Are Lee & Man Paper Manufacturing Limited (HKG:2314) Investors Paying Above The Intrinsic Value?

Simply Wall St.

Nov 04

AdvertisementKey Insights The projected fair value for Lee & Man Paper Manufacturing is HK$2.07 based on Dividend Discount Model Lee & Man Paper Manufacturing's HK$2.77 share price signals that it ...

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Our analysis will employ 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.  For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. Trump has pledged to \"unleash\" American oil and gas and these 15 US stocks have developments that are poised to benefit. What's The Estimated Valuation?   We have to calculate the value of Lee & Man Paper Manufacturing slightly differently to other stocks because it is a forestry company.  Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used.  This often underestimates the value of a stock, but it can still be good as a comparison to competitors.  We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained.  For a number of reasons a very conservative growth rate is used that cannot exceed that of a company's Gross Domestic Product (GDP). In this case we used the 5-year average of the 10-year government bond yield (2.7%). The expected dividend per share is then discounted to today's value at a cost of equity of 9.2%.  Relative to the current share price of HK$2.8, the company appears   reasonably expensive    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. Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)= HK$0.1 / (9.2% – 2.7%)= HK$2.1SEHK:2314 Discounted Cash Flow November 3rd 2025  Important 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 Lee & Man Paper Manufacturing 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 9.2%, which is based on a levered beta of 1.285. 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 Lee & Man Paper Manufacturing SWOT Analysis for Lee & Man Paper ManufacturingStrength Debt is well covered by earnings. Balance sheet summary for 2314. Weakness Earnings declined over the past year. Dividend is low compared to the top 25% of dividend payers in the Forestry market.Opportunity Annual earnings are forecast to grow for the next 3 years. Good value based on P/E ratio compared to estimated Fair P/E ratio. ThreatDebt is not well covered by operating cash flow. Paying a dividend but company has no free cash flows.  Annual earnings are forecast to grow slower than the Hong Kong market. Is 2314 well equipped to handle threats?  Looking Ahead:  Valuation is only one side of the coin in terms of building your investment thesis, and it  ideally won't be the sole piece of analysis you scrutinize for a company.  The DCF model is not a perfect stock valuation tool.  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.   Can we work out why the company is trading at a premium to intrinsic value?   For Lee & Man Paper Manufacturing, there are three  essential  elements  you should look at:   Risks: Case in point, we've spotted   2 warning signs for Lee & Man Paper Manufacturing  you should be aware of, and 1 of them doesn't sit too well with us.   Future Earnings: How does 2314'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SEHK every day. If you want to find the calculation for other stocks just search here.New: AI Stock Screener & AlertsOur new AI Stock Screener scans the market every day to uncover opportunities.• Dividend Powerhouses (3%+ Yield)• Undervalued Small Caps with Insider Buying• High growth Tech and AI CompaniesOr build your own from over 50 metrics.Explore Now for FreeHave 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":"-1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0,"need_auth":false,"code":"91000000","status":"200"}}}