A Look At The Fair Value Of Wuhan Sante Cableway Group Co., Ltd. (SZSE:002159)

Key Insights

• Wuhan Sante Cableway Group's estimated fair value is CN¥14.02 based on 2 Stage Free Cash Flow to Equity
• Current share price of CN¥14.75 suggests Wuhan Sante Cableway Group is potentially trading close to its fair value
• Our fair value estimate is 26% lower than Wuhan Sante Cableway Group's analyst price target of CN¥19.00

In this article we are going to estimate the intrinsic value of Wuhan Sante Cableway Group Co., Ltd. (SZSE:002159) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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.

Check out our latest analysis for Wuhan Sante Cableway Group

The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥211.0m	CN¥214.0m	CN¥195.7m	CN¥185.7m	CN¥180.7m	CN¥178.9m	CN¥179.2m	CN¥181.0m	CN¥183.9m	CN¥187.6m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ -8.55%	Est @ -5.10%	Est @ -2.69%	Est @ -1.00%	Est @ 0.18%	Est @ 1.01%	Est @ 1.59%	Est @ 1.99%
Present Value (CN¥, Millions) Discounted @ 9.2%	CN¥193	CN¥179	CN¥150	CN¥130	CN¥116	CN¥105	CN¥96.5	CN¥89.2	CN¥83.0	CN¥77.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.2b

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 9.2%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥188m× (1 + 2.9%) ÷ (9.2%– 2.9%) = CN¥3.1b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥3.1b÷ ( 1 + 9.2%)¹⁰= CN¥1.3b

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. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥14.8, the company appears around fair value at the time of writing. 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.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Wuhan Sante Cableway Group 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 9.2%, which is based on a levered beta of 1.120. 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 Wuhan Sante Cableway Group

Looking Ahead:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Wuhan Sante Cableway Group, we've put together three pertinent aspects you should consider:

1. Financial Health: Does 002159 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does 002159'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. 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.