Calculating The Intrinsic Value Of Jiangxi Tianli Technology, INC. (SZSE:300399)

Key Insights

• Jiangxi Tianli Technology's estimated fair value is CN¥11.65 based on 2 Stage Free Cash Flow to Equity
• Jiangxi Tianli Technology's CN¥12.84 share price indicates it is trading at similar levels as its fair value estimate
• When compared to theindustry average discount of -1,530%, Jiangxi Tianli Technology's competitors seem to be trading at a greater premium to fair value

In this article we are going to estimate the intrinsic value of Jiangxi Tianli Technology, INC. (SZSE:300399) by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Jiangxi Tianli Technology

What's The Estimated Valuation?

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¥82.8m	CN¥95.3m	CN¥106.1m	CN¥115.5m	CN¥123.6m	CN¥130.7m	CN¥137.2m	CN¥143.0m	CN¥148.5m	CN¥153.8m
Growth Rate Estimate Source	Est @ 20.26%	Est @ 15.04%	Est @ 11.38%	Est @ 8.82%	Est @ 7.03%	Est @ 5.78%	Est @ 4.90%	Est @ 4.28%	Est @ 3.85%	Est @ 3.55%
Present Value (CN¥, Millions) Discounted @ 7.8%	CN¥76.8	CN¥82.0	CN¥84.7	CN¥85.5	CN¥84.8	CN¥83.2	CN¥81.0	CN¥78.3	CN¥75.4	CN¥72.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥804m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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¥154m× (1 + 2.9%) ÷ (7.8%– 2.9%) = CN¥3.2b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥3.2b÷ ( 1 + 7.8%)¹⁰= CN¥1.5b

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¥2.3b. 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¥12.8, 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. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Jiangxi Tianli 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 0.998. 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.

Looking Ahead:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching 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 Jiangxi Tianli Technology, there are three fundamental elements you should further research:

1. Risks: For example, we've discovered 2 warning signs for Jiangxi Tianli Technology that you should be aware of before investing here.
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 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. 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.