China Modern Dairy Holdings (SEHK:1117) has drawn fresh attention after its share price moved to HK$1.535, with performance over the past month and past three months prompting closer scrutiny from investors.
Recent trading has been choppy for China Modern Dairy Holdings, with a 1-day share price return of 1.32% and a 7-day share price decline of 4.36% following a strong 90-day share price gain of 56.63% from lower levels.
Despite the year-to-date share price being down 5.25%, longer-run total shareholder returns tell a different story, with a 1-year total shareholder return of 20.87% and a 3-year total shareholder return of 103.18%, suggesting momentum has been rebuilding over time.
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For China Modern Dairy Holdings, the sharp 90 day rebound sits against a year to date decline and mixed profits. Is this move mainly about improving fundamentals, or a sentiment swing that valuation still needs to test?
Preferred Price-to-Sales of 0.8x: Is it justified?
Valuation on China Modern Dairy Holdings currently hinges on a Price-to-Sales ratio of 0.8x, which leaves the stock looking more expensive than both peers and the wider Hong Kong food sector, even after the recent rebound to HK$1.535.
P/S compares the market value of the equity to the revenue it generates. It is often used for companies where earnings are volatile or loss making, as is the case here with China Modern Dairy Holdings reporting a loss of CN¥196.4m on CN¥13,121.0m of sales.
For this dairy operator, the picture is mixed. Management is forecast to grow earnings strongly and revenue is expected to expand at 14.6% each year, which points to optimism reflected in the valuation. At the same time, the business is currently unprofitable, Return on Equity is negative at 1.73%, and losses have widened over the past 5 years. As a result, the market is paying up relative to many peers for a turnaround that still needs to be delivered.
The comparison with other food companies is stark. China Modern Dairy Holdings trades on a 0.8x P/S, while both the Hong Kong Food industry and peer group sit at 0.6x, so investors are accepting a clear premium to sector norms. The SWS fair P/S ratio estimate of 0.9x is slightly higher than where the shares trade today, which suggests the current multiple already leans toward the upper end of where the market could reasonably move.
Explore the SWS fair ratio for China Modern Dairy Holdings.
Result: Price-to-Sales of 0.8x (OVERVALUED).
Still, the reliance on a single core market in Mainland China and the current CN¥196.4m loss mean that any setback in execution could quickly challenge this rebound story.
Find out about the key risks to this China Modern Dairy Holdings narrative .
Another View on China Modern Dairy Holdings: Our DCF Signal
While the 0.8x P/S ratio makes China Modern Dairy Holdings look expensive next to food sector peers, the SWS DCF model points the other way, with an estimated future cash flow value of HK$14.4 versus a market price of HK$1.54. If both are right, which signal do you trust more?
Look into how the SWS DCF model arrives at its fair value.
Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day ( check out China Modern Dairy Holdings for example ). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 194 high quality undervalued stocks . If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.
Next Steps
With sentiment on China Modern Dairy Holdings pulling in two different directions, now is the time to review the numbers yourself and pressure test the thesis. Move quickly, compare how the upside case stacks up against the risks, and weigh those 3 key rewards .
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Companies discussed in this article include 1117.HK .
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