Calculating The Intrinsic Value Of HangZhou Nbond Nonwovens Co., Ltd. (SHSE:603238)

Key Insights

• The projected fair value for HangZhou Nbond Nonwovens is CN¥15.09 based on 2 Stage Free Cash Flow to Equity
• HangZhou Nbond Nonwovens' CN¥15.58 share price indicates it is trading at similar levels as its fair value estimate
• When compared to theindustry average discount of -620%, HangZhou Nbond Nonwovens' competitors seem to be trading at a greater premium to fair value

How far off is HangZhou Nbond Nonwovens Co., Ltd. (SHSE:603238) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing 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 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for HangZhou Nbond Nonwovens

The Model

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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¥150.0m	CN¥156.3m	CN¥162.2m	CN¥167.8m	CN¥173.3m	CN¥178.6m	CN¥183.9m	CN¥189.3m	CN¥194.7m	CN¥200.2m
Growth Rate Estimate Source	Est @ 4.83%	Est @ 4.20%	Est @ 3.76%	Est @ 3.46%	Est @ 3.24%	Est @ 3.09%	Est @ 2.99%	Est @ 2.91%	Est @ 2.86%	Est @ 2.82%
Present Value (CN¥, Millions) Discounted @ 8.6%	CN¥138	CN¥133	CN¥127	CN¥121	CN¥115	CN¥109	CN¥103	CN¥98.1	CN¥93.0	CN¥88.0

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

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 8.6%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥200m× (1 + 2.7%) ÷ (8.6%– 2.7%) = CN¥3.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥3.5b÷ ( 1 + 8.6%)¹⁰= CN¥1.6b

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¥2.7b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥15.6, 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

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 HangZhou Nbond Nonwovens 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 8.6%, which is based on a levered beta of 1.105. 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.

Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 HangZhou Nbond Nonwovens, we've put together three further items you should explore:

1. Risks: Take risks, for example - HangZhou Nbond Nonwovens has 3 warning signs (and 1 which is a bit concerning) we think you should know about.
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 Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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.