An Intrinsic Calculation For JCET Group Co., Ltd. (SHSE:600584) Suggests It's 37% Undervalued

Key Insights

• The projected fair value for JCET Group is CN¥44.28 based on 2 Stage Free Cash Flow to Equity
• JCET Group's CN¥28.06 share price signals that it might be 37% undervalued
• Our fair value estimate is 15% higher than JCET Group's analyst price target of CN¥38.38

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of JCET Group Co., Ltd. (SHSE:600584) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for JCET Group

Step By Step Through The Calculation

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. 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, 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) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥3.16b	CN¥4.16b	CN¥4.92b	CN¥5.60b	CN¥6.19b	CN¥6.69b	CN¥7.13b	CN¥7.52b	CN¥7.87b	CN¥8.20b
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ 18.39%	Est @ 13.72%	Est @ 10.46%	Est @ 8.18%	Est @ 6.58%	Est @ 5.46%	Est @ 4.68%	Est @ 4.13%
Present Value (CN¥, Millions) Discounted @ 10%	CN¥2.9k	CN¥3.4k	CN¥3.7k	CN¥3.8k	CN¥3.8k	CN¥3.8k	CN¥3.6k	CN¥3.5k	CN¥3.3k	CN¥3.1k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥35b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 10%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥8.2b× (1 + 2.9%) ÷ (10%– 2.9%) = CN¥116b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥116b÷ ( 1 + 10%)¹⁰= CN¥44b

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¥79b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥28.1, the company appears quite good value at a 37% 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.

Important 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 JCET Group 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 10%, which is based on a levered beta of 1.458. 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 JCET Group

Moving On:

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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For JCET Group, we've compiled three additional items you should further research:

1. Risks: Case in point, we've spotted 1 warning sign for JCET Group you should be aware of.
2. Future Earnings: How does 600584'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.