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- SZSE:300433
Lens Technology Co., Ltd. (SZSE:300433) Shares Could Be 24% Above Their Intrinsic Value Estimate
Key Insights
- The projected fair value for Lens Technology is CN¥13.87 based on 2 Stage Free Cash Flow to Equity
- Lens Technology's CN¥17.14 share price signals that it might be 24% overvalued
- Analyst price target for 300433 is CN¥17.87, which is 29% above our fair value estimate
Does the August share price for Lens Technology Co., Ltd. (SZSE:300433) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don't get put off by the jargon, the math behind it is actually quite straightforward.
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 Lens Technology
Step By Step Through The Calculation
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. 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.
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¥3.42b | CN¥3.73b | CN¥3.97b | CN¥4.19b | CN¥4.38b | CN¥4.56b | CN¥4.73b | CN¥4.89b | CN¥5.05b | CN¥5.21b |
Growth Rate Estimate Source | Analyst x3 | Analyst x2 | Est @ 6.48% | Est @ 5.39% | Est @ 4.63% | Est @ 4.09% | Est @ 3.72% | Est @ 3.46% | Est @ 3.28% | Est @ 3.15% |
Present Value (CN¥, Millions) Discounted @ 8.6% | CN¥3.1k | CN¥3.2k | CN¥3.1k | CN¥3.0k | CN¥2.9k | CN¥2.8k | CN¥2.6k | CN¥2.5k | CN¥2.4k | CN¥2.3k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥28b
The second stage is also known as Terminal Value, this is the business's cash flow after 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¥5.2b× (1 + 2.9%) ÷ (8.6%– 2.9%) = CN¥93b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥93b÷ ( 1 + 8.6%)10= CN¥41b
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¥69b. 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¥17.1, 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
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 Lens 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 8.6%, which is based on a levered beta of 1.159. 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 Lens Technology
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- 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.
- Annual earnings are forecast to grow slower than the Chinese market.
Looking Ahead:
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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value lower than the current share price? For Lens Technology, we've compiled three pertinent aspects you should look at:
- Risks: For example, we've discovered 1 warning sign for Lens Technology that you should be aware of before investing here.
- Future Earnings: How does 300433'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 SZSE:300433
Lens Technology
Engages in the production and sale of electronic components in China.
Flawless balance sheet with proven track record.