Is Ctrip.com International, Ltd. (NASDAQ:CTRP) Worth CN¥33.99 Based On Its Intrinsic Value?

Does the August share price for Ctrip.com International, Ltd. (NASDAQ:CTRP) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. I will be using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Ctrip.com International

Is Ctrip.com International fairly valued?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2020	2021	2022	2023	2024	2025	2026	2027	2028	2029
Levered FCF (CN¥, Millions)	CN¥8.5b	CN¥12.1b	CN¥13.3b	CN¥12.9b	CN¥12.7b	CN¥12.7b	CN¥12.8b	CN¥13.0b	CN¥13.2b	CN¥13.5b
Growth Rate Estimate Source	Analyst x13	Analyst x11	Analyst x4	Analyst x2	Est @ -1.36%	Est @ -0.14%	Est @ 0.72%	Est @ 1.33%	Est @ 1.75%	Est @ 2.04%
Present Value (CN¥, Millions) Discounted @ 13.47%	CN¥7.5k	CN¥9.4k	CN¥9.1k	CN¥7.8k	CN¥6.8k	CN¥5.9k	CN¥5.3k	CN¥4.7k	CN¥4.2k	CN¥3.8k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF)= CN¥64.5b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 10-year government bond rate (2.7%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 13.5%.

Terminal Value (TV) = FCF₂₀₂₉ × (1 + g) ÷ (r – g) = CN¥13b × (1 + 2.7%) ÷ (13.5% – 2.7%) = CN¥129b

Present Value of Terminal Value (PVTV) = TV / (1 + r)¹⁰ = CN¥CN¥129b ÷ ( 1 + 13.5%)¹⁰ = CN¥36.39b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥100.90b. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value estimate in the company’s reported currency of CN¥182.3. However, CTRP’s primary listing is in China, and 1 share of CTRP in CNY represents 0.142 ( CNY/ USD) share of NasdaqGS:CTRP, so the intrinsic value per share in USD is $25.95. Compared to the current share price of $33.99, the company appears potentially overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

NasdaqGS:CTRP Intrinsic value, August 7th 2019

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Ctrip.com International 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 13.5%, which is based on a levered beta of 1.802. 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.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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. What is the reason for the share price to differ from the intrinsic value? For Ctrip.com International, I've compiled three essential factors you should further examine:

1. Financial Health: Does CTRP have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

2. Future Earnings: How does CTRP'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.

3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of CTRP? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock just search here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.