Is Chongqing Taiji Industry(Group) Co.,Ltd (SHSE:600129) Trading At A 33% Discount?

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Chongqing Taiji Industry(Group)Ltd fair value estimate is CN¥56.79
• Chongqing Taiji Industry(Group)Ltd is estimated to be 33% undervalued based on current share price of CN¥38.27
• Analyst price target for 600129 is CN¥55.90 which is 1.6% below our fair value estimate

Today we will run through one way of estimating the intrinsic value of Chongqing Taiji Industry(Group) Co.,Ltd (SHSE:600129) 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. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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 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.

View our latest analysis for Chongqing Taiji Industry(Group)Ltd

The Model

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 start off with, we need to estimate the next ten years of cash flows. 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, 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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥1.14b	CN¥939.4m	CN¥1.06b	CN¥1.80b	CN¥1.78b	CN¥1.78b	CN¥1.79b	CN¥1.82b	CN¥1.86b	CN¥1.90b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Analyst x1	Analyst x1	Est @ 0.04%	Est @ 0.91%	Est @ 1.52%	Est @ 1.95%	Est @ 2.24%
Present Value (CN¥, Millions) Discounted @ 7.4%	CN¥1.1k	CN¥814	CN¥857	CN¥1.3k	CN¥1.2k	CN¥1.2k	CN¥1.1k	CN¥1.0k	CN¥972	CN¥925

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

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 7.4%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥1.9b× (1 + 2.9%) ÷ (7.4%– 2.9%) = CN¥43b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥43b÷ ( 1 + 7.4%)¹⁰= CN¥21b

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¥32b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CN¥38.3, the company appears quite good value at a 33% 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 Chongqing Taiji Industry(Group)Ltd 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 7.4%, which is based on a levered beta of 0.800. 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 Chongqing Taiji Industry(Group)Ltd

Looking Ahead:

Although the valuation of a company is important, 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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or 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 sitting below the intrinsic value? For Chongqing Taiji Industry(Group)Ltd, we've compiled three further aspects you should look at:

1. Risks: As an example, we've found 1 warning sign for Chongqing Taiji Industry(Group)Ltd that you need to consider before investing here.
2. Future Earnings: How does 600129'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 SHSE 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.