Stock Analysis

Estimating The Fair Value Of Beijing E-Hualu Information Technology Co., Ltd. (SZSE:300212)

SZSE:300212
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Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Beijing E-Hualu Information Technology fair value estimate is CN¥14.19
  • Current share price of CN¥16.90 suggests Beijing E-Hualu Information Technology is potentially trading close to its fair value
  • Beijing E-Hualu Information Technology's peers seem to be trading at a higher premium to fair value based onthe industry average of -1,781%

In this article we are going to estimate the intrinsic value of Beijing E-Hualu Information Technology Co., Ltd. (SZSE:300212) by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

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 Beijing E-Hualu Information Technology

The Method

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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Levered FCF (CN¥, Millions) CN¥768.0m CN¥765.0m CN¥769.7m CN¥779.8m CN¥793.6m CN¥810.4m CN¥829.5m CN¥850.4m CN¥872.8m CN¥896.4m
Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ 0.62% Est @ 1.30% Est @ 1.78% Est @ 2.12% Est @ 2.35% Est @ 2.52% Est @ 2.63% Est @ 2.71%
Present Value (CN¥, Millions) Discounted @ 9.8% CN¥699 CN¥634 CN¥581 CN¥536 CN¥497 CN¥462 CN¥431 CN¥402 CN¥376 CN¥352

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥5.0b

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 9.8%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥896m× (1 + 2.9%) ÷ (9.8%– 2.9%) = CN¥13b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥13b÷ ( 1 + 9.8%)10= CN¥5.2b

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¥10b. 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¥16.9, 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.

dcf
SZSE:300212 Discounted Cash Flow July 16th 2024

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. 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 Beijing E-Hualu Information 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 9.8%, which is based on a levered beta of 1.226. 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 Beijing E-Hualu Information Technology

Strength
  • Debt is well covered by earnings.
Weakness
  • Expensive based on P/S ratio and estimated fair value.
  • Shareholders have been diluted in the past year.
Opportunity
  • Expected to breakeven next year.
  • Has sufficient cash runway for more than 3 years based on current free cash flows.
Threat
  • Debt is not well covered by operating cash flow.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. 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 Beijing E-Hualu Information Technology, we've put together three important factors you should consider:

  1. Risks: Be aware that Beijing E-Hualu Information Technology is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...
  2. Future Earnings: How does 300212'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 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!

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.

Valuation is complex, but we're here to simplify it.

Discover if Beijing E-Hualu Information Technology might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.