Estimating The Intrinsic Value Of China Resources Phoenix Healthcare Holdings Company Limited (SZSC:1515)

I am going to run you through how I calculated the intrinsic value of China Resources Phoenix Healthcare Holdings Company Limited (SZSC:1515) by projecting its future cash flows and then discounting them to today’s value. I will use the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in June 2018 so be sure check out the updated calculation by following the link below. View out our latest analysis for China Resources Phoenix Healthcare Holdings

Step by step through the calculation

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 five years. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow forecast

2018	2019	2020	2021	2022
Levered FCF (CN¥, Millions)	CN¥427.00	CN¥492.48	CN¥606.00	CN¥709.02	CN¥822.46
Source	Analyst x2	Analyst x4	Analyst x2	Extrapolated @ (17%, capped from 17.1%)	Extrapolated @ (16%, capped from 17.1%)
Present Value Discounted @ 8.44%	CN¥393.76	CN¥418.79	CN¥475.22	CN¥512.73	CN¥548.48

Present Value of 5-year Cash Flow (PVCF)= HK$2.35b

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.2%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.4%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = HK$822.46m × (1 + 2.2%) ÷ (8.4% – 2.2%) = HK$13.48b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = HK$13.48b ÷ ( 1 + 8.4%)⁵ = HK$8.99b

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is HK$11.34b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value in the company’s reported currency of CN¥8.74. However, 1515’s primary listing is in China, and 1 share of 1515 in CNY represents 1.219 ( CNY/ HKD) share of SZSC:1515, so the intrinsic value per share in HKD is HK$10.66. Relative to the current share price of HK$9.89, the stock is about right, perhaps slightly undervalued at a 7.21% discount to what it is available for right now.

SZSC:1515 Intrinsic Value June 24th 18

The 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at China Resources Phoenix Healthcare Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.4%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.

For 1515, there are three key aspects you should further examine:

1. Financial Health: Does 1515 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.

2. Future Earnings: How does 1515’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.

3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of 1515? 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 for every stock on the SZSC every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.