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QuestionsCategory: Valuation QuadrantTencent’s instrinsic valuation
Theodore Tan asked 1 year ago

Hi Victor,
I calculated the following for Tencent.
Based on instrinsic (Average PE ratio 5 years x Average EPS for 5 years) =40.64 * 6.55 = HKD 266
Including Net Debt per Share of HKD 34.59 and current price of HKD 510,
Advanced Margin of Safety = (266-510+34.59)/266 =-5.2% currently

My question is ” Can I use Price to Cashflow” to calculate the instrinsic value?
I used 
Instrinsic value = Average P/Cashflow Ratio 5 years * Current Cash/Share = 27.24*15.47 = HKD 420.
With Net debt per share of HKD 34.59, Advanced margin of safety = (420 + 34.59 – 510)/420 = -1.3 %
Can I have your advice on if this is correct?
Sorry if this is a bit messy
 
Thank you!

3 Answers
Victor Chng answered 1 year ago

Hi Theodore,
 
1.For Tencent, their profit are consistently growing so you don;t need to use the average EPS, just use the latest EPS will do. 
 
2.Regarding calculating your margin of safety,
IV = 266
Net Debt = 34.59
So your new IV include debt should be = 231.41
Share price = 510 so margin of safety is (231.41-510)/231.41 = -120.4%
 
3.For Tencent case, you can just use to Average PE multiply by latest EPS to get Intrinsic Value (IV). Do note that, we are not going to use the net cash/debt formula in valuation as this way may be too conservative or aggressive in valuation method depending on the cash/debt position. 
 
4.The cash flow to net income ratio for Tencent is mostly below 2x, hence my take is PE valuation is sufficient. Once you use the latest EPS figure, your PE and PCFO valuation is roughly the same figure.

Theodore Tan replied 1 year ago

thank you. I will try it out :)

Theodore Tan replied 1 year ago

For HK Stocks, Do I use Average 5 years or 10 Years PE ratio?

Victor Chng replied 1 year ago

It depend on the company’s growth. If the company is growing very fast then I will use 5 years because they PE valuation will increase. If the company is growing moderately then I will use 10 years.

yoga replied 1 year ago

Hi victor, for fair valuation, i used Op cash flow per share 17.9 * Average P/CFO 22.5x = 402.59 HKD. In this case, i didnt include debt to account for MOS.

Any valuation at or below Average P/CFO 22.5x is good enough.

May i check with you whether you got the same valuation below so that my math are toughly accurate?
SD for past 5 years Average P/CFO is 4.3x.
My undervalued Average P/CFO -1SD is about 22.5x – 4.3x = 18.2x

I think this method is a compromise between over cautious (unable to get in) & over optimistic (overpay).

Can i check with you do, you use TTM Operational Cash Flow per Share as a more dynamic valuation than 2019 historical FY data? I’m still using 2019 historical FY data.

Theodore Tan replied 1 year ago

HI Victor!
How do we compare growing v fast and growing moderate?
But using 10 years PE , is it only for overseas stocks?

Victor Chng answered 1 year ago

Hi Yoga,
 
My suggestion for Tencent is to use PE ratio as a valuation instead of PCFO. You can also use the TTM operating cash flow per share for valuation. 

yoga replied 1 year ago

Hi Victor, my valuation using Avg PE * Lastest EPS – Net debt per share is quite close to PCFO. Method. Only about 3 – 4 percent gap, which has an another layer of assurance…

My question is why is PE more suitable than PCFO for Tencents? What is because of the deterioration of Net cash per share over the years?

Victor Chng replied 1 year ago

1.I think PCFO is better suitable for company that have high depreciation with cash flow to net income of more than 2x. In Tencent case, they are usually below 2x so PE is sufficient. Then again, if you still want to use PCFO, it is still possible.

2.We are going to remove the method of using net cash/debt because it can be overly aggressive or conservative respectively. Company like Tencent is able to use debt efficiently due to their consistent cash flow so we don;t want to penalise them because they are in net debt position.

yoga replied 1 year ago

Hi Victor, thank you! I shall take your suggestion in my intrinsic valuation

Victor Chng replied 1 year ago

Welcome :)

Victor Chng answered 1 year ago

Hi Theodore,
 
1.Fast growing is those company that have net profit growth of more than 20% while moderate should be below 20%.
 
2.As what I mentioned earlier, if the company having moderate growth then I will use 10 years PE. It is not depend on whether the company is local or overseas. On the other hand, you can also plot out the 5 years and 10 years PE charts.