Goldlion Holdings HK Based Stock Valuation Analysis: Part II by SG Value Investor, The Value Edge.
This is part 2 of a 2-part series analysing Goldlion Holdings with different methods. To see the first part, please click here.
As we have already covered most of the qualitative aspects of Goldlion Holdings Limited (HKG:0533)’s business in the first part, we will focus more on the quantitative valuation to avoid repetition. I will attempt to value Goldlion Holdings based on its different business segments to determine if Goldlion Holdings is indeed undervalued, as suggested by our 3 metrics.
Before we go into the details of each segment, the table above represents certain figures I consider pertinent to the analysis of the segments which I will now elaborate.
Group Unallocated Cost – These are common costs which are not allocated to any particular segment. We will make a certain assumption in order to split this figure to the segments; this will be stated later.
Interest Income – While the annual report does split Interest Income into a segment-level, it is our style to not account for these in the segment results because we only want to derive the value of the segment based on its core operations.
Profit After Tax (Check) – As we break down the business into its different segments, certain assumptions would have to be made. This figure represents the sum of Profit After Tax from the different segments and the after-tax interest income. We can compare this figure to the stated Profit After Tax on the annual report to ensure that we are not grossly off.
Accuracy – How close our Profit After Tax (Check) is to Profit After Tax (As Stated)
Trade Receivables – As the amount belonging to each individual segment was not disclosed, we will make a certain assumption in order to split this figure to the segments; this will also be stated later.
In addition, the tax rates for the relevant countries are as follows:
The figures are from KPMG
Apparel in China and HK
In deriving the FCF, we assume the higher tax rate of the 2 countries which happens to be China in this case.
Segment’s Share of Unallocated Cost is calculated based on Segment Revenue/Total Revenue x Group Unallocated Cost. We admit this is a crude form of approximation. However, as you will later observe, as the tax rates used for all the segments are the same, our Profit After Tax calculation at a group level will not be affected by this assumption. It does still affect our FCF calculation, but we do not know of any other way to side step this.
Share of Trade Receivables is also allocated based on a similar concept as a proportion of revenue. There are also some figures (represented by N/A) which are not provided in the earlier years of the annual reports.
Moving forward, we assume 0% growth and a FCF of HKD219.91m corresponding to a 3-year median. We think that using an average would not be appropriate here due to very large disparities in the values. Considering the geography of this segment, we think that a 8% FCF yield/cost of equity is appropriate. This gives us a value of HKD2748.88.5m.
Apparel in Singapore and Malaysia
Once again, we assume the higher tax rate of the 2 countries which is 25% from Malaysia. All other assumptions remain the same as well.
The 5-year average FCF of this segment is HKD8.1m. However, this is large to due exceptionally high cash flows in 2010 and 2011. Therefore, we do not think that this figure is a suitable representation going forward and instead assume FCF of HKD4.5m. With zero growth and 8% FCF yield/cost of equity, we have a valuation of HKD56.25m
You can also observe that margins in Singapore and Malaysia are really, really poor due to rising rental and manpower costs. It would be difficult to see cost pressures easing significantly; consequently, we expect this segment to possess only nominal value.
Property Investment and Development
As all, if not most, of the properties are based in China, we assume China’s tax rate as well for this segment. Goldlion Holdings Limited (HKG:0533) accounts for fair value gains of its investment properties in its income statement, it is our view that these are merely paper gains which distorts the true profit figures. This is also why you can see the seemingly high gross profit margins; in some years, the gross profit is even higher than the revenue. Therefore, a more accurate figure for cash flow would be the FCF less fair value gains which adjusts for this distortion. Its 5-year average would be HKD83.5m.
Once again, the key question would be “Is this an accurate number moving forward?” At this juncture, we will assume that it is accurate. However, we must disclose that without this assumption, we are actually able to rationalize a negative valuation for this division. Unfortunately, as learners ourselves, we cannot fully reconcile the differences and hence there is the need for the assumption in the first place. We will explore this in a subsequent post but in the meantime, we cannot stress on this enough to avoid any misrepresentation. In all honesty, we also feel that the valuation, which we are about to cover, is realistic and through that, the dilemma arises.
We think that 6% is adequate compensation for the risk of property investment and based on an FCF of HKD83.5m, the property division would be valued at HKD1391.67m. If we were to be extremely conservative and use the 5-year low of HKD62.79m, the property division would be worth HKD1046.5m, almost half of its current book value. In conjunction with the disclosure above, we will use this lower figure instead.
This exercise does support our stand that Goldlion Holdings Limited (HKG:0533) is undervalued, however, it also shows that the margin of safety is not significantly large. Admittedly, this was calculated based on conservative estimates, especially with regards to their property arm.
However, regardless of what the intrinsic value may be, we should not lose sight of the possible learning points. Readers might be notice the relatively high number of assumptions made in deriving our intrinsic value and hence be sceptical of its accuracy. To share my own perspective, I used to think that way too. With a preference to keep the number assumptions and estimates as little as possible, I had almost close to no belief in DCF-derived figures and financial models due to their reliance on expectations, relying instead of normalized historical figures. So what changed?
Learning point #1: When using normalized historical figures, the underlying assumption is that the business performance of the future will mirror or be similar to the past. This is usually not the case and adjustments in estimates have to be made.
Learning point #2: Any cash flow yield is essentially based on the concept of DCF (time value of money). With that, I realised that the problem was not a high number of assumptions made but rather the optimistic nature of the assumptions/expectations made by research houses in their financial models or DCF figures. It is understandable; their job is to predict the most likely business outcome, but as value investors, we seek insurance by taking into account what if the unlikely occurs (which it most often does). In conjunction with learning point #1, we cannot avoid making assumptions and estimates, but the solution is to make very conservative, almost pessimistic assumptions.