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What Value Should You Place On BOC Hong Kong (Holdings) Limited (HKG:2388)?

Bank stocks such as 2388 are hard to value. This is because the rules banks face are different to other companies, which can impact the way we forecast their cash flows. For example, banks are required to hold more capital to reduce the risk to depositors. Examining line items like book values, as well as the return and cost of equity, is useful for estimating 2388’s value. Below I’ll take you through how to value 2388 in a fairly accurate and straightforward approach.

See our latest analysis for BOC Hong Kong (Holdings)

What Is The Excess Return Model?

There are two facets to consider: regulation and type of assets. The regulatory environment in Hong Kong is fairly rigorous. In addition to this, banks tend to not have large portions of physical assets as part of total assets. Therefore the Excess Returns model is appropriate for deriving the true value of 2388 as opposed to the traditional model, which puts weight on factors such as capital expenditure and depreciation.

SEHK:2388 Intrinsic Value Export August 28th 18
SEHK:2388 Intrinsic Value Export August 28th 18

Calculating 2388’s Value

The key belief for this model is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns in excess of cost of equity is called excess returns:

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Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)

= (13.51% – 9.6%) x HK$26.54 = HK$1.03

Excess Return Per Share is used to calculate the terminal value of 2388, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:

Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)

= HK$1.03 / (9.6% – 2.2%) = HK$13.87

Putting this all together, we get the value of 2388’s share:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= HK$26.54 + HK$13.87 = HK$40.41

This results in an intrinsic value of HK$40.41. Given 2388’s current share price of HK$39.20, 2388 is priced in-line with its intrinsic value. This means 2388 isn’t an attractive buy right now. Pricing is only one aspect when you’re looking at whether to buy or sell 2388. Fundamental factors are key to determining if 2388 fits with the rest of your portfolio holdings.

Next Steps:

For banks, there are three key aspects you should look at:

  1. Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like bad loans and customer deposits.

  2. Future earnings: What does the market think of 2388 going forward? Our analyst growth expectation chart helps visualize 2388’s growth potential over the upcoming years.

  3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether 2388 is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on 2388 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.