Avary Holding: Ample Upside Potential in a Steady Margin Expansion Scenario

31 ratings

Avary Holding (Shenzhen) Co., Limited is a China-based company involved in the design, manufacture and sales of various printed circuits board products such as communication boards, consumer electronics and computer boards, among others. These products are applied across mobile phones, network equipment, and tablet computers. The company is based in China.

The stock currently trades at RMB 50.7, with a 52-week high of RMB 61.57, and a 52-week low of RMB 29.37. The earnings multiple stands at 45.1x on a trailing basis and 30.1x on a next twelve months basis, with a market cap of RMB 116,867 million.

Economic Value-Added (EVA) Analysis

The company has posted operating income of RMB 2,130 million, RMB 3,352 million, and RMB 3,426 million in the last three fiscal years, respectively. Adjusted for ongoing operating lease expenses of RMB 6 million and taxes of - RMB 1,201 million, the company's adjusted net operating profit after taxes (NOPAT) amounts to RMB 2,231 million in the most recent fiscal year. A full breakdown of the company's NOPAT trend is as follows:

The company's NOPAT is generated using the following capital structure - total debt of RMB 2,254 million and an equity balance amounting to RMB 19,829 million. Adjusted for the present value of operating leases of RMB 66 million, the company's adjusted capital base stands at RMB 22,149 million as at the most recent fiscal year.

The company's WACC stands at 10.6%, in-line with the cost of equity. Meanwhile, the cost of equity assumptions includes an inflation-adjusted risk-free rate of 1.2%, an equity risk premium of 8.0% based on the SHCOMP index, and a beta of 1.19.

The WACC assumption results in a capital charge of RMB 2,347 million in the latest fiscal year, offsetting NOPAT of RMB 2,231 million, and driving annual economic value added (EVA) of - RMB 116 million. Thus, relative to its cost of capital, the company is generating -0.5% in economic value added as of the most recent fiscal year. An illustration of the company's EVA trend is as follows:

Discounted Cash Flow (DCF) Valuation

The company's unlevered free cash flow stands at RMB 27,350 million as at the most recent fiscal year, with prior years' FCF at RMB 26,311 million and - RMB 3,760 million. The unlevered FCF numbers are calculated based on adjusted operating cash flows of RMB 31,196 million in the most recent fiscal year, offset by capex of - RMB 3,845 million, based on additions to PP&E. The forecast period's FCF numbers are generated based on consensus' revenue growth assumptions of 7.7%, 19.9%, 17.9%, 15.9%, and 13.9% in the five-year forecast period, along with EBIT margin assumptions of 12.7%, 13.3%, 14.3%, 15.3%, and 16.3%.

Assuming a WACC of 10.6%, the sum of the present value of the total forecast unlevered FCF is RMB 10,118 million.

Assuming an in-line exit EBITDA multiple of 17x, this brings the present value of the company's terminal value to RMB 122,907 million (92.4% of the total equity value).

Based on the assumptions laid out above, the fair value of the company's equity stands at RMB 138,036 million after accounting for RMB 2,254 million in debt and - RMB 7,264 million in cash and short-term investments. With shares outstanding at 2,305 million, the per-share equity value stands at 59.88, a 18.1% difference relative to the current price.

Sensitizing the DCF results, the per-share equity valuation rises by RMB 3.14 for every additional turn in the exit EBITDA assumption and decreases by RMB 2.35 with an additional %pt increase in the WACC assumption.




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