Are investors undervaluing Atour Lifestyle Holdings Limited (NASDAQ:ATAT) by 22%?

Key Insights

Applying two-stage free cash flow to the stock, we estimate Atour Lifestyle Holdings’ fair value to be US$27.37. The current share price of US$21.22 suggests that Atour Lifestyle Holdings is potentially undervalued by 22%. Our fair value estimate is 1.6% higher than Atour Lifestyle Holdings’ analyst target price of RMB 26.93.

How far is Atour Lifestyle Holdings Limited (NASDAQ:ATAT) from its intrinsic value? We’ll use the most recent financial data to see if the stock is fairly priced by projecting future cash flows and discounting them to today’s value. In this case, we’ll use the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple.

We caution that there are many ways to value a company, and like a DCF, each method has advantages and disadvantages in certain scenarios. If you’d like to learn a bit more about intrinsic value, check out the Simply Wall St analysis model.

Check out our latest analysis for Atour Lifestyle Holdings

What is the estimated valuation?

We use what is called a two-stage model. This means that there are two distinct periods of growth in a company’s cash flows. Typically, the first stage is a period of higher growth and the second a period of lower growth. First, we need to forecast cash flows for the next 10 years. We use analyst forecasts where possible, but if they’re not available, we extrapolate previous free cash flow (FCF) from previous forecasts or reported values. During this period, we assume that companies with shrinking free cash flows will slow their rate of shrinkage, and that companies with growing free cash flows will slow their growth rate. This is to reflect the fact that growth tends to be slower in the early years than in the later years.

A DCF is based on the idea that a dollar in the future is less valuable than a dollar today, so it discounts the value of future cash flows to their estimated value in today’s dollars.

10-year free cash flow (FCF) estimates

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Leveraged FCF (CNJPY, JPY million) CNJPY196 million CNJPY182 million CNJPY175 million CNJPY171 million CNJPY170 million CNJPY171 million CNJPY172 million 75b CN¥1.78b CN¥1.81b Growth Estimate Source Analyst x2 Analyst x1 Forecast @ -4.02% Forecast @ -2.06% Forecast @ -0.69% Forecast @ 0.26% Forecast @ 0.94% Forecast @ 1.40% Forecast @ 1.73% Forecast @ 1.96% Present Value (CN¥, millions) Discounted @ 8.2% CN¥1.8k CN¥1.6k CN¥1.4k CN¥1.2k CN¥1.1k CN¥1.1k CN¥990 CN¥928 CN¥872 CN¥822

(“Estimate” = Simply Wall St’s estimate of FCF growth rate)
Present value of 10-year cash flows (PVCF) = 12 billion yuan

After calculating the present value of the future cash flows for the first 10 years, we need to calculate a terminal value that accounts for all future cash flows beyond the first stage. A very conservative growth rate that does not exceed the country’s GDP growth rate is used for several reasons. In this case, we used a 5-year average of the 10-year Treasury yield (2.5%) to project future growth. As with the 10-year “growth” period, we discount the future cash flows to today’s value using a cost of equity of 8.2%.

Terminal Value (TV) = FCF2034 × (1 + g) ÷ (r – g) = CN¥1.8b × (1 + 2.5%) ÷ (8.2%– 2.5%) = CN¥32b

Present Value of Terminal Value (PVTV) = TV / (1 + r)10 = CN¥32b ÷ ( 1 + 8.2%)10 = CN¥15b

The total value is the sum of the next 10 years’ cash flows plus the discounted terminal value, giving a total equity value of RMB 27 billion. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of US$21.2, the company appears a bit undervalued, with a 22% discount to the current share price. Assumptions in the calculation have a big impact on valuation, so it’s best to view this as a rough estimate rather than accurate to the last cent.

Important Assumptions

The above calculation relies heavily on two assumptions. The first is the discount rate, and the other is the cash flow. You are not required to agree with these inputs. I encourage you to try and redo the calculations yourself. DCF does not give a complete picture of the company’s potential performance as it does not take into account the cyclicality of the industry or the company’s future capital requirements. Since we are considering Atour Lifestyle Holdings as a potential shareholder, the cost of equity capital is used as the discount rate, not the cost of capital (or weighted average cost of capital, WACC) that takes into account debt. In this calculation, we used a leverage beta of 8.2% based on 1.148. Beta is a measure of the volatility of a stock compared to the overall market. The beta is taken from the industry average beta of globally comparable companies and is subject to a limit of 0.8 to 2.0, which is a reasonable range for a stable business.

SWOT Analysis of Atour Lifestyle Holdings

Future Outlook:

Valuation is only one side of the coin when building an investment thesis. Valuation should not be the only thing you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Ideally, you should apply different cases and assumptions to see how they affect a company’s valuation. For example, changes in a company’s cost of equity capital or risk-free rate can have a big impact on valuation. Can we figure out why a company is trading at a discount to its intrinsic value? In the case of Atour Lifestyle Holdings, we’ve summarized three fundamental factors to look at:

Risks: Every company has risks, but Atour Lifestyle Holdings has 2 warning signs you should know about. Future earnings: How is ATAT’s growth rate comparing to its peers and the market as a whole? Interact with our free analyst growth forecast chart to take a closer look at analyst consensus figures for the next few years. Other solid businesses: Low debt, high return on equity and great past performance are the fundamentals of a solid business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you might not have considered.

PS. The Simply Wall St app performs daily discounted cash flow valuations for all stocks on the NASDAQGS. If you want to find calculations for other stocks, search here.

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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.