Stock Analysis

A Look At The Fair Value Of Jiang Zhong Pharmaceutical Co.,Ltd (SHSE:600750)

SHSE:600750
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Key Insights

  • Jiang Zhong PharmaceuticalLtd's estimated fair value is CN¥22.07 based on 2 Stage Free Cash Flow to Equity
  • With CN¥26.35 share price, Jiang Zhong PharmaceuticalLtd appears to be trading close to its estimated fair value
  • Our fair value estimate is 29% lower than Jiang Zhong PharmaceuticalLtd's analyst price target of CN¥31.12

Does the May share price for Jiang Zhong Pharmaceutical Co.,Ltd (SHSE:600750) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 Jiang Zhong PharmaceuticalLtd

Is Jiang Zhong PharmaceuticalLtd Fairly Valued?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (CN¥, Millions) CN¥719.7m CN¥701.7m CN¥695.5m CN¥697.2m CN¥704.5m CN¥715.8m CN¥730.1m CN¥746.6m CN¥764.9m CN¥784.7m
Growth Rate Estimate Source Est @ -4.82% Est @ -2.50% Est @ -0.88% Est @ 0.25% Est @ 1.05% Est @ 1.60% Est @ 1.99% Est @ 2.26% Est @ 2.45% Est @ 2.59%
Present Value (CN¥, Millions) Discounted @ 7.4% CN¥670 CN¥608 CN¥561 CN¥524 CN¥493 CN¥466 CN¥443 CN¥422 CN¥402 CN¥384

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥5.0b

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¥785m× (1 + 2.9%) ÷ (7.4%– 2.9%) = CN¥18b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥18b÷ ( 1 + 7.4%)10= CN¥8.8b

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¥14b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥26.4, 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.

dcf
SHSE:600750 Discounted Cash Flow May 22nd 2024

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. 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 Jiang Zhong PharmaceuticalLtd 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 Jiang Zhong PharmaceuticalLtd

Strength
  • Earnings growth over the past year exceeded the industry.
  • Currently debt free.
  • Dividend is in the top 25% of dividend payers in the market.
Weakness
  • No major weaknesses identified for 600750.
Opportunity
  • Annual earnings are forecast to grow for the next 3 years.
  • Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat
  • Dividends are not covered by earnings and cashflows.
  • Annual earnings are forecast to grow slower than the Chinese market.

Moving On:

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. The DCF model is not a perfect stock valuation tool. 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Jiang Zhong PharmaceuticalLtd, we've put together three fundamental elements you should look at:

  1. Risks: To that end, you should be aware of the 1 warning sign we've spotted with Jiang Zhong PharmaceuticalLtd .
  2. Future Earnings: How does 600750'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 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. 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.

Valuation is complex, but we're helping make it simple.

Find out whether Jiang Zhong PharmaceuticalLtd is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.