Calculating The Intrinsic Value Of Qingdao Citymedia Co,. Ltd. (SHSE:600229)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Qingdao Citymedia Co fair value estimate is CN¥7.71
• Current share price of CN¥8.37 suggests Qingdao Citymedia Co is potentially trading close to its fair value
• Qingdao Citymedia Co's peers seem to be trading at a higher premium to fair value based onthe industry average of -1,714%

How far off is Qingdao Citymedia Co,. Ltd. (SHSE:600229) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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.

View our latest analysis for Qingdao Citymedia Co

Crunching The Numbers

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.

Generally we assume that a dollar today is more valuable than a dollar in the future, 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¥287.7m	CN¥269.4m	CN¥259.6m	CN¥255.2m	CN¥254.3m	CN¥255.8m	CN¥259.0m	CN¥263.5m	CN¥268.9m	CN¥275.0m
Growth Rate Estimate Source	Est @ -10.32%	Est @ -6.38%	Est @ -3.63%	Est @ -1.70%	Est @ -0.35%	Est @ 0.59%	Est @ 1.26%	Est @ 1.72%	Est @ 2.04%	Est @ 2.27%
Present Value (CN¥, Millions) Discounted @ 7.2%	CN¥269	CN¥235	CN¥211	CN¥194	CN¥180	CN¥169	CN¥160	CN¥152	CN¥144	CN¥138

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.8b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 7.2%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥275m× (1 + 2.8%) ÷ (7.2%– 2.8%) = CN¥6.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥6.5b÷ ( 1 + 7.2%)¹⁰= CN¥3.2b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CN¥5.1b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥8.4, the company appears around fair value 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

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. 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 Qingdao Citymedia Co 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 7.2%, which is based on a levered beta of 0.876. 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Qingdao Citymedia Co, there are three fundamental aspects you should further research:

1. Risks: Case in point, we've spotted 2 warning signs for Qingdao Citymedia Co you should be aware of.
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.

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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.