Stock Analysis

Estimating The Fair Value Of Zhejiang Chunhui Intelligent Control Co., Ltd. (SZSE:300943)

SZSE:300943
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Key Insights

  • Zhejiang Chunhui Intelligent Control's estimated fair value is CN¥14.73 based on 2 Stage Free Cash Flow to Equity
  • With CN¥12.21 share price, Zhejiang Chunhui Intelligent Control appears to be trading close to its estimated fair value
  • Zhejiang Chunhui Intelligent Control's peers are currently trading at a premium of 1,547% on average

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Zhejiang Chunhui Intelligent Control Co., Ltd. (SZSE:300943) as an investment opportunity by projecting its future cash flows and then discounting them to today's 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.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 Zhejiang Chunhui Intelligent Control

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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Levered FCF (CN¥, Millions) CN¥102.1m CN¥119.3m CN¥134.5m CN¥147.5m CN¥158.8m CN¥168.6m CN¥177.3m CN¥185.2m CN¥192.5m CN¥199.5m
Growth Rate Estimate Source Est @ 22.93% Est @ 16.89% Est @ 12.66% Est @ 9.70% Est @ 7.63% Est @ 6.18% Est @ 5.17% Est @ 4.46% Est @ 3.96% Est @ 3.61%
Present Value (CN¥, Millions) Discounted @ 7.8% CN¥94.7 CN¥103 CN¥107 CN¥109 CN¥109 CN¥108 CN¥105 CN¥102 CN¥98.3 CN¥94.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.0b

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 7.8%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥199m× (1 + 2.8%) ÷ (7.8%– 2.8%) = CN¥4.1b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥4.1b÷ ( 1 + 7.8%)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¥3.0b. 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¥12.2, the company appears about fair value at a 17% 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.

dcf
SZSE:300943 Discounted Cash Flow December 23rd 2024

Important 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 Zhejiang Chunhui Intelligent Control 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 7.8%, which is based on a levered beta of 0.995. 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 Zhejiang Chunhui Intelligent Control

Strength
  • Currently debt free.
  • Dividends are covered by earnings and cash flows.
Weakness
  • Earnings declined over the past year.
  • Dividend is low compared to the top 25% of dividend payers in the Machinery market.
Opportunity
  • Current share price is below our estimate of fair value.
  • Lack of analyst coverage makes it difficult to determine 300943's earnings prospects.
Threat
  • No apparent threats visible for 300943.

Looking Ahead:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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. For Zhejiang Chunhui Intelligent Control, there are three fundamental aspects you should assess:

  1. Risks: You should be aware of the 3 warning signs for Zhejiang Chunhui Intelligent Control (1 is concerning!) we've uncovered before considering an investment in the company.
  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 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. 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.

Valuation is complex, but we're here to simplify it.

Discover if Zhejiang Chunhui Intelligent Control 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.