A Look At The Intrinsic Value Of Uroica Precision Information Engineering Co.,Ltd (SZSE:300099)

Key Insights

• Uroica Precision Information EngineeringLtd's estimated fair value is CN¥4.27 based on 2 Stage Free Cash Flow to Equity
• With CN¥4.40 share price, Uroica Precision Information EngineeringLtd appears to be trading close to its estimated fair value
• Industry average of 336% suggests Uroica Precision Information EngineeringLtd's peers are currently trading at a higher premium to fair value

In this article we are going to estimate the intrinsic value of Uroica Precision Information Engineering Co.,Ltd (SZSE:300099) by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Uroica Precision Information EngineeringLtd

What's The Estimated Valuation?

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.

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¥84.7m	CN¥112.8m	CN¥140.0m	CN¥164.9m	CN¥186.8m	CN¥205.8m	CN¥222.2m	CN¥236.6m	CN¥249.4m	CN¥261.0m
Growth Rate Estimate Source	Est @ 46.17%	Est @ 33.19%	Est @ 24.10%	Est @ 17.74%	Est @ 13.29%	Est @ 10.17%	Est @ 7.99%	Est @ 6.46%	Est @ 5.39%	Est @ 4.65%
Present Value (CN¥, Millions) Discounted @ 8.7%	CN¥78.0	CN¥95.5	CN¥109	CN¥118	CN¥123	CN¥125	CN¥124	CN¥122	CN¥118	CN¥114

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.1b

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 8.7%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥261m× (1 + 2.9%) ÷ (8.7%– 2.9%) = CN¥4.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥4.7b÷ ( 1 + 8.7%)¹⁰= CN¥2.0b

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¥3.2b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥4.4, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The Assumptions

Now 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 Uroica Precision Information EngineeringLtd 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 1.026. 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:

Whilst important, the DCF calculation 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Uroica Precision Information EngineeringLtd, there are three relevant elements you should further examine:

1. Risks: Case in point, we've spotted 1 warning sign for Uroica Precision Information EngineeringLtd you should be aware of.
2. 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!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.