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Is Vipshop Holdings Limited (NYSE:VIPS) Worth US$6.98 Based On Intrinsic Value?

I am going to run you through how I calculated the intrinsic value of Vipshop Holdings Limited (NYSE:VIPS) by taking the expected future cash flows and discounting them to their present value. This is done using the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not September 2018 then I highly recommend you check out the latest calculation for Vipshop Holdings by following the link below.

Check out our latest analysis for Vipshop Holdings

The calculation

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow forecast

2019

2020

2021

2022

2023

Levered FCF (CN¥, Millions)

CN¥2.89k

CN¥5.63k

CN¥2.24k

CN¥2.62k

CN¥3.04k

Source

Analyst x5

Analyst x3

Analyst x1

Est @ 17%, capped from 37.39%

Est @ 16%, capped from 37.39%

Present Value Discounted @ 14.41%

CN¥2.52k

CN¥4.30k

CN¥1.49k

CN¥1.53k

CN¥1.55k

Present Value of 5-year Cash Flow (PVCF)= CN¥11.40b

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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 an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 14.4%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = CN¥3.04b × (1 + 2.9%) ÷ (14.4% – 2.9%) = CN¥27.27b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CN¥27.27b ÷ ( 1 + 14.4%)5 = CN¥13.91b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CN¥25.30b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value in the company’s reported currency of CN¥38.23. However, VIPS’s primary listing is in China, and 1 share of VIPS in CNY represents 0.146 ( CNY/ USD) share of NYSE:VIPS, so the intrinsic value per share in USD is $5.59. Compared to the current share price of $6.98, the stock is fair value, maybe slightly overvalued at the time of writing.

NYSE:VIPS Intrinsic Value Export September 5th 18
NYSE:VIPS Intrinsic Value Export September 5th 18

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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Vipshop Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 14.4%, which is based on a levered beta of 1.626. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For VIPS, there are three important factors you should further examine:

  1. Financial Health: Does VIPS have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Future Earnings: How does VIPS’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: Are there other high quality stocks you could be holding instead of VIPS? 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 does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.