ANTA Sports Products Limited (HKG:2020) Shares Could Be 34% Below Their Intrinsic Value Estimate

Simply Wall St.10-14

Key Insights Using the 2 Stage Free Cash Flow to Equity, ANTA Sports Products fair value estimate is HK$152 ANTA Sports Products' HK$100 share price signals that it might be 34% undervalued The ...

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Our analysis will employ the Discounted Cash Flow (DCF) model.  Don't get put off by the jargon, the math behind it is actually quite straightforward.  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 want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.  See our latest analysis for ANTA Sports Products  Crunching The Numbers   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.  In the first stage we need to estimate the cash flows to the business over the next ten years.   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.   Generally we assume that a dollar today is more valuable than a dollar in the future,  and so the sum of these future cash flows is then discounted to today's value:  10-year free cash flow (FCF) forecast  2025 2026 2027 2028 2029 2030 2031 2032 2033 2034  Levered FCF (CN¥, Millions)  CN¥17.9b CN¥19.9b CN¥21.3b CN¥22.5b CN¥23.6b CN¥24.5b CN¥25.3b CN¥26.1b CN¥26.9b CN¥27.6b Growth Rate Estimate Source Analyst x9 Analyst x9 Est @ 7.23% Est @ 5.74% Est @ 4.69% Est @ 3.96% Est @ 3.45% Est @ 3.09% Est @ 2.84% Est @ 2.66%  Present Value (CN¥, Millions) Discounted @ 7.9%  CN¥16.6k CN¥17.1k CN¥17.0k CN¥16.6k CN¥16.1k CN¥15.6k CN¥14.9k CN¥14.3k CN¥13.6k CN¥12.9k (\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = CN¥155b The second stage is also known as Terminal Value, this is the business's cash flow after 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 2.3%. We discount the terminal cash flows to today's value at a cost of equity of 7.9%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥28b× (1 + 2.3%) ÷ (7.9%– 2.3%) = CN¥502bPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥502b÷ ( 1 + 7.9%)10= CN¥235b The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value,  which in this case is CN¥390b.  The last step is to then divide the equity value by the number of shares outstanding.  Relative to the current share price of HK$100, the company appears   quite good value    at a 34% discount to where the stock price trades currently.   Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out. SEHK:2020 Discounted Cash Flow October 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.  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 ANTA Sports Products 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 7.9%, which is based on a levered beta of 1.129. 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 ANTA Sports ProductsStrength Earnings growth over the past year exceeded the industry. Debt is not viewed as a risk. Dividends are covered by earnings and cash flows.  Dividend information for 2020. Weakness Dividend is low compared to the top 25% of dividend payers in the Luxury market.Opportunity Annual revenue is forecast to grow faster than the Hong Kong market. 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 2020?  Looking Ahead:  Valuation is only one side of the coin in terms of building your investment thesis, and it  ideally won't be the sole piece of analysis you scrutinize for a company.  DCF models are not the be-all and end-all of investment valuation.  Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or 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.   Why is the intrinsic value higher than the current share price?   For ANTA Sports Products, we've compiled three  relevant  aspects  you should explore:  Financial Health: Does 2020 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk. Future Earnings: How does 2020'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. The Simply Wall St app conducts 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.New: Manage All Your Stock Portfolios in One PlaceWe've created the ultimate portfolio companion for stock investors, and it's free.• Connect an unlimited number of Portfolios and see your total in one currency• Be alerted to new Warning Signs or Risks via email or mobile• Track the Fair Value of your stocksTry a Demo Portfolio for FreeHave 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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