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- SHSE:688676
Hainan Jinpan Smart Technology Co., Ltd. (SHSE:688676) Shares Could Be 26% Above Their Intrinsic Value Estimate
Key Insights
- The projected fair value for Hainan Jinpan Smart Technology is CN¥30.39 based on 2 Stage Free Cash Flow to Equity
- Hainan Jinpan Smart Technology is estimated to be 26% overvalued based on current share price of CN¥38.39
- Analyst price target for 688676 is CN¥48.58, which is 60% above our fair value estimate
Does the January share price for Hainan Jinpan Smart Technology Co., Ltd. (SHSE:688676) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. Our analysis will employ 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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
See our latest analysis for Hainan Jinpan Smart Technology
The Method
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (CN¥, Millions) | -CN¥446.0m | -CN¥119.5m | CN¥60.0m | CN¥583.0m | CN¥775.0m | CN¥922.7m | CN¥1.05b | CN¥1.17b | CN¥1.26b | CN¥1.35b |
Growth Rate Estimate Source | Analyst x2 | Analyst x2 | Analyst x1 | Analyst x1 | Analyst x1 | Est @ 19.06% | Est @ 14.18% | Est @ 10.77% | Est @ 8.38% | Est @ 6.70% |
Present Value (CN¥, Millions) Discounted @ 8.6% | -CN¥411 | -CN¥101 | CN¥46.8 | CN¥419 | CN¥513 | CN¥562 | CN¥591 | CN¥603 | CN¥602 | CN¥591 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥3.4b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.8%) 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 8.6%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥1.3b× (1 + 2.8%) ÷ (8.6%– 2.8%) = CN¥24b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥24b÷ ( 1 + 8.6%)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¥14b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CN¥38.4, the company appears slightly overvalued at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Hainan Jinpan Smart 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 8.6%, which is based on a levered beta of 1.164. 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 Hainan Jinpan Smart Technology
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividend is low compared to the top 25% of dividend payers in the Electrical market.
- Shareholders have been diluted in the past year.
- Annual earnings are forecast to grow faster than the Chinese market.
- Good value based on P/E ratio compared to estimated Fair P/E ratio.
- Paying a dividend but company has no free cash flows.
- Revenue is forecast to grow slower than 20% per year.
Next Steps:
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 exceeding the intrinsic value? For Hainan Jinpan Smart Technology, we've compiled three pertinent elements you should explore:
- Risks: As an example, we've found 2 warning signs for Hainan Jinpan Smart Technology that you need to consider before investing here.
- Future Earnings: How does 688676'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 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.
Valuation is complex, but we're here to simplify it.
Discover if Hainan Jinpan Smart Technology 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.
About SHSE:688676
Hainan Jinpan Smart Technology
Engages in the research and development, production, sale, and servicing of power transmission and distribution, and control equipment products in China.
High growth potential with solid track record.