- Kuaishou Technology’s estimated fair value is CN¥60.7 based on 2 Stage Free Cash Flow to Equity
- Current share price of CN¥70.1 suggests Kuaishou Technology is trading close to its fair value
- Analyst price target for 1024 is CN¥88.51 which is 46% above our fair value estimate
Does the January share price for Kuaishou Technology (HKG:1024) reflect what it’s really worth? Today, we will estimate the stock’s intrinsic value by taking the forecast future cash flows of the company and discounting them back to today’s value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
See our latest analysis for Kuaishou Technology
Is Kuaishou Technology Fairly Valued?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. 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, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
|Levered FCF (CN¥, Millions)||-CN¥713.2m||CN¥5.24b||CN¥11.7b||CN¥14.2b||CN¥16.9b||CN¥18.8b||CN¥20.5b||CN¥21.8b||CN¥22.9b||CN¥23.8b|
|Growth Rate Estimate Source||Analyst x9||Analyst x9||Analyst x1||Analyst x1||Analyst x1||Est @ 11.69%||Est @ 8.67%||Est @ 6.55%||Est @ 5.07%||Est @ 4.04%|
|Present Value (CN¥, Millions) Discounted @ 9.0%||-CN¥655||CN¥4.4k||CN¥9.1k||CN¥10.0k||CN¥11.0k||CN¥11.2k||CN¥11.2k||CN¥11.0k||CN¥10.6k||CN¥10.1k|
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥88b
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 1.6%. We discount the terminal cash flows to today’s value at a cost of equity of 9.0%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = CN¥24b× (1 + 1.6%) ÷ (9.0%– 1.6%) = CN¥330b
Present Value or Terminal Value (PVTV)= TV / (1 + r)10= CN¥330b÷ ( 1 + 9.0%)10= CN¥140b
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¥228b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of HK$70.1, 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.
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 Kuaishou Technology 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 9.0%, which is based on a levered beta of 1,049. 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 Kuaishou Technology
- No major weaknesses identified for 1024.
- Forecast to reduce losses next year.
- Good value based on P/S ratio compared to estimated Fair P/S ratio.
- Has less than 3 years of cash runway based on current free cash flow.
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching 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?” For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Kuaishou Technology, we’ve compiled three pertinent aspects you should further research:
- Risks: Case in point, we’ve spotted 1 warning sign for Kuaishou Technology you should be aware of.
- Future Earnings: How does 1024’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 forecast 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. 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.
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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.