Shanghai Taisheng Wind Power Equipment Co., Ltd.'s (SZSE:300129) Intrinsic Value Is Potentially 25% Below Its Share Price

Key Insights

• The projected fair value for Shanghai Taisheng Wind Power Equipment is CN¥5.57 based on 2 Stage Free Cash Flow to Equity
• Current share price of CN¥7.44 suggests Shanghai Taisheng Wind Power Equipment is potentially 34% overvalued
• The CN¥9.57 analyst price target for 300129 is 72% more than our estimate of fair value

In this article we are going to estimate the intrinsic value of Shanghai Taisheng Wind Power Equipment Co., Ltd. (SZSE:300129) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Shanghai Taisheng Wind Power Equipment

Crunching The Numbers

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	-CN¥321.0m	CN¥62.0m	CN¥111.8m	CN¥175.6m	CN¥247.3m	CN¥320.0m	CN¥388.5m	CN¥450.0m	CN¥503.6m	CN¥549.9m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 80.34%	Est @ 57.08%	Est @ 40.79%	Est @ 29.40%	Est @ 21.42%	Est @ 15.83%	Est @ 11.92%	Est @ 9.19%
Present Value (CN¥, Millions) Discounted @ 8.9%	-CN¥295	CN¥52.3	CN¥86.6	CN¥125	CN¥162	CN¥192	CN¥214	CN¥228	CN¥234	CN¥235

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.2b

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 (2.8%) 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 8.9%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥550m× (1 + 2.8%) ÷ (8.9%– 2.8%) = CN¥9.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥9.3b÷ ( 1 + 8.9%)¹⁰= CN¥4.0b

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¥5.2b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥7.4, the company appears reasonably expensive 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

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. 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 Shanghai Taisheng Wind Power Equipment 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 8.9%, which is based on a levered beta of 1.221. 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 Shanghai Taisheng Wind Power Equipment

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. 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. Can we work out why the company is trading at a premium to intrinsic value? For Shanghai Taisheng Wind Power Equipment, we've compiled three important elements you should look at:

1. Risks: For example, we've discovered 3 warning signs for Shanghai Taisheng Wind Power Equipment (1 is a bit concerning!) that you should be aware of before investing here.
2. Future Earnings: How does 300129'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.

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.