Lesso Group Holdings, we've put together three  further  factors  you should consider:   Risks: We feel that you should assess the 2 warning signs for China Lesso Group Holdings we've flagged before making an investment in the company.   Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for 2128's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.  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 China Lesso Group Holdings 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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