Intrinsic value of Hailiang Education Group ADR - HLG

Previous Close

$45.62

  Intrinsic Value

$19.06

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  Rating & Target

str. sell

-58%

Previous close

$45.62

 
Intrinsic value

$19.06

 
Up/down potential

-58%

 
Rating

str. sell

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of HLG stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.2

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  28.38
  28.40
  26.06
  23.95
  22.06
  20.35
  18.82
  17.44
  16.19
  15.07
  14.07
  13.16
  12.34
  11.61
  10.95
  10.35
  9.82
  9.34
  8.90
  8.51
  8.16
  7.84
  7.56
  7.30
  7.07
  6.87
  6.68
  6.51
  6.36
  6.22
  6.10
Revenue, $m
  95
  122
  154
  191
  233
  280
  333
  391
  454
  522
  596
  674
  757
  845
  938
  1,035
  1,137
  1,243
  1,353
  1,469
  1,589
  1,713
  1,843
  1,977
  2,117
  2,263
  2,414
  2,571
  2,734
  2,905
  3,082
Variable operating expenses, $m
 
  91
  114
  141
  172
  207
  246
  289
  336
  386
  440
  497
  559
  624
  692
  763
  838
  917
  998
  1,083
  1,172
  1,264
  1,359
  1,458
  1,561
  1,669
  1,780
  1,896
  2,017
  2,142
  2,273
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  81
  91
  114
  141
  172
  207
  246
  289
  336
  386
  440
  497
  559
  624
  692
  763
  838
  917
  998
  1,083
  1,172
  1,264
  1,359
  1,458
  1,561
  1,669
  1,780
  1,896
  2,017
  2,142
  2,273
Operating income, $m
  14
  31
  39
  49
  60
  73
  86
  102
  118
  136
  155
  177
  199
  222
  246
  272
  298
  326
  355
  385
  417
  450
  484
  519
  556
  594
  634
  675
  718
  762
  809
EBITDA, $m
  23
  42
  53
  66
  81
  97
  115
  135
  157
  181
  207
  234
  263
  293
  325
  359
  394
  431
  469
  509
  551
  594
  639
  685
  734
  784
  837
  891
  948
  1,007
  1,068
Interest expense (income), $m
  0
  0
  0
  1
  1
  2
  2
  3
  3
  4
  5
  6
  7
  8
  9
  10
  11
  12
  13
  14
  16
  17
  18
  20
  21
  23
  25
  26
  28
  30
  32
Earnings before tax, $m
  14
  31
  39
  48
  59
  71
  84
  99
  115
  132
  151
  171
  192
  214
  238
  262
  288
  314
  342
  371
  401
  433
  465
  499
  534
  571
  609
  648
  689
  732
  777
Tax expense, $m
  0
  8
  11
  13
  16
  19
  23
  27
  31
  36
  41
  46
  52
  58
  64
  71
  78
  85
  92
  100
  108
  117
  126
  135
  144
  154
  164
  175
  186
  198
  210
Net income, $m
  14
  23
  29
  35
  43
  52
  62
  72
  84
  96
  110
  125
  140
  156
  173
  191
  210
  229
  250
  271
  293
  316
  340
  364
  390
  417
  444
  473
  503
  535
  567

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  42
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  164
  157
  197
  245
  299
  359
  427
  502
  583
  671
  765
  866
  972
  1,085
  1,204
  1,329
  1,459
  1,595
  1,737
  1,885
  2,039
  2,199
  2,365
  2,538
  2,718
  2,904
  3,098
  3,300
  3,510
  3,729
  3,956
Adjusted assets (=assets-cash), $m
  122
  157
  197
  245
  299
  359
  427
  502
  583
  671
  765
  866
  972
  1,085
  1,204
  1,329
  1,459
  1,595
  1,737
  1,885
  2,039
  2,199
  2,365
  2,538
  2,718
  2,904
  3,098
  3,300
  3,510
  3,729
  3,956
Revenue / Adjusted assets
  0.779
  0.777
  0.782
  0.780
  0.779
  0.780
  0.780
  0.779
  0.779
  0.778
  0.779
  0.778
  0.779
  0.779
  0.779
  0.779
  0.779
  0.779
  0.779
  0.779
  0.779
  0.779
  0.779
  0.779
  0.779
  0.779
  0.779
  0.779
  0.779
  0.779
  0.779
Average production assets, $m
  70
  89
  113
  140
  170
  205
  244
  286
  332
  382
  436
  494
  554
  619
  687
  758
  832
  910
  991
  1,075
  1,163
  1,254
  1,349
  1,447
  1,550
  1,656
  1,767
  1,882
  2,002
  2,126
  2,256
Working capital, $m
  13
  -37
  -47
  -58
  -71
  -85
  -101
  -119
  -138
  -159
  -182
  -206
  -231
  -258
  -286
  -316
  -347
  -379
  -413
  -448
  -485
  -523
  -562
  -603
  -646
  -690
  -736
  -784
  -834
  -886
  -940
Total debt, $m
  0
  9
  19
  31
  45
  60
  77
  96
  117
  139
  163
  189
  216
  245
  275
  306
  340
  374
  410
  448
  487
  528
  570
  614
  659
  707
  756
  807
  861
  916
  974
Total liabilities, $m
  31
  40
  50
  62
  76
  91
  108
  127
  148
  170
  194
  220
  247
  276
  306
  337
  371
  405
  441
  479
  518
  559
  601
  645
  690
  738
  787
  838
  892
  947
  1,005
Total equity, $m
  133
  117
  147
  183
  223
  268
  319
  374
  435
  500
  571
  646
  725
  810
  898
  991
  1,089
  1,190
  1,296
  1,406
  1,521
  1,641
  1,765
  1,894
  2,027
  2,167
  2,311
  2,462
  2,619
  2,782
  2,951
Total liabilities and equity, $m
  164
  157
  197
  245
  299
  359
  427
  501
  583
  670
  765
  866
  972
  1,086
  1,204
  1,328
  1,460
  1,595
  1,737
  1,885
  2,039
  2,200
  2,366
  2,539
  2,717
  2,905
  3,098
  3,300
  3,511
  3,729
  3,956
Debt-to-equity ratio
  0.000
  0.080
  0.130
  0.170
  0.200
  0.220
  0.240
  0.260
  0.270
  0.280
  0.290
  0.290
  0.300
  0.300
  0.310
  0.310
  0.310
  0.310
  0.320
  0.320
  0.320
  0.320
  0.320
  0.320
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
  0.330
Adjusted equity ratio
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  14
  23
  29
  35
  43
  52
  62
  72
  84
  96
  110
  125
  140
  156
  173
  191
  210
  229
  250
  271
  293
  316
  340
  364
  390
  417
  444
  473
  503
  535
  567
Depreciation, amort., depletion, $m
  9
  11
  14
  17
  20
  24
  29
  34
  39
  45
  51
  57
  64
  71
  79
  87
  96
  105
  114
  124
  134
  144
  155
  166
  178
  190
  203
  216
  230
  244
  259
Funds from operations, $m
  38
  34
  42
  52
  64
  76
  90
  106
  123
  141
  161
  182
  204
  228
  252
  278
  306
  334
  364
  394
  427
  460
  495
  531
  568
  607
  647
  690
  733
  779
  826
Change in working capital, $m
  7
  -8
  -10
  -11
  -13
  -14
  -16
  -18
  -19
  -21
  -22
  -24
  -25
  -27
  -28
  -30
  -31
  -32
  -34
  -35
  -37
  -38
  -40
  -41
  -43
  -44
  -46
  -48
  -50
  -52
  -54
Cash from operations, $m
  31
  42
  52
  64
  76
  91
  107
  124
  142
  162
  183
  206
  229
  254
  281
  308
  337
  366
  397
  430
  463
  498
  534
  572
  611
  651
  694
  738
  783
  831
  880
Maintenance CAPEX, $m
  0
  -8
  -10
  -13
  -16
  -20
  -24
  -28
  -33
  -38
  -44
  -50
  -57
  -64
  -71
  -79
  -87
  -96
  -105
  -114
  -124
  -134
  -144
  -155
  -166
  -178
  -190
  -203
  -216
  -230
  -244
New CAPEX, $m
  -50
  -20
  -23
  -27
  -31
  -35
  -39
  -42
  -46
  -50
  -54
  -57
  -61
  -64
  -68
  -71
  -74
  -78
  -81
  -84
  -88
  -91
  -95
  -99
  -102
  -106
  -111
  -115
  -120
  -125
  -130
Cash from investing activities, $m
  -41
  -28
  -33
  -40
  -47
  -55
  -63
  -70
  -79
  -88
  -98
  -107
  -118
  -128
  -139
  -150
  -161
  -174
  -186
  -198
  -212
  -225
  -239
  -254
  -268
  -284
  -301
  -318
  -336
  -355
  -374
Free cash flow, $m
  -10
  14
  19
  24
  30
  37
  44
  53
  63
  74
  86
  98
  112
  126
  142
  158
  175
  193
  212
  231
  252
  273
  295
  318
  342
  367
  393
  419
  447
  476
  506
Issuance/(repayment) of debt, $m
  0
  9
  10
  12
  14
  15
  17
  19
  21
  22
  24
  26
  27
  29
  30
  32
  33
  35
  36
  38
  39
  41
  42
  44
  46
  47
  49
  51
  53
  55
  58
Issuance/(repurchase) of shares, $m
  18
  3
  2
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  17
  12
  12
  12
  14
  15
  17
  19
  21
  22
  24
  26
  27
  29
  30
  32
  33
  35
  36
  38
  39
  41
  42
  44
  46
  47
  49
  51
  53
  55
  58
Total cash flow (excl. dividends), $m
  8
  26
  31
  36
  43
  52
  62
  72
  84
  96
  110
  124
  139
  155
  172
  190
  208
  228
  248
  269
  291
  314
  337
  362
  388
  414
  442
  471
  501
  532
  564
Retained Cash Flow (-), $m
  -32
  -26
  -30
  -35
  -40
  -45
  -50
  -56
  -61
  -66
  -70
  -75
  -80
  -84
  -89
  -93
  -97
  -102
  -106
  -110
  -115
  -119
  -124
  -129
  -134
  -139
  -145
  -151
  -157
  -163
  -170
Prev. year cash balance distribution, $m
 
  42
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  42
  0
  0
  3
  7
  11
  17
  23
  31
  39
  49
  59
  71
  83
  97
  111
  126
  142
  159
  176
  194
  213
  233
  254
  275
  297
  320
  344
  369
  394
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  41
  0
  0
  3
  5
  8
  11
  14
  18
  21
  23
  25
  27
  28
  28
  28
  27
  26
  24
  22
  20
  18
  15
  13
  11
  9
  7
  5
  4
  3
Current shareholders' claim on cash, %
  100
  99.6
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4
  99.4

Hailiang Education Group Inc. is a holding company. The Company, through its subsidiaries Hailiang Education (HK) Limited (Hailiang HK) and Zhejiang Hailiang Education Consulting and Services Co., Ltd. (Hailiang Consulting), and consolidated affiliated entities, Zhejiang Hailiang Education Investment Co., Ltd. (Hailiang Investment), Zhuji Hailiang Foreign Language School (Foreign Language), Zhuji Private High School (Private High) and Zhuji Tianma Experimental School (Tianma Experimental), is principally engaged in provision of private K-12 educational services. These schools are located in Zhuji City, Zhejiang province in the People's Republic of China (the PRC). Through its schools, it offers educational programs that cover kindergarten through twelfth grade.

FINANCIAL RATIOS  of  Hailiang Education Group ADR (HLG)

Valuation Ratios
P/E Ratio 1340
Price to Sales 197.5
Price to Book 141
Price to Tangible Book
Price to Cash Flow 605.1
Price to Free Cash Flow -987.3
Growth Rates
Sales Growth Rate 28.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 138.1%
Cap. Spend. - 3 Yr. Gr. Rate 90.4%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 0%
Total Debt to Equity 0%
Interest Coverage 0
Management Effectiveness
Return On Assets 9.7%
Ret/ On Assets - 3 Yr. Avg. 17.6%
Return On Total Capital 12%
Ret/ On T. Cap. - 3 Yr. Avg. 20.8%
Return On Equity 12%
Return On Equity - 3 Yr. Avg. 20.8%
Asset Turnover 0.7
Profitability Ratios
Gross Margin 25.3%
Gross Margin - 3 Yr. Avg. 32.1%
EBITDA Margin 24.2%
EBITDA Margin - 3 Yr. Avg. 30.3%
Operating Margin 14.7%
Oper. Margin - 3 Yr. Avg. 22.4%
Pre-Tax Margin 14.7%
Pre-Tax Margin - 3 Yr. Avg. 23.9%
Net Profit Margin 14.7%
Net Profit Margin - 3 Yr. Avg. 23.9%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 0%
Payout Ratio 0%

HLG stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the HLG stock intrinsic value calculation we used $95 million for the last fiscal year's total revenue generated by Hailiang Education Group ADR. The default revenue input number comes from 2016 income statement of Hailiang Education Group ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our HLG stock valuation model: a) initial revenue growth rate of 28.4% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for HLG is calculated based on our internal credit rating of Hailiang Education Group ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Hailiang Education Group ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of HLG stock the variable cost ratio is equal to 74.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for HLG stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Hailiang Education Group ADR.

Corporate tax rate of 27% is the nominal tax rate for Hailiang Education Group ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the HLG stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for HLG are equal to 73.2%.

Life of production assets of 8.7 years is the average useful life of capital assets used in Hailiang Education Group ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for HLG is equal to -30.5%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $133 million for Hailiang Education Group ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 25.678 million for Hailiang Education Group ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Hailiang Education Group ADR at the current share price and the inputted number of shares is $1.2 billion.

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COMPANY NEWS

▶ Hailiang Education Receives Multiple Industry Awards   [Mar-20-17 07:16AM  PR Newswire]
▶ Hailiang Education Releases Fiscal 2016 Chairman Letter   [Jan-12-17 06:00AM  PR Newswire]
▶ Hailiang Education Elects New Independent Director   [Oct-17-16 06:00AM  PR Newswire]
Financial statements of HLG
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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