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- Electrical
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- SHSE:601369
Is Xi'an Shaangu Power Co., Ltd. (SHSE:601369) Worth CN¥9.7 Based On Its Intrinsic Value?
Key Insights
- The projected fair value for Xi'an Shaangu Power is CN¥7.47 based on 2 Stage Free Cash Flow to Equity
- Xi'an Shaangu Power's CN¥9.74 share price signals that it might be 30% overvalued
- Our fair value estimate is 31% lower than Xi'an Shaangu Power's analyst price target of CN¥10.79
Does the April share price for Xi'an Shaangu Power Co., Ltd. (SHSE:601369) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Check out our latest analysis for Xi'an Shaangu Power
Step By Step Through The Calculation
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) estimate
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF (CN¥, Millions) | CN¥814.8m | CN¥868.0m | CN¥915.3m | CN¥958.2m | CN¥998.2m | CN¥1.04b | CN¥1.07b | CN¥1.11b | CN¥1.14b | CN¥1.18b |
Growth Rate Estimate Source | Est @ 8.06% | Est @ 6.52% | Est @ 5.45% | Est @ 4.70% | Est @ 4.17% | Est @ 3.80% | Est @ 3.54% | Est @ 3.36% | Est @ 3.24% | Est @ 3.15% |
Present Value (CN¥, Millions) Discounted @ 9.9% | CN¥742 | CN¥719 | CN¥690 | CN¥658 | CN¥623 | CN¥589 | CN¥555 | CN¥522 | CN¥491 | CN¥461 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥6.0b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 9.9%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥1.2b× (1 + 2.9%) ÷ (9.9%– 2.9%) = CN¥18b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥18b÷ ( 1 + 9.9%)10= CN¥6.8b
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¥13b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CN¥9.7, the company appears reasonably expensive at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
The Assumptions
We would point out that 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 Xi'an Shaangu Power 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 9.9%, which is based on a levered beta of 1.231. 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 Xi'an Shaangu Power
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Dividend is in the top 25% of dividend payers in the market.
- Earnings growth over the past year underperformed the Electrical industry.
- Annual revenue is forecast to grow faster than the Chinese market.
- Good value based on P/E ratio compared to estimated Fair P/E ratio.
- Annual earnings are forecast to grow slower than the Chinese market.
Looking Ahead:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a premium to intrinsic value? For Xi'an Shaangu Power, we've put together three important items you should further examine:
- Risks: For example, we've discovered 1 warning sign for Xi'an Shaangu Power that you should be aware of before investing here.
- Future Earnings: How does 601369'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.
- 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!
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.
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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.
About SHSE:601369
Xi'an Shaangu Power
Provides systematic solutions and services in the People’s Republic of China.
Excellent balance sheet with proven track record and pays a dividend.