Gosuncn Technology Group Co., Ltd. (SZSE:300098) Shares Could Be 34% Above Their Intrinsic Value Estimate

Key Insights

• Gosuncn Technology Group's estimated fair value is CN¥2.98 based on 2 Stage Free Cash Flow to Equity
• Gosuncn Technology Group's CN¥3.99 share price signals that it might be 34% overvalued
• Gosuncn Technology Group's peers seem to be trading at a higher premium to fair value based onthe industry average of -166%

How far off is Gosuncn Technology Group Co., Ltd. (SZSE:300098) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. 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.

See our latest analysis for Gosuncn Technology Group

What's The Estimated Valuation?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. 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¥117.5m	CN¥153.9m	CN¥188.7m	CN¥220.2m	CN¥247.8m	CN¥271.6m	CN¥292.2m	CN¥310.3m	CN¥326.3m	CN¥340.9m
Growth Rate Estimate Source	Est @ 43.16%	Est @ 31.06%	Est @ 22.60%	Est @ 16.67%	Est @ 12.53%	Est @ 9.62%	Est @ 7.59%	Est @ 6.17%	Est @ 5.17%	Est @ 4.48%
Present Value (CN¥, Millions) Discounted @ 7.6%	CN¥109	CN¥133	CN¥152	CN¥164	CN¥172	CN¥175	CN¥175	CN¥173	CN¥169	CN¥164

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.6b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 7.6%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥341m× (1 + 2.9%) ÷ (7.6%– 2.9%) = CN¥7.4b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥7.4b÷ ( 1 + 7.6%)¹⁰= CN¥3.6b

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¥5.2b. 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¥4.0, the company appears reasonably expensive at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The 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 Gosuncn Technology Group 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 7.6%, which is based on a levered beta of 0.948. 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 Gosuncn Technology Group

Moving On:

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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a premium to intrinsic value? For Gosuncn Technology Group, we've compiled three pertinent factors you should further research:

1. Risks: For instance, we've identified 1 warning sign for Gosuncn Technology Group that you should be aware of.
2. Future Earnings: How does 300098'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 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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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.