“Unlocking Potential: Is Atour Lifestyle Holdings Limited (NASDAQ:ATAT) a Hidden Gem with 33% Undervaluation?”

Essential Insights

• The fair value estimation for Atour Lifestyle Holdings is US$41.98 using a 2 Stage Free Cash Flow to Equity methodology.
• Atour Lifestyle Holdings appears to be 33% undervalued, given the current share price of US$27.99.
• The analyst price target of CN¥33.09 for ATAT is 21% lower than our fair value estimate.

In this article, we will explore one method of determining the intrinsic worth of Atour Lifestyle Holdings Limited (NASDAQ:ATAT) by assessing the expected future cash flows and discounting them to the present value. The Discounted Cash Flow (DCF) model will be employed to accomplish this task. While it may seem intricate, the process is actually quite straightforward!

There are various methods to assess the value of companies, thus we emphasize that DCF may not be suitable for every circumstance. If you still have pressing inquiries regarding this valuation approach, examine the Simply Wall St analysis model.

Discover our most recent analysis on Atour Lifestyle Holdings

Analyzing The Figures

We will utilize a two-stage DCF model, which, as indicated by its name, considers two distinct growth phases. The preliminary stage typically involves a higher growth trajectory that levels off towards the terminal value, which is represented in the subsequent ‘steady growth’ phase. Initially, we must forecast the cash flows for the next ten years. Whenever feasible, we utilize analyst projections, but in instances where they are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or reported data. We assume that companies experiencing declining free cash flow will decelerate their rate of decline and that organizations with increasing free cash flow will experience a slowdown in their growth rate throughout this time frame. This approach reflects the tendency for growth to diminish more in the earlier years compared to later years.

Generally, we assume that a dollar today carries more value than a dollar in the future, thus we need to discount the total of these future cash flows to derive a current value estimate:

10-year free cash flow (FCF) projections

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥1.91b	CN¥2.16b	CN¥2.35b	CN¥2.51b	CN¥2.66b	CN¥2.78b	CN¥2.89b	CN¥3.00b	CN¥3.10b	CN¥3.20b
Growth Rate Estimate Source	Analyst x2	Analyst x1	Est @ 8.74%	Est @ 6.90%	Est @ 5.62%	Est @ 4.72%	Est @ 4.09%	Est @ 3.65%	Est @ 3.34%	Est @ 3.12%
Present Value (CN¥, Millions) Discounted @ 8.4%	CN¥1.8k	CN¥1.8k	CN¥1.8k	CN¥1.8k	CN¥1.8k	CN¥1.7k	CN¥1.6k	CN¥1.6k	CN¥1.5k	CN¥1.4k

(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥17b

Now we must compute the Terminal Value, which encompasses all future cash flows beyond this ten-year timeframe. The Gordon Growth formula will be applied to ascertain the Terminal Value at a future annual growth rate equivalent to the 5-year average of the 10-year government bond yield of 2.6%. We discount the terminal cash flows to present value at an equity cost of 8.4%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥3.2b× (1 + 2.6%) ÷ (8.4%– 2.6%) = CN¥57b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥57b÷ ( 1 + 8.4%)¹⁰= CN¥25b

The cumulative value is the aggregation of cash flows for the ensuing decade plus the discounted terminal value, which culminates in the Total Equity Value, presently assessed at CN¥42b. To ascertain the intrinsic worth per share, we divide this total by the overall number of shares outstanding. When compared to the current stock price of US$28.0, the firm appears to be substantially undervalued at a 33% discount relative to its current trading price. The assumptions incorporated in any evaluation significantly influence the valuation, making it advisable to treat this as an approximation rather than an exact figure.

Key Assumptions

It is crucial to note that the most significant factors in a discounted cash flow model are the discount rate and the actual cash flows. Investing involves formulating your own assessment of a company’s upcoming performance, thus it is recommended to conduct your own calculations and verify your assumptions. The DCF model does not account for potential cyclical variations in an industry or future capital needs of a company, thus it may not provide a complete overview of a company’s performance potential. Since we are evaluating Atour Lifestyle Holdings from a shareholder’s perspective, the cost of equity is employed as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC), which considers debt. In this assessment, we’ve adopted a rate of 8.4%, derived from a levered beta of 1.163. Beta serves as an indicator of a stock’s volatility compared to the overall market. Our beta is obtained from the industry average beta of similarly positioned global companies, maintaining limits between 0.8 and 2.0, which is a rational range for a stable entity.

SWOT Evaluation for Atour Lifestyle Holdings

Subsequent Actions:

Valuation is merely one aspect of crafting your investment thesis and should not be the sole criterion during your company research. It is impractical to derive a foolproof valuation with a DCF model. Instead, the optimal use of a DCF model is to evaluate specific assumptions.

and hypotheses to determine if they could result in the firm being undervalued or overvalued. For instance, fluctuations in the organization’s cost of equity or the risk-free rate can greatly affect the appraisal. What might be the cause for the stock price remaining below the intrinsic value? For Atour Lifestyle Holdings, we have gathered three relevant elements you should examine:

1. Financial Stability: Does ATAT possess a robust balance sheet? Review our complimentary balance sheet assessment with six straightforward checks on crucial aspects such as leverage and risk.
2. Projected Earnings: How does ATAT’s growth rate stand in comparison to its competitors and the broader market? Delve deeper into the analyst consensus figures for the forthcoming years by engaging with our no-cost analyst growth expectation chart.
3. Other Reliable Companies: Minimal debt, high equity returns, and strong historical performance are essential for a solid business. Why not investigate our interactive roster of stocks with strong business fundamentals to uncover other firms you might not have thought about!

PS. Simply Wall St refreshes its DCF calculation for every American stock daily, so if you wish to ascertain the intrinsic value of any additional stock simply search here.

Do you have feedback on this article? Concerned regarding the content? Reach out to us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is broadly framed. We provide insights based on historical data and analyst predictions using an impartial approach and our articles are not intended as financial guidance. It does not serve as a suggestion to buy or sell any stock, nor does it take your objectives, or financial circumstances into account. We strive to deliver long-term focused evaluations driven by fundamental data. Please be aware that our analysis might not consider the latest price-sensitive announcements from the company or qualitative elements. Simply Wall St holds no position in any stocks referenced.