Stock Analysis
- China
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- Oil and Gas
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- SHSE:601001
Is There An Opportunity With Jinneng Holding Shanxi Coal Industry Co.,ltd.'s (SHSE:601001) 33% Undervaluation?
Key Insights
- The projected fair value for Jinneng Holding Shanxi Coal Industryltd is CN¥22.34 based on 2 Stage Free Cash Flow to Equity
- Jinneng Holding Shanxi Coal Industryltd's CN¥14.92 share price signals that it might be 33% undervalued
- The CN¥20.40 analyst price target for 601001 is 8.7% less than our estimate of fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Jinneng Holding Shanxi Coal Industry Co.,ltd. (SHSE:601001) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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 Jinneng Holding Shanxi Coal Industryltd
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.
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
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (CN¥, Millions) | CN¥3.66b | CN¥3.10b | CN¥2.80b | CN¥2.63b | CN¥2.54b | CN¥2.50b | CN¥2.50b | CN¥2.51b | CN¥2.55b | CN¥2.59b |
Growth Rate Estimate Source | Est @ -23.04% | Est @ -15.27% | Est @ -9.84% | Est @ -6.03% | Est @ -3.37% | Est @ -1.50% | Est @ -0.20% | Est @ 0.72% | Est @ 1.36% | Est @ 1.81% |
Present Value (CN¥, Millions) Discounted @ 8.8% | CN¥3.4k | CN¥2.6k | CN¥2.2k | CN¥1.9k | CN¥1.7k | CN¥1.5k | CN¥1.4k | CN¥1.3k | CN¥1.2k | CN¥1.1k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥18b
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 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 8.8%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥2.6b× (1 + 2.9%) ÷ (8.8%– 2.9%) = CN¥45b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥45b÷ ( 1 + 8.8%)10= CN¥19b
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¥37b. 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¥14.9, the company appears quite undervalued at a 33% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
Important 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 Jinneng Holding Shanxi Coal Industryltd 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 8.8%, which is based on a levered beta of 1.198. 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 Jinneng Holding Shanxi Coal Industryltd
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Dividend is in the top 25% of dividend payers in the market.
- Earnings growth over the past year is below its 5-year average.
- Annual earnings are forecast to grow for the next 3 years.
- Good value based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow slower than the Chinese market.
Next Steps:
Whilst important, the DCF calculation 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. What is the reason for the share price sitting below the intrinsic value? For Jinneng Holding Shanxi Coal Industryltd, there are three relevant items you should further examine:
- Risks: For example, we've discovered 1 warning sign for Jinneng Holding Shanxi Coal Industryltd that you should be aware of before investing here.
- Future Earnings: How does 601001'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.
- 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!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SHSE every day. If you want to find the calculation for other stocks just search here.
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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About SHSE:601001
Jinneng Holding Shanxi Coal Industryltd
Engages in the production and sales of coal and related chemical products in China.