Stock Analysis

Are Investors Undervaluing NBTM New Materials Group Co., Ltd. (SHSE:600114) By 44%?

SHSE:600114
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Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, NBTM New Materials Group fair value estimate is CN¥26.90
  • NBTM New Materials Group is estimated to be 44% undervalued based on current share price of CN¥15.00
  • Our fair value estimate is 48% higher than NBTM New Materials Group's analyst price target of CN¥18.16

In this article we are going to estimate the intrinsic value of NBTM New Materials Group Co., Ltd. (SHSE:600114) by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for NBTM New Materials Group

The Model

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Levered FCF (CN¥, Millions) CN¥447.0m CN¥659.0m CN¥827.4m CN¥982.5m CN¥1.12b CN¥1.24b CN¥1.34b CN¥1.43b CN¥1.51b CN¥1.58b
Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ 25.56% Est @ 18.75% Est @ 13.98% Est @ 10.64% Est @ 8.30% Est @ 6.67% Est @ 5.52% Est @ 4.72%
Present Value (CN¥, Millions) Discounted @ 9.4% CN¥409 CN¥551 CN¥632 CN¥686 CN¥715 CN¥723 CN¥716 CN¥698 CN¥673 CN¥645

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥6.4b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 9.4%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥1.6b× (1 + 2.9%) ÷ (9.4%– 2.9%) = CN¥25b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥25b÷ ( 1 + 9.4%)10= CN¥10b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥17b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥15.0, the company appears quite undervalued at a 44% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
SHSE:600114 Discounted Cash Flow September 30th 2024

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at NBTM New Materials Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 9.4%, which is based on a levered beta of 1.314. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for NBTM New Materials Group

Strength
  • Earnings growth over the past year exceeded the industry.
  • Debt is well covered by earnings.
Weakness
  • Dividend is low compared to the top 25% of dividend payers in the Auto Components market.
Opportunity
  • Annual earnings are forecast to grow faster than the Chinese market.
  • Trading below our estimate of fair value by more than 20%.
Threat
  • Debt is not well covered by operating cash flow.
  • Dividends are not covered by cash flow.
  • Revenue is forecast to grow slower than 20% per year.

Moving On:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For NBTM New Materials Group, we've compiled three relevant elements you should further examine:

  1. Risks: As an example, we've found 3 warning signs for NBTM New Materials Group (2 make us uncomfortable!) that you need to consider before investing here.
  2. Future Earnings: How does 600114's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SHSE every day. If you want to find the calculation for other stocks just search here.

Valuation is complex, but we're here to simplify it.

Discover if NBTM New Materials Group might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.