A Look At The Intrinsic Value Of Shenzhen International Holdings Limited (HKG:152)

Simply Wall St.12-10

Key Insights The projected fair value for Shenzhen International Holdings is HK$7.46 based on Dividend Discount Model Current share price of HK$6.92 suggests Shenzhen International Holdings is ...

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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.  We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws.  If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.  View our latest analysis for Shenzhen International Holdings  Is Shenzhen International Holdings Fairly Valued?   We have to calculate the value of Shenzhen International Holdings slightly differently to other stocks because it is a infrastructure company.  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.  This often underestimates the value of a stock, but it can still be good as a comparison to competitors.  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 2.3%. We then discount this figure to today's value at a cost of equity of 11%.  Compared to the current share price of HK$6.9, the company appears   about fair value    at a 7.2% 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. Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)= HK$0.6 / (11% – 2.3%)= HK$7.5SEHK:152 Discounted Cash Flow December 9th 2024  Important Assumptions  Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows.  If you don't agree with these result, have a go at the calculation yourself and play with the 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 Shenzhen International 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 11%, which is based on a levered beta of 1.706. 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 Shenzhen International HoldingsStrength Earnings growth over the past year exceeded the industry.  See 152's revenue and earnings trends. Weakness Interest payments on debt are not well covered.Dividend is low compared to the top 25% of dividend payers in the Infrastructure market.Opportunity Annual earnings are forecast to grow faster than the Hong Kong market. Good value based on P/E ratio and estimated fair value. ThreatDebt is not well covered by operating cash flow. Paying a dividend but company has no free cash flows. Annual revenue is forecast to grow slower than the Hong Kong market. Is 152 well equipped to handle threats?  Looking Ahead:  Whilst important, the DCF calculation  is only one of many factors that you need to assess for a company.  The DCF model is not a perfect stock valuation tool.  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 Shenzhen International Holdings, there are three  essential  elements  you should consider:   Risks: As an example, we've found 2 warning signs for Shenzhen International Holdings (1 is a bit unpleasant!) that you need to consider before investing here.  Future Earnings: How does 152'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. 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. Simply Wall St has no position in any stocks mentioned.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"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":"4.29.3","shortVersion":"4.29.3","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/2490003122"}