Stock Analysis
- China
- /
- Basic Materials
- /
- SZSE:002271
Beijing Oriental Yuhong Waterproof Technology Co., Ltd.'s (SZSE:002271) Intrinsic Value Is Potentially 19% Below Its Share Price
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Beijing Oriental Yuhong Waterproof Technology fair value estimate is CN¥9.60
- Current share price of CN¥11.82 suggests Beijing Oriental Yuhong Waterproof Technology is potentially 23% overvalued
- The CN¥17.46 analyst price target for 002271 is 82% more than our estimate of fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Beijing Oriental Yuhong Waterproof Technology Co., Ltd. (SZSE:002271) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. Our analysis will employ 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.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
Check out our latest analysis for Beijing Oriental Yuhong Waterproof Technology
Step By Step Through The Calculation
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. 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) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (CN¥, Millions) | CN¥1.64b | CN¥1.50b | CN¥1.43b | CN¥1.39b | CN¥1.38b | CN¥1.38b | CN¥1.40b | CN¥1.42b | CN¥1.44b | CN¥1.48b |
Growth Rate Estimate Source | Analyst x2 | Analyst x2 | Est @ -4.87% | Est @ -2.55% | Est @ -0.93% | Est @ 0.20% | Est @ 1.00% | Est @ 1.55% | Est @ 1.94% | Est @ 2.21% |
Present Value (CN¥, Millions) Discounted @ 8.2% | CN¥1.5k | CN¥1.3k | CN¥1.1k | CN¥1.0k | CN¥932 | CN¥863 | CN¥806 | CN¥757 | CN¥713 | CN¥674 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥9.7b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 (2.9%) 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 8.2%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥1.5b× (1 + 2.9%) ÷ (8.2%– 2.9%) = CN¥29b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥29b÷ ( 1 + 8.2%)10= CN¥13b
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¥23b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥11.8, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
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 Beijing Oriental Yuhong Waterproof 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 8.2%, which is based on a levered beta of 1.065. 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 Beijing Oriental Yuhong Waterproof Technology
- 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 compared to estimated Fair P/E ratio.
- Annual earnings are forecast to grow slower than the Chinese market.
Next Steps:
Whilst important, the DCF calculation 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. What is the reason for the share price exceeding the intrinsic value? For Beijing Oriental Yuhong Waterproof Technology, we've put together three fundamental items you should consider:
- Risks: Every company has them, and we've spotted 1 warning sign for Beijing Oriental Yuhong Waterproof Technology you should know about.
- Future Earnings: How does 002271'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 SZSE every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're here to simplify it.
Discover if Beijing Oriental Yuhong Waterproof Technology might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
Access Free AnalysisHave 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 SZSE:002271
Beijing Oriental Yuhong Waterproof Technology
Engages in research and development, production, and sale of waterproof materials primarily in China.