A Look At The Intrinsic Value Of Harbin Electric Company Limited (HKG:1133)

Simply Wall St.

Oct 10

AdvertisementKey Insights The projected fair value for Harbin Electric is HK$11.31 based on 2 Stage Free Cash Flow to Equity With HK$13.28 share price, Harbin Electric appears to be trading close to...

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Our analysis will employ the Discounted Cash Flow (DCF) model.  It may sound complicated, but actually it is quite simple!  We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws.  If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free. Step By Step Through The Calculation   We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period.  To start off with, we need to estimate the next ten years of cash flows.   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.   A DCF is all about the idea that a dollar in the future is less valuable than a dollar today,  so we need to discount the sum of these future cash flows to arrive at a present value estimate:  10-year free cash flow (FCF) estimate  2026202720282029203020312032203320342035 Levered FCF (CN¥, Millions) CN¥2.38bCN¥2.12bCN¥1.97bCN¥1.89bCN¥1.86bCN¥1.85bCN¥1.85bCN¥1.87bCN¥1.90bCN¥1.94bGrowth Rate Estimate SourceEst @ -16.77%Est @ -10.93%Est @ -6.84%Est @ -3.98%Est @ -1.98%Est @ -0.58%Est @ 0.40%Est @ 1.09%Est @ 1.57%Est @ 1.90% Present Value (CN¥, Millions) Discounted @ 9.9% CN¥2.2kCN¥1.8kCN¥1.5kCN¥1.3kCN¥1.2kCN¥1.0kCN¥959CN¥882CN¥816CN¥756(\"Est\" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = CN¥12b The second stage is also known as Terminal Value, this is the business's cash flow after the first stage.  The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.7%. We discount the terminal cash flows to today's value at a cost of equity of 9.9%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = CN¥1.9b× (1 + 2.7%) ÷ (9.9%– 2.7%) = CN¥28bPresent Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥28b÷ ( 1 + 9.9%)10= CN¥11b 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¥23b.  The last step is to then divide the equity value by the number of shares outstanding.  Compared to the current share price of HK$13.3, the company appears   around fair value    at the time of writing.   Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. SEHK:1133 Discounted Cash Flow October 9th 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.  Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Harbin Electric 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 9.9%, which is based on a levered beta of 1.368. 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 Harbin Electric SWOT Analysis for Harbin ElectricStrength Earnings growth over the past year exceeded the industry. Debt is not viewed as a risk. Dividends are covered by earnings and cash flows.  Dividend information for 1133. Weakness Dividend is low compared to the top 25% of dividend payers in the Electrical market.Opportunity Annual earnings are forecast to grow faster than the Hong Kong market. Good value based on P/E ratio compared to estimated Fair P/E ratio. Threat Revenue is forecast to grow slower than 20% per year.  What else are analysts forecasting for 1133?  Looking Ahead:  Valuation is only one side of the coin in terms of building your investment thesis, and it  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.  Rather it should be seen as a guide to \"what assumptions need to be true for this stock to be under/overvalued?\"  For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result.  For Harbin Electric, we've compiled three  pertinent  aspects  you should look at:   Risks: We feel that you should assess the 1 warning sign for Harbin Electric we've flagged before making an investment in the company.  Future Earnings: How does 1133'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. 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.Valuation is complex, but we're here to simplify it.Discover if Harbin Electric might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.Access Free AnalysisHave 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.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0,"need_auth":false,"code":"91000000","status":"200"}}}