CNGR Advanced Material Co.,Ltd. (SZSE:300919) Shares Could Be 48% Below Their Intrinsic Value Estimate

Key Insights

• CNGR Advanced MaterialLtd's estimated fair value is CN¥73.76 based on 2 Stage Free Cash Flow to Equity
• CNGR Advanced MaterialLtd is estimated to be 48% undervalued based on current share price of CN¥38.25
• Analyst price target for 300919 is CN¥48.55 which is 34% below our fair value estimate

Does the March share price for CNGR Advanced Material Co.,Ltd. (SZSE:300919) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

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.

Check out our latest analysis for CNGR Advanced MaterialLtd

Step By Step Through The Calculation

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. 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, 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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	-CN¥371.0m	CN¥1.01b	CN¥1.90b	CN¥3.08b	CN¥4.44b	CN¥5.86b	CN¥7.21b	CN¥8.44b	CN¥9.51b	CN¥10.4b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 87.54%	Est @ 62.10%	Est @ 44.29%	Est @ 31.83%	Est @ 23.10%	Est @ 16.99%	Est @ 12.72%	Est @ 9.72%
Present Value (CN¥, Millions) Discounted @ 11%	-CN¥334	CN¥820	CN¥1.4k	CN¥2.0k	CN¥2.6k	CN¥3.1k	CN¥3.4k	CN¥3.6k	CN¥3.7k	CN¥3.6k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥24b

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 2.7%. We discount the terminal cash flows to today's value at a cost of equity of 11%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥10b× (1 + 2.7%) ÷ (11%– 2.7%) = CN¥128b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥128b÷ ( 1 + 11%)¹⁰= CN¥45b

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¥69b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CN¥38.3, the company appears quite good value at a 48% 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.

Important Assumptions

Now 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 CNGR Advanced MaterialLtd 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 11%, which is based on a levered beta of 1.590. 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.

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SWOT Analysis for CNGR Advanced MaterialLtd

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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 CNGR Advanced MaterialLtd, we've put together three additional items you should consider:

1. Risks: Be aware that CNGR Advanced MaterialLtd is showing 3 warning signs in our investment analysis , and 1 of those shouldn't be ignored...
2. Future Earnings: How does 300919'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 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!

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.

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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.