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Is Shenzhen Transsion Holdings Co., Ltd. (SHSE:688036) Trading At A 28% Discount?
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Shenzhen Transsion Holdings fair value estimate is CN¥125
- Current share price of CN¥89.53 suggests Shenzhen Transsion Holdings is potentially 28% undervalued
- The CN¥114 analyst price target for 688036 is 8.8% less than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of Shenzhen Transsion Holdings Co., Ltd. (SHSE:688036) by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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.
View our latest analysis for Shenzhen Transsion Holdings
The Calculation
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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (CN¥, Millions) | CN¥7.29b | CN¥7.86b | CN¥8.31b | CN¥8.71b | CN¥9.08b | CN¥9.43b | CN¥9.77b | CN¥10.1b | CN¥10.4b | CN¥10.7b |
Growth Rate Estimate Source | Analyst x2 | Analyst x1 | Est @ 5.70% | Est @ 4.85% | Est @ 4.25% | Est @ 3.83% | Est @ 3.53% | Est @ 3.33% | Est @ 3.19% | Est @ 3.08% |
Present Value (CN¥, Millions) Discounted @ 8.6% | CN¥6.7k | CN¥6.7k | CN¥6.5k | CN¥6.3k | CN¥6.0k | CN¥5.7k | CN¥5.5k | CN¥5.2k | CN¥5.0k | CN¥4.7k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥58b
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 8.6%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥11b× (1 + 2.9%) ÷ (8.6%– 2.9%) = CN¥192b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥192b÷ ( 1 + 8.6%)10= CN¥84b
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¥142b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥89.5, the company appears a touch undervalued at a 28% discount to where the stock price trades currently. 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.
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 Shenzhen Transsion Holdings 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 8.6%, which is based on a levered beta of 1.155. 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 Shenzhen Transsion Holdings
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividend is in the top 25% of dividend payers in the market.
- No major weaknesses identified for 688036.
- Annual earnings are forecast to grow for the next 3 years.
- Good value based on P/E ratio and estimated fair value.
- Dividends are not covered by earnings and cashflows.
- Annual earnings are forecast to grow slower than the Chinese market.
Looking Ahead:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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. Why is the intrinsic value higher than the current share price? For Shenzhen Transsion Holdings, we've put together three important factors you should look at:
- Risks: For instance, we've identified 2 warning signs for Shenzhen Transsion Holdings (1 doesn't sit too well with us) you should be aware of.
- Future Earnings: How does 688036'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.
- 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. 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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About SHSE:688036
Shenzhen Transsion Holdings
Manufactures and sells smart devices in Africa and internationally.