A Look At The Intrinsic Value Of Fuxin Dare Automotive Parts Co., Ltd. (SZSE:300473)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Fuxin Dare Automotive Parts fair value estimate is CN¥19.78
• With CN¥19.46 share price, Fuxin Dare Automotive Parts appears to be trading close to its estimated fair value
• Fuxin Dare Automotive Parts' peers are currently trading at a premium of 3,730% on average

In this article we are going to estimate the intrinsic value of Fuxin Dare Automotive Parts Co., Ltd. (SZSE:300473) by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Fuxin Dare Automotive Parts

What's The Estimated Valuation?

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 start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥161.1m	CN¥192.8m	CN¥221.1m	CN¥245.7m	CN¥267.1m	CN¥285.7m	CN¥302.1m	CN¥316.9m	CN¥330.6m	CN¥343.5m
Growth Rate Estimate Source	Est @ 26.88%	Est @ 19.70%	Est @ 14.67%	Est @ 11.15%	Est @ 8.69%	Est @ 6.96%	Est @ 5.76%	Est @ 4.91%	Est @ 4.32%	Est @ 3.91%
Present Value (CN¥, Millions) Discounted @ 11%	CN¥145	CN¥156	CN¥161	CN¥161	CN¥158	CN¥152	CN¥145	CN¥137	CN¥128	CN¥120

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.5b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 11%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥344m× (1 + 2.9%) ÷ (11%– 2.9%) = CN¥4.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥4.3b÷ ( 1 + 11%)¹⁰= CN¥1.5b

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¥3.0b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥19.5, the company appears about fair value at a 1.6% 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.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Fuxin Dare Automotive Parts 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 11%, which is based on a levered beta of 1.449. 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.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Fuxin Dare Automotive Parts, we've put together three important items you should assess:

1. Risks: Every company has them, and we've spotted 2 warning signs for Fuxin Dare Automotive Parts (of which 1 doesn't sit too well with us!) you should know about.
2. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. Simply Wall St updates its DCF calculation for every Chinese stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.