A Look At The Intrinsic Value Of TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT Co., LTD. (SZSE:000826)

Key Insights

• The projected fair value for TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT is CN¥1.77 based on 2 Stage Free Cash Flow to Equity
• With CN¥2.01 share price, TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT appears to be trading close to its estimated fair value
• When compared to theindustry average discount of -2,767%, TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT's competitors seem to be trading at a greater premium to fair value

In this article we are going to estimate the intrinsic value of TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT Co., LTD. (SZSE:000826) by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT

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 begin with, we have to get estimates of 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, 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¥435.2m	CN¥350.9m	CN¥306.3m	CN¥281.6m	CN¥268.1m	CN¥261.4m	CN¥258.9m	CN¥259.4m	CN¥262.0m	CN¥266.0m
Growth Rate Estimate Source	Est @ -28.85%	Est @ -19.36%	Est @ -12.71%	Est @ -8.06%	Est @ -4.80%	Est @ -2.52%	Est @ -0.92%	Est @ 0.19%	Est @ 0.98%	Est @ 1.52%
Present Value (CN¥, Millions) Discounted @ 13%	CN¥386	CN¥276	CN¥214	CN¥174	CN¥147	CN¥127	CN¥112	CN¥99.3	CN¥88.9	CN¥80.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.7b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 13%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥266m× (1 + 2.8%) ÷ (13%– 2.8%) = CN¥2.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥2.7b÷ ( 1 + 13%)¹⁰= CN¥826m

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¥2.5b. 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¥2.0, 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.

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. 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 TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT 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 13%, which is based on a levered beta of 2.000. 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 TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT

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 TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT, we've put together three further items you should consider:

1. Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT (at least 1 which shouldn't be ignored) , and understanding these should be part of your investment process.
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. 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.