A Look At The Fair Value Of Jolywood (Suzhou) Sunwatt Co.,Ltd. (SZSE:300393)

Key Insights

• The projected fair value for Jolywood (Suzhou) SunwattLtd is CN¥6.19 based on 2 Stage Free Cash Flow to Equity
• Current share price of CN¥5.79 suggests Jolywood (Suzhou) SunwattLtd is potentially trading close to its fair value
• The average premium for Jolywood (Suzhou) SunwattLtd's competitorsis currently 1,537%

How far off is Jolywood (Suzhou) Sunwatt Co.,Ltd. (SZSE:300393) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for Jolywood (Suzhou) SunwattLtd

Crunching The Numbers

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 start off with, we need to estimate 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, 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¥1.12b	CN¥321.0m	CN¥497.5m	CN¥693.2m	CN¥890.2m	CN¥1.08b	CN¥1.24b	CN¥1.39b	CN¥1.51b	CN¥1.62b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 54.97%	Est @ 39.35%	Est @ 28.42%	Est @ 20.76%	Est @ 15.40%	Est @ 11.65%	Est @ 9.03%	Est @ 7.19%
Present Value (CN¥, Millions) Discounted @ 14%	-CN¥982	CN¥246	CN¥334	CN¥408	CN¥459	CN¥486	CN¥491	CN¥480	CN¥459	CN¥431

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥2.8b

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

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥1.6b× (1 + 2.9%) ÷ (14%– 2.9%) = CN¥15b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥15b÷ ( 1 + 14%)¹⁰= CN¥3.9b

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¥6.7b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥5.8, the company appears about fair value at a 6.5% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Jolywood (Suzhou) SunwattLtd 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 Jolywood (Suzhou) SunwattLtd

Moving On:

Although the valuation of a company is important, 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Jolywood (Suzhou) SunwattLtd, there are three fundamental aspects you should consider:

1. Risks: Case in point, we've spotted 3 warning signs for Jolywood (Suzhou) SunwattLtd you should be aware of.
2. Future Earnings: How does 300393'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 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com