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However, there is a dilemma here, the question of how to balance the discounted cash flow with its own historical PE range
According to the DCF, the valuation range is between 15X and 35X, and from the perspective of the historical valuation range, the historical PE of this case is rarely lower than 20 times.
It can be seen that the market is very optimistic about the transformation of its generic drugs, and the valuation is very strong.
However, judging by the margin of safety and the ROIC level (around 10%), it doesn't seem to be very cheap.
In this case, before September 28, 2018, its PE was 46 times and its market value was 26 billion
After the black swan event, the stock price plummeted, but the lowest PE was around 24 times.
At present, its PE has rebounded, and its market value has risen to 17 billion yuan.
In addition, there are three more risk points and valuation details that need to be paid attention to for reference:
First, the pledge ratio of major shareholders - the number of pledges of major shareholders of Huahai accounts for a relatively high proportion of shareholdings, accounting for about 42.36%, and is higher than the proportion of 32% before the black swan event
Second, management risk - Huahai was co-founded by Chen Baohua (the major shareholder) and Zhou Minghua (the second shareholder) at that time, but now it is necessary to pay attention to the details behind it. With such a big change in the business structure, there may be friction in the internal system from a company's operational perspective.
We flipped through the announcement: according to the announcement of the resolution of the 2006 general meeting of shareholders, Zhou Minghua did not pass the "Proposal on the Election of the Third Board of Directors of the Company", with 52% of the votes against, and Zhou Minghua did not enter the board of directors
Then, the day before the black swan event, Zhou Minghua began to reduce his stake in Huahai, and at present, he still holds 19.25% of the shares, and in the future, it may be necessary to consider the risks of governance structure and management.
If we have the opportunity to have an in-depth communication with the management of this case, the above questions will be our main concern.
Third, the PE-TTM value has changed greatly - at present, on October 19, 2018, after the black swan event, Huahai's share price fell to 10.62 yuan / share, and PE-TTM fell to 24 times
As of November 28, 2018, the stock price rebounded to 13.48 yuan, an increase of 27%; At the same time, PE-TTM rose to 41.2 times, an increase of 72%
Here's an important valuation detail: Why did the share price rise by only 27% while the PE-TTM jumped by 72%?
According to the formula PE-TTM = (share price * total share capital) / rolling 12-month net profit.
Since PE-TTM is based on the rolling net profit of the first four quarters, on October 30, 2018, Huahai announced its third quarterly report, in which the net profit fell by 47%, resulting in a decline in the rolling net profit margin for the current period
It can be seen that the stock price rose by 23% (numerator) and the rolling net profit (denominator) fell by 47%, so the increase in PE-TTM was magnified.
In a similar situation, PE-TTM needs to be adjusted – it is currently trading at 42x PE-TTM compared to 2018 dynamic P/E of 25.8x, which is clearly the latter figure more trustworthy when it comes to valuation
Predict the follow-up and listen to the next breakdown
It does not constitute any investment advice, the stock market is risky, and you need to be cautious when entering the market