Calculating The Fair Value Of Aerospace Intelligent Manufacturing Technology Co., Ltd. (SZSE:300446)

Key Insights

• Aerospace Intelligent Manufacturing Technology's estimated fair value is CN¥15.63 based on 2 Stage Free Cash Flow to Equity
• With CN¥18.36 share price, Aerospace Intelligent Manufacturing Technology appears to be trading close to its estimated fair value
• When compared to theindustry average discount of -1,096%, Aerospace Intelligent Manufacturing Technology's competitors seem to be trading at a greater premium to fair value

How far off is Aerospace Intelligent Manufacturing Technology Co., Ltd. (SZSE:300446) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Aerospace Intelligent Manufacturing Technology

What's The Estimated Valuation?

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. 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥518.5m	CN¥565.9m	CN¥606.8m	CN¥642.6m	CN¥674.5m	CN¥703.7m	CN¥730.8m	CN¥756.8m	CN¥781.9m	CN¥806.6m
Growth Rate Estimate Source	Est @ 11.84%	Est @ 9.13%	Est @ 7.23%	Est @ 5.90%	Est @ 4.97%	Est @ 4.32%	Est @ 3.86%	Est @ 3.54%	Est @ 3.32%	Est @ 3.16%
Present Value (CN¥, Millions) Discounted @ 7.5%	CN¥483	CN¥490	CN¥489	CN¥482	CN¥471	CN¥457	CN¥442	CN¥426	CN¥409	CN¥393

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥4.5b

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 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 7.5%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥807m× (1 + 2.8%) ÷ (7.5%– 2.8%) = CN¥18b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥18b÷ ( 1 + 7.5%)¹⁰= CN¥8.7b

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¥13b. 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¥18.4, the company appears around fair value at the time of writing. 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 Aerospace Intelligent Manufacturing 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 7.5%, which is based on a levered beta of 0.935. 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:

Valuation is only one side of the coin in terms of building your investment thesis, and it 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. For Aerospace Intelligent Manufacturing Technology, we've put together three relevant factors you should consider:

1. Risks: For example, we've discovered 3 warning signs for Aerospace Intelligent Manufacturing Technology that you should be aware of before investing here.
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 Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.