Stock Analysis
- China
- /
- Medical Equipment
- /
- SHSE:688576
Is Chongqing Xishan Science & Technology Co., Ltd. (SHSE:688576) Trading At A 23% Discount?
Key Insights
- Chongqing Xishan Science & Technology's estimated fair value is CN¥64.20 based on 2 Stage Free Cash Flow to Equity
- Chongqing Xishan Science & Technology is estimated to be 23% undervalued based on current share price of CN¥49.70
- Peers of Chongqing Xishan Science & Technology are currently trading on average at a 116% premium
Today we will run through one way of estimating the intrinsic value of Chongqing Xishan Science & Technology Co., Ltd. (SHSE:688576) 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. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 Chongqing Xishan Science & Technology
The Method
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. 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) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (CN¥, Millions) | CN¥66.0m | CN¥95.0m | CN¥117.9m | CN¥138.7m | CN¥157.1m | CN¥173.0m | CN¥186.8m | CN¥198.7m | CN¥209.4m | CN¥219.0m |
Growth Rate Estimate Source | Analyst x1 | Analyst x1 | Est @ 24.07% | Est @ 17.70% | Est @ 13.25% | Est @ 10.13% | Est @ 7.94% | Est @ 6.42% | Est @ 5.35% | Est @ 4.60% |
Present Value (CN¥, Millions) Discounted @ 7.4% | CN¥61.4 | CN¥82.3 | CN¥95.0 | CN¥104 | CN¥110 | CN¥113 | CN¥113 | CN¥112 | CN¥110 | CN¥107 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.0b
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 7.4%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥219m× (1 + 2.9%) ÷ (7.4%– 2.9%) = CN¥4.9b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥4.9b÷ ( 1 + 7.4%)10= CN¥2.4b
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¥3.4b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CN¥49.7, the company appears a touch undervalued at a 23% 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
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Chongqing Xishan Science & Technology 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 0.921. 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 Chongqing Xishan Science & Technology
- Earnings growth over the past year exceeded the industry.
- Currently debt free.
- Earnings growth over the past year is below its 5-year average.
- Dividend is low compared to the top 25% of dividend payers in the Medical Equipment market.
- Annual earnings are forecast to grow faster than the Chinese market.
- Trading below our estimate of fair value by more than 20%.
- Paying a dividend but company has no free cash flows.
Next Steps:
Whilst important, the DCF calculation 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. 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. Why is the intrinsic value higher than the current share price? For Chongqing Xishan Science & Technology, we've put together three additional elements you should further research:
- Risks: We feel that you should assess the 2 warning signs for Chongqing Xishan Science & Technology (1 is significant!) we've flagged before making an investment in the company.
- Future Earnings: How does 688576'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 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.
About SHSE:688576
Chongqing Xishan Science & Technology
Chongqing Xishan Science & Technology Co., Ltd.