Calculating The Intrinsic Value Of Shanghai Awinic Technology Co.,Ltd. (SHSE:688798)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Shanghai Awinic TechnologyLtd fair value estimate is CN¥73.40
• With CN¥74.25 share price, Shanghai Awinic TechnologyLtd appears to be trading close to its estimated fair value
• Our fair value estimate is 8.5% lower than Shanghai Awinic TechnologyLtd's analyst price target of CN¥80.22

In this article we are going to estimate the intrinsic value of Shanghai Awinic Technology Co.,Ltd. (SHSE:688798) by taking the forecast future cash flows of the company and discounting them back to today's 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.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Shanghai Awinic TechnologyLtd

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 begin with, we have to get estimates of 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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥178.0m	CN¥396.0m	CN¥593.2m	CN¥804.8m	CN¥1.01b	CN¥1.20b	CN¥1.37b	CN¥1.52b	CN¥1.65b	CN¥1.76b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 49.79%	Est @ 35.69%	Est @ 25.82%	Est @ 18.92%	Est @ 14.08%	Est @ 10.70%	Est @ 8.33%	Est @ 6.67%
Present Value (CN¥, Millions) Discounted @ 9.4%	CN¥163	CN¥331	CN¥454	CN¥563	CN¥648	CN¥704	CN¥735	CN¥744	CN¥737	CN¥719

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥5.8b

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 (2.8%) 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 9.4%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥1.8b× (1 + 2.8%) ÷ (9.4%– 2.8%) = CN¥28b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥28b÷ ( 1 + 9.4%)¹⁰= CN¥11b

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¥17b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥74.3, the company appears around fair value at the time of writing. 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

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 Shanghai Awinic TechnologyLtd 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 9.4%, which is based on a levered beta of 1.315. 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 Shanghai Awinic TechnologyLtd

Moving On:

Whilst important, the DCF calculation 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Shanghai Awinic TechnologyLtd, we've put together three important aspects you should further research:

1. Risks: For instance, we've identified 2 warning signs for Shanghai Awinic TechnologyLtd that you should be aware of.
2. Future Earnings: How does 688798'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.