A Look At The Fair Value Of Beijing Leadman Biochemistry Co.,Ltd. (SZSE:300289)

Key Insights

• The projected fair value for Beijing Leadman BiochemistryLtd is CN¥4.90 based on 2 Stage Free Cash Flow to Equity
• With CN¥4.15 share price, Beijing Leadman BiochemistryLtd appears to be trading close to its estimated fair value
• Peers of Beijing Leadman BiochemistryLtd are currently trading on average at a 168% premium

Does the April share price for Beijing Leadman Biochemistry Co.,Ltd. (SZSE:300289) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Beijing Leadman BiochemistryLtd

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. To begin with, we have to get estimates of the next ten years of cash flows. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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¥112.1m	CN¥119.5m	CN¥126.2m	CN¥132.2m	CN¥137.8m	CN¥143.0m	CN¥148.2m	CN¥153.2m	CN¥158.1m	CN¥163.1m
Growth Rate Estimate Source	Est @ 8.26%	Est @ 6.67%	Est @ 5.55%	Est @ 4.77%	Est @ 4.22%	Est @ 3.83%	Est @ 3.57%	Est @ 3.38%	Est @ 3.25%	Est @ 3.15%
Present Value (CN¥, Millions) Discounted @ 7.6%	CN¥104	CN¥103	CN¥101	CN¥98.6	CN¥95.5	CN¥92.2	CN¥88.7	CN¥85.3	CN¥81.8	CN¥78.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥929m

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 7.6%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥163m× (1 + 2.9%) ÷ (7.6%– 2.9%) = CN¥3.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥3.6b÷ ( 1 + 7.6%)¹⁰= CN¥1.7b

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¥2.7b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥4.2, the company appears about fair value at a 15% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Beijing Leadman BiochemistryLtd 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 7.6%, which is based on a levered beta of 0.827. 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 Beijing Leadman BiochemistryLtd

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Beijing Leadman BiochemistryLtd, we've put together three relevant items you should further research:

1. Risks: To that end, you should learn about the 2 warning signs we've spotted with Beijing Leadman BiochemistryLtd (including 1 which is concerning) .
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. 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.