Calculating The Intrinsic Value Of Pinming Technology Co., Ltd. (SHSE:688109)

Key Insights

• Pinming Technology's estimated fair value is CN¥20.64 based on 2 Stage Free Cash Flow to Equity
• With CN¥23.40 share price, Pinming Technology appears to be trading close to its estimated fair value
• When compared to theindustry average discount of -1,681%, Pinming Technology's competitors seem to be trading at a greater premium to fair value

Today we will run through one way of estimating the intrinsic value of Pinming Technology Co., Ltd. (SHSE:688109) by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Pinming Technology

Is Pinming Technology Fairly Valued?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥37.0m	CN¥48.9m	CN¥60.4m	CN¥70.8m	CN¥80.0m	CN¥87.9m	CN¥94.8m	CN¥100.7m	CN¥106.1m	CN¥110.9m
Growth Rate Estimate Source	Est @ 44.93%	Est @ 32.31%	Est @ 23.47%	Est @ 17.28%	Est @ 12.95%	Est @ 9.92%	Est @ 7.80%	Est @ 6.32%	Est @ 5.28%	Est @ 4.55%
Present Value (CN¥, Millions) Discounted @ 7.8%	CN¥34.3	CN¥42.1	CN¥48.2	CN¥52.4	CN¥54.9	CN¥56.0	CN¥56.0	CN¥55.2	CN¥53.9	CN¥52.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥505m

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 7.8%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥111m× (1 + 2.9%) ÷ (7.8%– 2.9%) = CN¥2.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥2.3b÷ ( 1 + 7.8%)¹⁰= CN¥1.1b

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¥1.6b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CN¥23.4, 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.

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 Pinming Technology 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 7.8%, which is based on a levered beta of 0.997. 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 Pinming Technology

Next Steps:

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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Pinming Technology, we've put together three further items you should look at:

1. Risks: Case in point, we've spotted 3 warning signs for Pinming Technology you should be aware of, and 1 of them shouldn't be ignored.
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 Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. Simply Wall St updates its DCF calculation for every Chinese stock every day, so if you want to find the intrinsic value of any other stock 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.