Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology Co., Ltd. (SHSE:603300) Shares Could Be 40% Below Their Intrinsic Value Estimate

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology fair value estimate is CN¥19.21
• Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology's CN¥11.55 share price signals that it might be 40% undervalued
• Our fair value estimate is 190% higher than Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology's analyst price target of CN¥6.63

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology Co., Ltd. (SHSE:603300) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology

Step By Step Through The Calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥1.70b	CN¥2.03b	CN¥2.33b	CN¥2.58b	CN¥2.80b	CN¥2.99b	CN¥3.16b	CN¥3.31b	CN¥3.44b	CN¥3.57b
Growth Rate Estimate Source	Est @ 26.75%	Est @ 19.55%	Est @ 14.51%	Est @ 10.98%	Est @ 8.50%	Est @ 6.78%	Est @ 5.56%	Est @ 4.72%	Est @ 4.12%	Est @ 3.71%
Present Value (CN¥, Millions) Discounted @ 9.6%	CN¥1.5k	CN¥1.7k	CN¥1.8k	CN¥1.8k	CN¥1.8k	CN¥1.7k	CN¥1.7k	CN¥1.6k	CN¥1.5k	CN¥1.4k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥16b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 2.7%. We discount the terminal cash flows to today's value at a cost of equity of 9.6%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥3.6b× (1 + 2.7%) ÷ (9.6%– 2.7%) = CN¥53b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥53b÷ ( 1 + 9.6%)¹⁰= CN¥21b

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¥38b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥11.6, the company appears quite undervalued at a 40% discount to where the stock price trades currently. 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. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology 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 9.6%, which is based on a levered beta of 1.305. 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 Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess 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. 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. What is the reason for the share price sitting below the intrinsic value? For Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology, we've compiled three important aspects you should explore:

1. Risks: Case in point, we've spotted 3 warning signs for Zhejiang Haikong Nanke Huatie Digital Intelligence and Technology you should be aware of, and 2 of them are a bit unpleasant.
2. Future Earnings: How does 603300'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. 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.