Estimated fair value of Pangea Connectivity Technology Limited (HKG:1473)

Today we are going to give a simple overview of a valuation method used to estimate the attractiveness of Pangea Connectivity Technology Limited (HKG:1473) as an investment opportunity by estimating cash flow company’s future and discounting them to their present value. Our analysis will use the discounted cash flow (DCF) model. Don’t be put off by the jargon, the underlying calculations are actually quite simple.

Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St analysis template.

See our latest analysis for Pangea Connectivity Technology

The model

As Pangea Connectivity Technology operates in the electronics business, we have to calculate intrinsic value slightly differently. In this approach, dividends per share (DPS) are used, because free cash flow is difficult to estimate and often not reported by analysts. This often underestimates the value of a stock, but it can still be a good comparison against competitors. The “Gordon Growth Model” is used, which simply assumes that dividend payments will continue to increase at a sustainable rate of growth forever. The dividend is expected to grow at an annual growth rate equal to the 5-year average 10-year government bond yield of 1.5%. We then discount this figure to present value at a cost of equity of 7.6%. Against the current share price of HK$0.2, the company appears around fair value at the time of writing. The assumptions of any calculation have a big impact on the valuation, so it’s best to consider this as a rough estimate, not accurate down to the last penny.

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= HK$0.01 / (7.6% – 1.5%)

= HK$0.2

SEHK: 1473 Discounted Cash Flow June 8, 2022

Important assumptions

We emphasize 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 entries, I recommend that you redo the calculations yourself and play around with them. 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 Pangea Connectivity 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 takes debt into account. In this calculation, we used 7.6%, which is based on a leveraged beta of 1.261. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Look forward:

While important, the DCF calculation will ideally not be the only piece of analysis you look at for a business. DCF models are not the be-all and end-all of investment valuation. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, changes in the company’s cost of equity or in the risk-free rate can have a significant impact on the valuation. For Pangea Connectivity Technology, we’ve rounded up three essentials you should delve into:

  1. Risks: You should be aware of the 6 warning signs for Pangea Connectivity Technology (3 cannot be ignored!) that we discovered before considering an investment in the company.
  2. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of ​​what you might be missing!
  3. Other top analyst picks: Interested to see what the analysts think? Take a look at our interactive list of analysts’ top stock picks to find out what they think could have attractive future prospects!

PS. The Simply Wall St app performs an updated cash flow valuation for each SEHK stock every day. If you want to find the calculation for other stocks, search here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Myra R.

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