Calculating The Fair Value Of Jiangsu Teeyer Intelligent Equipment Co.,Ltd. (SHSE:603273)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Jiangsu Teeyer Intelligent EquipmentLtd fair value estimate is CN¥18.68
• Current share price of CN¥21.66 suggests Jiangsu Teeyer Intelligent EquipmentLtd is potentially trading close to its fair value
• Industry average of 1,815% suggests Jiangsu Teeyer Intelligent EquipmentLtd's peers are currently trading at a higher premium to fair value

In this article we are going to estimate the intrinsic value of Jiangsu Teeyer Intelligent Equipment Co.,Ltd. (SHSE:603273) by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Jiangsu Teeyer Intelligent EquipmentLtd

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. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥128.7m	CN¥161.9m	CN¥192.5m	CN¥219.7m	CN¥243.3m	CN¥263.8m	CN¥281.7m	CN¥297.6m	CN¥311.9m	CN¥325.2m
Growth Rate Estimate Source	Est @ 35.54%	Est @ 25.76%	Est @ 18.91%	Est @ 14.12%	Est @ 10.77%	Est @ 8.42%	Est @ 6.78%	Est @ 5.62%	Est @ 4.82%	Est @ 4.26%
Present Value (CN¥, Millions) Discounted @ 8.7%	CN¥118	CN¥137	CN¥150	CN¥157	CN¥160	CN¥160	CN¥157	CN¥153	CN¥147	CN¥141

("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 8.7%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥325m× (1 + 2.9%) ÷ (8.7%– 2.9%) = CN¥5.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥5.8b÷ ( 1 + 8.7%)¹⁰= CN¥2.5b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CN¥4.0b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥21.7, the company appears around fair value 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.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Jiangsu Teeyer Intelligent EquipmentLtd 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 8.7%, which is based on a levered beta of 1.023. 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.

Looking Ahead:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Jiangsu Teeyer Intelligent EquipmentLtd, there are three fundamental factors you should consider:

1. Risks: Take risks, for example - Jiangsu Teeyer Intelligent EquipmentLtd has 1 warning sign we think you should be aware of.
2. 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!
3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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.

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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.