Estimating The Intrinsic Value Of Jiangsu Bioperfectus Technologies Co., Ltd. (SHSE:688399)

Key Insights

• Jiangsu Bioperfectus Technologies' estimated fair value is CN¥74.93 based on 2 Stage Free Cash Flow to Equity
• With CN¥70.20 share price, Jiangsu Bioperfectus Technologies appears to be trading close to its estimated fair value
• Jiangsu Bioperfectus Technologies' peers are currently trading at a premium of 2,374% on average

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Jiangsu Bioperfectus Technologies Co., Ltd. (SHSE:688399) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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.

Check out our latest analysis for Jiangsu Bioperfectus Technologies

The Method

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥223.4m	CN¥222.3m	CN¥223.5m	CN¥226.1m	CN¥229.9m	CN¥234.5m	CN¥239.8m	CN¥245.6m	CN¥251.8m	CN¥258.4m
Growth Rate Estimate Source	Est @ -1.89%	Est @ -0.48%	Est @ 0.50%	Est @ 1.19%	Est @ 1.67%	Est @ 2.01%	Est @ 2.25%	Est @ 2.41%	Est @ 2.53%	Est @ 2.61%
Present Value (CN¥, Millions) Discounted @ 7.6%	CN¥208	CN¥192	CN¥179	CN¥169	CN¥159	CN¥151	CN¥144	CN¥137	CN¥130	CN¥124

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.6b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.8%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.6%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥258m× (1 + 2.8%) ÷ (7.6%– 2.8%) = CN¥5.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥5.5b÷ ( 1 + 7.6%)¹⁰= CN¥2.7b

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¥4.2b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥70.2, the company appears about fair value at a 6.3% discount to where the stock price trades currently. 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.

Important 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. 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 Bioperfectus Technologies 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 7.6%, which is based on a levered beta of 0.965. 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.

Looking Ahead:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. 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 Jiangsu Bioperfectus Technologies, there are three fundamental aspects you should further examine:

1. Risks: Be aware that Jiangsu Bioperfectus Technologies is showing 1 warning sign in our investment analysis , you should know about...
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.

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.