Estimation of the fair value of Shanghai Foreign Service Holding Group Co., Ltd. (SHSE:600662)

Key insights

Today we will discuss a way to determine the intrinsic value of Shanghai Foreign Service Holding Group Co., Ltd. (SHSE:600662) by taking the company’s forecasted future cash flows and reducing them to their current value. The Discounted Cash Flow (DCF) model is the tool we will use for this. Before you think you won’t be able to understand it, just read on! It’s actually much less complex than you might think.

Companies can be valued in many ways. We therefore point out that a DCF is not perfect for every situation. If you still have burning questions about these types of valuations, take a look at the Simply Wall St analysis model.

See our latest analysis for Shanghai Foreign Service Holding Group

Is Shanghai Foreign Service Holding Group fairly valued?

We have to calculate Shanghai Foreign Service Holding Group’s value slightly differently than other stocks because it is a professional services company. Instead of using free cash flows, which are difficult to estimate and often unreported by industry analysts, dividend per share (DPS) payments are used. Unless a company pays out most of its free cash flow as dividends, this method will generally understate the value of the stock. It uses the ‘Gordon Growth Model’, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. The dividend is expected to grow at an annual growth rate equal to the five-year average of the 10-year Treasury yield of 2.9%. We then discount this figure to its current value, at a cost of equity of 8.0%. Compared to the current share price of CN¥4.2, the company appears to be around fair value at the time of writing. The assumptions in each calculation have a big impact on the valuation, so it’s better to treat this as a rough estimate, and not down to the last cent.

Value per share = expected dividend per share / (discount rate – perpetual growth rate)

= CN¥0.2 / (8.0% – 2.9%)

= CN¥3.8

SHSE:600662 Discounted cash flow June 15, 2024

The assumptions

The above calculation is highly dependent on two assumptions. The first is the discount rate and the other is the cash flows. You do not have to agree with this entry. I recommend that you redo the calculations yourself and play around with them. The DCF also does not take into account the potential cyclicality of an industry, or a company’s future capital requirements, and thus does not provide a complete picture of a company’s potential performance. Since we consider Shanghai Foreign Service Holding Group 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 takes debt into account. In this calculation we used 8.0%, which is based on a levered beta of 0.900. Beta is a measure of a stock’s volatility compared to the market as a whole. We take 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 company.

SWOT Analysis for Shanghai Foreign Service Holding Group

power

  • Earnings growth over the past year exceeded that of the sector.
  • Debts are not seen as a risk.
  • Dividend is among the top 25% of dividend payers in the market.
Weakness

  • Profit growth over the past year is below the five-year average.
Possibility

  • Annual sales are expected to grow faster than the Chinese market.
  • Good value based on the price-to-earnings ratio compared to the estimated fair price-to-earnings ratio.
Threat

  • Pays dividends, but company has no free cash flows.
  • Annual profits are expected to grow slower than those of the Chinese market.

Next steps:

Valuation is only one side of the coin when it comes to crafting your investment thesis, and ideally it won’t be the only piece of analysis you scrutinize for a company. With a DCF model it is not possible to obtain a watertight valuation. Ideally, you would apply different cases and assumptions and see how they would affect the company’s valuation. For example, changes in the company’s cost of equity or risk-free interest rate can have a significant impact on valuation. For Shanghai Foreign Service Holding Group, there are three fundamental elements you need to investigate:

  1. Risks: For example, consider the ever-present specter of investment risk. We’ve identified two warning signs with Shanghai Foreign Service Holding Group, and understanding it should be part of your investment process.
  2. Future earnings: How does 600662’s growth rate compare to its competitors and the broader market? Dive deeper into the analyst consensus figure for the coming years by using our free analyst growth forecast chart.
  3. 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 you could be missing!

P.S. Simply Wall St updates the DCF calculation for every Chinese stock every day, so if you want to find the intrinsic value of another stock, just search here.

Valuation is complex, but we help make it simple.

Find out whether Shanghai Foreign Service Holding Group may be over or undervalued by checking out our comprehensive analysis, including: fair value estimates, risks and cautions, dividends, insider transactions and financial health.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.

Valuation is complex, but we help make it simple.

Find out whether Shanghai Foreign Service Holding Group may be over or undervalued by checking out our comprehensive analysis, including: fair value estimates, risks and cautions, dividends, insider transactions and financial health.

View the Free Analysis

Do you have feedback on this article? Worried about the content? Please contact us directly. You can also send an email to [email protected]