China South Publishing: Recent Underperformance Drives Discount to Fair Value

36 ratings

China South Publishing & Media Group primarily provides publishing products, from general books, textbooks, and education counseling materials, to video products. The company also offers newspaper media products and electronic publications. The company mainly operates its businesses within the Hunan province and is led by Gong Shuguang.

The stock currently trades at RMB 9.04, with a 52-week high of RMB 13.57 and a 52-week low of RMB 9.01. The earnings multiple stands at 11.9x on a trailing basis and 10.7x on a next twelve months basis, with a market cap of RMB 16,247 million.

Economic Value-Added (EVA) Analysis

The company has posted operating income of RMB 1,672 million, RMB 1,419 million, and RMB 1,454 million in the last three fiscal years, respectively. Adjusted for ongoing operating lease expenses of RMB 51 million and taxes of - RMB 527 million, the company's adjusted net operating profit after taxes (NOPAT) amounts to RMB 978 million in the most recent fiscal year.

The company's NOPAT is generated using the following capital structure - a total debt load of RMB 415 million, minority interest of RMB 782 million, and an equity balance amounting to RMB 13,670 million. The company's adjusted capital base stands at RMB 14,869 million as at the most recent fiscal year.

The company's WACC stands at 5.8%, based on a cost of debt of 4.2% and a cost of equity of 5.8%. The company's cost of debt is composed of a short-term debt cost of 4.3% and a long-term debt cost of 5.5%. Meanwhile, the cost of equity assumptions includes an inflation-adjusted risk-free rate of 1.5%, an equity risk premium of 7.2% based on the Shanghai Composite index, and a beta of 0.61.

The WACC assumption results in a capital charge of RMB 868 million in the latest fiscal year, offsetting NOPAT of RMB 978 million and driving annual economic value added (EVA) of RMB 110 million. Thus, relative to its cost of capital, the company is generating 0.7% in economic value added as of the most recent fiscal year.

Discounted Cash Flow (DCF) Valuation

The company's unlevered free cash flow stands at RMB 4,093 million as at the most recent fiscal year, with prior years' FCF at RMB 4,466 million and - RMB 659 million. The unlevered FCF numbers are calculated based on adjusted operating cash flows of RMB 4,663 million in the most recent fiscal year, offset by capex of - RMB 570 million, based on additions to PP&E. The forecast period's FCF numbers are generated based on consensus' revenue growth assumptions of 2.3%, 9.3%, -2.4%, -1.4%, and -0.4% in the five-year forecast period, along with EBIT margin assumptions of 11.3%, 11.6%, 11.6%, 11.6%, and 11.6%.

Assuming a WACC of 6.0%, the sum of the present value of the total forecast unlevered FCF is RMB 3,753 million.

Assuming an in-line exit EBITDA multiple of 1.5x, this brings the present value of the company's terminal value to RMB 1,623 million (30.2% of the total equity value).

Based on the assumptions laid out above, the fair value of the company's equity stands at RMB 18,811 million after accounting for RMB 415 million in debt and - RMB 14,633 million in cash and short-term investments, as well as RMB 782 million in minority interest. With shares outstanding at 1,797 million, the per-share equity value stands at RMB 10.47, a 15.8% difference relative to the current price.

Sensitizing the DCF results, the per-share equity valuation rises by RMB 0.60 for every additional turn in the exit EBITDA assumption and decreases by RMB 0.04 with an additional %pt increase in the WACC assumption.


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