Estimating The Intrinsic Value Of Jiangsu Eazytec Co., Ltd. (SHSE:688258)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Jiangsu Eazytec fair value estimate is CN¥26.98
• Current share price of CN¥31.56 suggests Jiangsu Eazytec is potentially trading close to its fair value
• When compared to theindustry average discount of -2,546%, Jiangsu Eazytec's competitors seem to be trading at a greater premium to fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Jiangsu Eazytec Co., Ltd. (SHSE:688258) as an investment opportunity 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. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Jiangsu Eazytec

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. To start off with, we need to estimate 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, 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¥94.1m	CN¥122.8m	CN¥150.1m	CN¥174.7m	CN¥196.2m	CN¥214.8m	CN¥230.8m	CN¥244.8m	CN¥257.3m	CN¥268.6m
Growth Rate Estimate Source	Est @ 42.44%	Est @ 30.55%	Est @ 22.22%	Est @ 16.40%	Est @ 12.32%	Est @ 9.46%	Est @ 7.46%	Est @ 6.06%	Est @ 5.09%	Est @ 4.40%
Present Value (CN¥, Millions) Discounted @ 8.7%	CN¥86.6	CN¥104	CN¥117	CN¥125	CN¥129	CN¥130	CN¥129	CN¥126	CN¥122	CN¥117

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.2b

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 (2.8%) 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 8.7%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥269m× (1 + 2.8%) ÷ (8.7%– 2.8%) = CN¥4.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥4.7b÷ ( 1 + 8.7%)¹⁰= CN¥2.0b

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¥3.2b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥31.6, 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

We would point out that 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 Jiangsu Eazytec 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 8.7%, which is based on a levered beta of 1.181. 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.

Next Steps:

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. 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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Jiangsu Eazytec, we've compiled three fundamental aspects you should consider:

1. Risks: Every company has them, and we've spotted 4 warning signs for Jiangsu Eazytec (of which 2 are significant!) you should know about.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
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. 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.