Is There An Opportunity With CGN Power Co., Ltd.'s (HKG:1816) 37% Undervaluation?

Simply Wall St.2025-12-27

Key Insights Using the 2 Stage Free Cash Flow to Equity, CGN Power fair value estimate is HK$4.80 CGN Power is estimated to be 37% undervalued based on current share price of HK$3.01 The CN¥3.09 ...

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(HKG:1816) by projecting its future cash flows and then discounting them to today's value.  We will use the Discounted Cash Flow (DCF) model on this occasion.  Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.  Remember though, that there are many ways to estimate a company's value, and a DCF is just one method.  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. This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality. Crunching The Numbers   We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate.  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.   A DCF is all about the idea that a dollar in the future is less valuable than a dollar today,  and so the sum of these future cash flows is then discounted to today's value:  10-year free cash flow (FCF) forecast  2026202720282029203020312032203320342035 Levered FCF (CN¥, Millions) CN¥9.24bCN¥16.3bCN¥16.9bCN¥17.4bCN¥18.0bCN¥18.5bCN¥19.1bCN¥19.7bCN¥20.2bCN¥20.8bGrowth Rate Estimate SourceAnalyst x2Analyst x1Est @ 3.59%Est @ 3.36%Est @ 3.20%Est @ 3.08%Est @ 3.00%Est @ 2.95%Est @ 2.91%Est @ 2.88% Present Value (CN¥, Millions) Discounted @ 10.0% CN¥8.4kCN¥13.5kCN¥12.7kCN¥11.9kCN¥11.2kCN¥10.5kCN¥9.8kCN¥9.2kCN¥8.6kCN¥8.0k(\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = CN¥104b 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 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 10.0%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = CN¥21b× (1 + 2.8%) ÷ (10.0%– 2.8%) = CN¥298bPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥298b÷ ( 1 + 10.0%)10= CN¥115b 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¥219b.  The last step is to then divide the equity value by the number of shares outstanding.  Compared to the current share price of HK$3.0, the company appears   quite good value    at a 37% discount to where the stock price trades currently.   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. SEHK:1816 Discounted Cash Flow December 26th 2025  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 CGN Power 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 10.0%, which is based on a levered beta of 1.366. 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.   See our latest analysis for CGN Power SWOT Analysis for CGN PowerStrength Debt is well covered by earnings. Dividends are covered by earnings and cash flows.  Dividend information for 1816. Weakness Earnings declined over the past year. Dividend is low compared to the top 25% of dividend payers in the Renewable Energy market.Opportunity Annual earnings are forecast to grow for the next 3 years. Trading below our estimate of fair value by more than 20%. ThreatDebt is not well covered by operating cash flow.  Annual earnings are forecast to grow slower than the Hong Kong market. Is 1816 well equipped to handle threats?  Moving On:  Although the valuation of a company is important, it  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.  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.   What is the reason for the share price sitting below the intrinsic value?   For CGN Power, we've put together three  fundamental  aspects  you should look at:   Risks: For instance, we've identified   1 warning sign for CGN Power  that you should be aware of.  Future Earnings: How does 1816'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.Mobile Infrastructure for Defense and DisasterThe next wave in robotics isn't humanoid. Its fully autonomous towers delivering 5G, ISR, and radar in under 30 minutes, anywhere.Get the investor briefing before the next round of contractsSponsored On Behalf of CiTechNew: AI Stock Screener & AlertsOur new AI Stock Screener scans the market every day to uncover opportunities.• Dividend Powerhouses (3%+ Yield)• Undervalued Small Caps with Insider Buying• High growth Tech and AI CompaniesOr build your own from over 50 metrics.Explore Now 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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