Is Pop Mart International Group Limited (HKG: 9992) worth HK $ 59.3 based on intrinsic value?
How far is Pop Mart International Group Limited (HKG: 9992) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock price is fair by taking the company’s future cash flow forecast and discounting it to today’s value. To this end, we will take advantage of the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too hard to follow, as you will see in our example!
We generally believe that the value of a business is the present value of all the cash it will generate in the future. However, a DCF is only one evaluation measure among many, and it is not without its flaws. If you still have burning questions about this type of valuation, take a look at the Simply Wall St.
Check out our latest analysis for Pop Mart International Group
The method
We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually, the first stage is higher growth, and the second stage is a lower growth stage. To begin with, we need to get cash flow estimates for the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
Generally, we assume that a dollar today is worth more than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value:
10-year Free Cash Flow (FCF) estimate
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF (CN ¥, Million) | CN ¥ 1.62b | CN ¥ 2.29b | CN ¥ 2.40b | CN ¥ 3.00b | CN ¥ 3.40b | CN ¥ 3.72b | CN ¥ 3.99b | CN ¥ 4.21b | CN ¥ 4.39b | CN ¥ 4.54b |
Source of estimated growth rate | Analyst x5 | Analyst x5 | Analyst x1 | Analyst x1 | Est @ 13.19% | Est @ 9.68% | East @ 7.22% | Is 5.5% | Is 4.29% | East @ 3.45% |
Present value (CN ¥, million) discounted at 8.0% | CN ¥ 1.5k | CN ¥ 2.0k | CN ¥ 1.9k | CN ¥ 2.2k | CN ¥ 2.3k | CN ¥ 2.3k | CN ¥ 2.3k | CN ¥ 2.3k | CN ¥ 2.2k | CN ¥ 2.1k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = CN ¥ 21b
We now need to calculate the Terminal Value, which takes into account all future cash flows after this ten-year period. For a number of reasons, a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (1.5%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 8.0%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = CN ¥ 4.5b × (1 + 1.5%) ÷ (8.0% – 1.5%) = CN ¥ 70b
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= CN ¥ 70b ÷ (1 + 8.0%)^{ten}= CN ¥ 32b
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total value of equity, which in this case is CN ¥ 54b. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current price of HK $ 59.3, the company appears to be slightly overvalued at the time of writing. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Pop Mart International Group to be 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 into account the debt. In this calculation, we used 8.0%, which is based on a leveraged beta of 1.214. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Next steps:
While a business valuation is important, ideally, it won’t be the only analysis you look at for a business. It is not possible to achieve a rock-solid valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. Why is intrinsic value lower than the current share price? For Pop Mart International Group, we have compiled three additional factors that you need to assess:
- Risks: To do this, you need to know the 1 warning sign we spotted with Pop Mart International Group.
- Future benefits: How does the growth rate of 9992 compare to that of its peers and the broader market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth expectations chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each SEHK share. If you want to find the calculation for other actions, do a search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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