Estimating The Intrinsic Value Of Nanjing Central Emporium (Group) Stocks Co., Ltd. (SHSE:600280)

Key Insights

• Nanjing Central Emporium (Group) Stocks' estimated fair value is CN¥2.24 based on 2 Stage Free Cash Flow to Equity
• With CN¥2.43 share price, Nanjing Central Emporium (Group) Stocks appears to be trading close to its estimated fair value
• Nanjing Central Emporium (Group) Stocks' peers seem to be trading at a higher premium to fair value based onthe industry average of -114%

In this article we are going to estimate the intrinsic value of Nanjing Central Emporium (Group) Stocks Co., Ltd. (SHSE:600280) by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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.

Check out our latest analysis for Nanjing Central Emporium (Group) Stocks

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. 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.

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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥339.0m	CN¥323.6m	CN¥316.1m	CN¥313.7m	CN¥314.8m	CN¥318.3m	CN¥323.6m	CN¥330.1m	CN¥337.7m	CN¥346.0m
Growth Rate Estimate Source	Est @ -7.74%	Est @ -4.55%	Est @ -2.31%	Est @ -0.75%	Est @ 0.35%	Est @ 1.11%	Est @ 1.65%	Est @ 2.02%	Est @ 2.29%	Est @ 2.47%
Present Value (CN¥, Millions) Discounted @ 14%	CN¥297	CN¥248	CN¥212	CN¥185	CN¥162	CN¥144	CN¥128	CN¥114	CN¥103	CN¥92.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.7b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 14%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥346m× (1 + 2.9%) ÷ (14%– 2.9%) = CN¥3.2b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥3.2b÷ ( 1 + 14%)¹⁰= CN¥841m

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¥2.5b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥2.4, 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. 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 Nanjing Central Emporium (Group) Stocks 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 14%, which is based on a levered beta of 2.000. 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 Nanjing Central Emporium (Group) Stocks

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess 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 Nanjing Central Emporium (Group) Stocks, we've compiled three pertinent elements you should explore:

1. Risks: As an example, we've found 1 warning sign for Nanjing Central Emporium (Group) Stocks that you need to consider before investing here.
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 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.