Estimating The Fair Value Of Wanda Film Holding Co., Ltd. (SZSE:002739)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Wanda Film Holding fair value estimate is CN¥9.23
• Wanda Film Holding's CN¥9.71 share price indicates it is trading at similar levels as its fair value estimate
• The CN¥16.38 analyst price target for 002739 is 77% more than our estimate of fair value

In this article we are going to estimate the intrinsic value of Wanda Film Holding Co., Ltd. (SZSE:002739) by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Wanda Film Holding

Step By Step Through The Calculation

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.

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¥2.27b	CN¥1.90b	CN¥1.70b	CN¥1.59b	CN¥1.54b	CN¥1.51b	CN¥1.50b	CN¥1.51b	CN¥1.53b	CN¥1.56b
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ -10.44%	Est @ -6.45%	Est @ -3.66%	Est @ -1.71%	Est @ -0.34%	Est @ 0.62%	Est @ 1.29%	Est @ 1.76%
Present Value (CN¥, Millions) Discounted @ 9.6%	CN¥2.1k	CN¥1.6k	CN¥1.3k	CN¥1.1k	CN¥969	CN¥869	CN¥790	CN¥725	CN¥670	CN¥622

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥11b

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 9.6%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥1.6b× (1 + 2.9%) ÷ (9.6%– 2.9%) = CN¥24b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥24b÷ ( 1 + 9.6%)¹⁰= CN¥9.4b

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¥20b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥9.7, 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

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 Wanda Film Holding 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 9.6%, which is based on a levered beta of 1.362. 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 Wanda Film Holding

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Wanda Film Holding, there are three essential factors you should look at:

1. Financial Health: Does 002739 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does 002739'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.
3. 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. 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.

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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.