Calculating The Intrinsic Value Of Jiangsu Hagong Intelligent Robot Co., Ltd (SZSE:000584)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Jiangsu Hagong Intelligent Robot fair value estimate is CN¥2.07
• Jiangsu Hagong Intelligent Robot's CN¥2.32 share price indicates it is trading at similar levels as its fair value estimate
• Industry average of 1,553% suggests Jiangsu Hagong Intelligent Robot'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 Hagong Intelligent Robot Co., Ltd (SZSE:000584) 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. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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.

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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. 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 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¥89.1m	CN¥92.0m	CN¥94.9m	CN¥97.7m	CN¥100.5m	CN¥103.4m	CN¥106.3m	CN¥109.3m	CN¥112.3m	CN¥115.4m
Growth Rate Estimate Source	Est @ 3.44%	Est @ 3.23%	Est @ 3.08%	Est @ 2.98%	Est @ 2.91%	Est @ 2.86%	Est @ 2.82%	Est @ 2.80%	Est @ 2.78%	Est @ 2.77%
Present Value (CN¥, Millions) Discounted @ 8.5%	CN¥82.2	CN¥78.2	CN¥74.3	CN¥70.6	CN¥66.9	CN¥63.5	CN¥60.2	CN¥57.0	CN¥54.0	CN¥51.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥658m

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. 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 (2.7%) 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 8.5%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥115m× (1 + 2.7%) ÷ (8.5%– 2.7%) = CN¥2.1b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥2.1b÷ ( 1 + 8.5%)¹⁰= CN¥918m

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¥1.6b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥2.3, the company appears around fair value 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.

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 Jiangsu Hagong Intelligent Robot 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 8.5%, which is based on a levered beta of 1.087. 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.

See our latest analysis for Jiangsu Hagong Intelligent Robot

SWOT Analysis for Jiangsu Hagong Intelligent Robot

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. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Jiangsu Hagong Intelligent Robot, we've put together three additional factors you should assess:

1. Risks: For instance, we've identified 2 warning signs for Jiangsu Hagong Intelligent Robot (1 is potentially serious) 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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SZSE every day. If you want to find the calculation for other stocks 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.