A Look At The Fair Value Of Ying Li International Real Estate Limited (SGX:5DM)

Key Insights

• Ying Li International Real Estate's estimated fair value is S$0.025 based on 2 Stage Free Cash Flow to Equity
• Current share price of S$0.028 suggests Ying Li International Real Estate is potentially trading close to its fair value
• Ying Li International Real Estate's peers seem to be trading at a higher premium to fair value based onthe industry average of -581%

Today we will run through one way of estimating the intrinsic value of Ying Li International Real Estate Limited (SGX:5DM) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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.

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The Calculation

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. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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) estimate

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (CN¥, Millions)	CN¥39.4m	CN¥35.6m	CN¥33.4m	CN¥32.2m	CN¥31.7m	CN¥31.5m	CN¥31.7m	CN¥32.0m	CN¥32.5m	CN¥33.1m
Growth Rate Estimate Source	Est @ -14.92%	Est @ -9.70%	Est @ -6.05%	Est @ -3.50%	Est @ -1.71%	Est @ -0.45%	Est @ 0.42%	Est @ 1.04%	Est @ 1.47%	Est @ 1.77%
Present Value (CN¥, Millions) Discounted @ 11%	CN¥35.5	CN¥28.9	CN¥24.5	CN¥21.3	CN¥18.9	CN¥17.0	CN¥15.4	CN¥14.0	CN¥12.8	CN¥11.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥200m

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 (2.5%) 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 11%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = CN¥33m× (1 + 2.5%) ÷ (11%– 2.5%) = CN¥402m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥402m÷ ( 1 + 11%)¹⁰= CN¥143m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥343m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of S$0.03, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Ying Li International Real Estate 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 11%, which is based on a levered beta of 2.000. 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.

Check out our latest analysis for Ying Li International Real Estate

SWOT Analysis for Ying Li International Real Estate

Moving On:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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. For Ying Li International Real Estate, we've put together three relevant items you should look at:

1. Risks: Take risks, for example - Ying Li International Real Estate has 1 warning sign we think you should be aware of.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. Simply Wall St updates its DCF calculation for every Singaporean stock every day, so if you want to find the intrinsic value of any other stock just search here.

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.