An Intrinsic Calculation For Xtep International Holdings Limited (HKG:1368) Suggests It's 33% Undervalued

Simply Wall St.
13 Mar

Key Insights

  • The projected fair value for Xtep International Holdings is HK$8.13 based on 2 Stage Free Cash Flow to Equity
  • Xtep International Holdings is estimated to be 33% undervalued based on current share price of HK$5.48
  • The CN¥7.04 analyst price target for 1368 is 13% less than our estimate of fair value

How far off is Xtep International Holdings Limited (HKG:1368) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Xtep International Holdings

Crunching The Numbers

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2025202620272028202920302031203220332034
Levered FCF (CN¥, Millions) CN¥1.24bCN¥1.39bCN¥1.40bCN¥1.42bCN¥1.44bCN¥1.47bCN¥1.50bCN¥1.53bCN¥1.57bCN¥1.60b
Growth Rate Estimate SourceAnalyst x6Analyst x7Est @ 0.75%Est @ 1.26%Est @ 1.61%Est @ 1.86%Est @ 2.04%Est @ 2.16%Est @ 2.24%Est @ 2.30%
Present Value (CN¥, Millions) Discounted @ 8.9% CN¥1.1kCN¥1.2kCN¥1.1kCN¥1.0kCN¥945CN¥884CN¥828CN¥777CN¥730CN¥686

("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = CN¥9.3b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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 have used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.9%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥1.6b× (1 + 2.4%) ÷ (8.9%– 2.4%) = CN¥26b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥26b÷ ( 1 + 8.9%)10= CN¥11b

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¥20b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of HK$5.5, the company appears quite good value at a 33% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

SEHK:1368 Discounted Cash Flow March 13th 2025

The Assumptions

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. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Xtep International Holdings 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 8.9%, which is based on a levered beta of 1.220. 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 Xtep International Holdings

Strength
  • Debt is not viewed as a risk.
  • Dividends are covered by earnings and cash flows.
    Dividend information for 1368.
Weakness
  • Earnings growth over the past year underperformed the Luxury industry.
  • Dividend is low compared to the top 25% of dividend payers in the Luxury market.
Opportunity
  • Annual earnings are forecast to grow faster than the Hong Kong market.
  • Trading below our estimate of fair value by more than 20%.
Threat
  • Annual revenue is forecast to grow slower than the Hong Kong market.
    What else are analysts forecasting for 1368?

Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for 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?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price sitting below the intrinsic value? For Xtep International Holdings, there are three further elements you should look at:

  1. Risks: We feel that you should assess the 1 warning sign for Xtep International Holdings we've flagged before making an investment in the company.
  2. Future Earnings: How does 1368'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: 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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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