Calculating The Intrinsic Value Of Jiangsu Kangliyuan Sports Tech. Co., Ltd. (SZSE:301287)

Key Insights

• The projected fair value for Jiangsu Kangliyuan Sports Tech is CN¥28.38 based on 2 Stage Free Cash Flow to Equity
• With CN¥24.63 share price, Jiangsu Kangliyuan Sports Tech appears to be trading close to its estimated fair value
• Jiangsu Kangliyuan Sports Tech's peers are currently trading at a premium of 1,048% on average

How far off is Jiangsu Kangliyuan Sports Tech. Co., Ltd. (SZSE:301287) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced 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. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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.

See our latest analysis for Jiangsu Kangliyuan Sports Tech

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. 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, 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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥95.4m	CN¥104.6m	CN¥112.6m	CN¥119.6m	CN¥125.8m	CN¥131.5m	CN¥136.9m	CN¥142.0m	CN¥147.0m	CN¥151.8m
Growth Rate Estimate Source	Est @ 12.51%	Est @ 9.64%	Est @ 7.63%	Est @ 6.22%	Est @ 5.24%	Est @ 4.55%	Est @ 4.07%	Est @ 3.73%	Est @ 3.49%	Est @ 3.33%
Present Value (CN¥, Millions) Discounted @ 8.9%	CN¥87.5	CN¥88.1	CN¥87.0	CN¥84.9	CN¥82.0	CN¥78.7	CN¥75.2	CN¥71.6	CN¥68.0	CN¥64.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥787m

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 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 8.9%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥152m× (1 + 2.9%) ÷ (8.9%– 2.9%) = CN¥2.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥2.6b÷ ( 1 + 8.9%)¹⁰= CN¥1.1b

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¥1.9b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥24.6, the company appears about fair value at a 13% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Jiangsu Kangliyuan Sports Tech 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 1.067. 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 Jiangsu Kangliyuan Sports Tech

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Jiangsu Kangliyuan Sports Tech, we've compiled three additional items you should further examine:

1. Risks: We feel that you should assess the 1 warning sign for Jiangsu Kangliyuan Sports Tech we've flagged before making an investment in the company.
2. 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!
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.