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Are Wus Printed Circuit (Kunshan) Co., Ltd. (SZSE:002463) Investors Paying Above The Intrinsic Value?
Key Insights
- The projected fair value for Wus Printed Circuit (Kunshan) is CN¥28.96 based on 2 Stage Free Cash Flow to Equity
- Wus Printed Circuit (Kunshan)'s CN¥37.50 share price signals that it might be 29% overvalued
- Analyst price target for 002463 is CN¥53.53, which is 85% above our fair value estimate
How far off is Wus Printed Circuit (Kunshan) Co., Ltd. (SZSE:002463) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. One way to achieve this is by employing 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 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 Wus Printed Circuit (Kunshan)
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 start off with, we need to estimate 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.
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¥2.58b | CN¥2.84b | CN¥3.03b | CN¥3.21b | CN¥3.36b | CN¥3.51b | CN¥3.64b | CN¥3.77b | CN¥3.89b | CN¥4.01b |
Growth Rate Estimate Source | Analyst x3 | Analyst x3 | Est @ 7.01% | Est @ 5.75% | Est @ 4.86% | Est @ 4.24% | Est @ 3.81% | Est @ 3.51% | Est @ 3.30% | Est @ 3.15% |
Present Value (CN¥, Millions) Discounted @ 8.3% | CN¥2.4k | CN¥2.4k | CN¥2.4k | CN¥2.3k | CN¥2.3k | CN¥2.2k | CN¥2.1k | CN¥2.0k | CN¥1.9k | CN¥1.8k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥22b
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 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 8.3%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥4.0b× (1 + 2.8%) ÷ (8.3%– 2.8%) = CN¥75b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥75b÷ ( 1 + 8.3%)10= CN¥34b
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¥56b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CN¥37.5, the company appears slightly overvalued at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
Important 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 Wus Printed Circuit (Kunshan) 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 8.3%, which is based on a levered beta of 1.104. 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 Wus Printed Circuit (Kunshan)
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividend is low compared to the top 25% of dividend payers in the Electronic market.
- Annual revenue is forecast to grow faster than the Chinese market.
- Good value based on P/E ratio compared to estimated Fair P/E ratio.
- Dividends are not covered by cash flow.
- Annual earnings are forecast to grow slower than the Chinese market.
Moving On:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value lower than the current share price? For Wus Printed Circuit (Kunshan), we've put together three pertinent items you should further research:
- Risks: For example, we've discovered 1 warning sign for Wus Printed Circuit (Kunshan) that you should be aware of before investing here.
- Future Earnings: How does 002463'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.
Valuation is complex, but we're here to simplify it.
Discover if Wus Printed Circuit (Kunshan) 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.
About SZSE:002463
Wus Printed Circuit (Kunshan)
Engages in the research, development, design, manufacture, and sale of printed circuit boards in China.
Outstanding track record with excellent balance sheet.