Calculating The Intrinsic Value Of Urovo Technology Co., Ltd. (SZSE:300531)

Key Insights

• The projected fair value for Urovo Technology is CN¥10.82 based on 2 Stage Free Cash Flow to Equity
• With CN¥10.91 share price, Urovo Technology appears to be trading close to its estimated fair value
• Urovo Technology's peers seem to be trading at a higher premium to fair value based onthe industry average of -1,258%

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Urovo Technology Co., Ltd. (SZSE:300531) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Urovo Technology

The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥202.0m	CN¥219.5m	CN¥234.8m	CN¥248.3m	CN¥260.5m	CN¥271.7m	CN¥282.3m	CN¥292.6m	CN¥302.5m	CN¥312.4m
Growth Rate Estimate Source	Est @ 11.13%	Est @ 8.67%	Est @ 6.95%	Est @ 5.75%	Est @ 4.91%	Est @ 4.32%	Est @ 3.90%	Est @ 3.61%	Est @ 3.41%	Est @ 3.27%
Present Value (CN¥, Millions) Discounted @ 9.7%	CN¥184	CN¥183	CN¥178	CN¥172	CN¥164	CN¥156	CN¥148	CN¥140	CN¥132	CN¥124

("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. 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 9.7%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥312m× (1 + 2.9%) ÷ (9.7%– 2.9%) = CN¥4.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥4.8b÷ ( 1 + 9.7%)¹⁰= CN¥1.9b

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¥3.5b. 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¥10.9, the company appears around fair value 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.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Urovo 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 9.7%, which is based on a levered beta of 1.194. 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.

Next Steps:

Although the valuation of a company is important, it 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. 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. For Urovo Technology, there are three relevant items you should further research:

1. Risks: For example, we've discovered 1 warning sign for Urovo Technology that you should be aware of before investing here.
2. 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!
3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

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.