Stock Analysis
A Look At The Fair Value Of Zhejiang Publishing & Media Co., Ltd. (SHSE:601921)
Key Insights
- The projected fair value for Zhejiang Publishing & Media is CN¥9.07 based on 2 Stage Free Cash Flow to Equity
- Current share price of CN¥7.42 suggests Zhejiang Publishing & Media is potentially trading close to its fair value
- Zhejiang Publishing & Media's peers are currently trading at a premium of 722% on average
Does the July share price for Zhejiang Publishing & Media Co., Ltd. (SHSE:601921) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 Zhejiang Publishing & Media
Step By Step Through The Calculation
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, 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¥1.13b | CN¥1.10b | CN¥1.09b | CN¥1.10b | CN¥1.11b | CN¥1.12b | CN¥1.15b | CN¥1.17b | CN¥1.20b | CN¥1.23b |
Growth Rate Estimate Source | Est @ -4.81% | Est @ -2.49% | Est @ -0.88% | Est @ 0.26% | Est @ 1.05% | Est @ 1.60% | Est @ 1.99% | Est @ 2.27% | Est @ 2.46% | Est @ 2.59% |
Present Value (CN¥, Millions) Discounted @ 7.7% | CN¥1.0k | CN¥950 | CN¥874 | CN¥813 | CN¥763 | CN¥719 | CN¥681 | CN¥646 | CN¥615 | CN¥585 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥7.7b
The second stage is also known as Terminal Value, this is the business's cash flow after 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 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 7.7%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥1.2b× (1 + 2.9%) ÷ (7.7%– 2.9%) = CN¥26b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥26b÷ ( 1 + 7.7%)10= CN¥12b
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¥20b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥7.4, the company appears about fair value at a 18% 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
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 Zhejiang Publishing & Media 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 7.7%, which is based on a levered beta of 0.859. 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 Zhejiang Publishing & Media
- 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.
- Good value based on P/E ratio and estimated fair value.
- No apparent threats visible for 601921.
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. 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 Zhejiang Publishing & Media, we've put together three further elements you should explore:
- Risks: You should be aware of the 3 warning signs for Zhejiang Publishing & Media (2 are concerning!) we've uncovered before considering an investment in the company.
- Future Earnings: How does 601921'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. 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.
Valuation is complex, but we're here to simplify it.
Discover if Zhejiang Publishing & Media might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
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About SHSE:601921
Zhejiang Publishing & Media
Engages in publishing, distribution, and printing activities in China.