Estimating The Intrinsic Value Of Yuan Long Ping High-Tech Agriculture Co., Ltd. (SZSE:000998)

Key Insights

• Yuan Long Ping High-Tech Agriculture's estimated fair value is CN¥14.11 based on 2 Stage Free Cash Flow to Equity
• With CN¥13.86 share price, Yuan Long Ping High-Tech Agriculture appears to be trading close to its estimated fair value
• Our fair value estimate is 27% lower than Yuan Long Ping High-Tech Agriculture's analyst price target of CN¥19.23

Does the March share price for Yuan Long Ping High-Tech Agriculture Co., Ltd. (SZSE:000998) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

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.

Check out our latest analysis for Yuan Long Ping High-Tech Agriculture

Crunching The Numbers

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 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥592.0m	CN¥891.0m	CN¥910.3m	CN¥932.0m	CN¥955.9m	CN¥981.4m	CN¥1.01b	CN¥1.04b	CN¥1.07b	CN¥1.10b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 2.16%	Est @ 2.39%	Est @ 2.56%	Est @ 2.67%	Est @ 2.75%	Est @ 2.81%	Est @ 2.85%	Est @ 2.88%
Present Value (CN¥, Millions) Discounted @ 7.4%	CN¥551	CN¥772	CN¥734	CN¥699	CN¥668	CN¥638	CN¥610	CN¥584	CN¥559	CN¥535

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥6.3b

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 7.4%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥1.1b× (1 + 2.9%) ÷ (7.4%– 2.9%) = CN¥25b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥25b÷ ( 1 + 7.4%)¹⁰= CN¥12b

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¥19b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥13.9, the company appears about fair value at a 1.7% 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.

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 Yuan Long Ping High-Tech Agriculture 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 7.4%, which is based on a levered beta of 0.800. 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. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Yuan Long Ping High-Tech Agriculture, we've compiled three important aspects you should assess:

1. Financial Health: Does 000998 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 000998'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 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. 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.