Estimating The Intrinsic Value Of Jiangxi Everbright Measurement And Control Technology Co.,Ltd. (SZSE:300906)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Jiangxi Everbright Measurement And Control TechnologyLtd fair value estimate is CN¥22.08
• Jiangxi Everbright Measurement And Control TechnologyLtd's CN¥20.20 share price indicates it is trading at similar levels as its fair value estimate
• Jiangxi Everbright Measurement And Control TechnologyLtd's peers are currently trading at a premium of 726% on average

How far off is Jiangxi Everbright Measurement And Control Technology Co.,Ltd. (SZSE:300906) 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. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Jiangxi Everbright Measurement And Control TechnologyLtd

The Method

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. 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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥71.3m	CN¥80.7m	CN¥88.9m	CN¥95.9m	CN¥102.0m	CN¥107.5m	CN¥112.4m	CN¥117.0m	CN¥121.3m	CN¥125.5m
Growth Rate Estimate Source	Est @ 17.61%	Est @ 13.18%	Est @ 10.08%	Est @ 7.91%	Est @ 6.39%	Est @ 5.33%	Est @ 4.59%	Est @ 4.07%	Est @ 3.70%	Est @ 3.45%
Present Value (CN¥, Millions) Discounted @ 8.2%	CN¥65.9	CN¥69.0	CN¥70.2	CN¥70.1	CN¥68.9	CN¥67.1	CN¥64.9	CN¥62.5	CN¥59.9	CN¥57.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥656m

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 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 8.2%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥125m× (1 + 2.9%) ÷ (8.2%– 2.9%) = CN¥2.4b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥2.4b÷ ( 1 + 8.2%)¹⁰= CN¥1.1b

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¥1.8b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥20.2, the company appears about fair value at a 8.5% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

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. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Jiangxi Everbright Measurement And Control TechnologyLtd 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 8.2%, which is based on a levered beta of 1.065. 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.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and 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?" 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. For Jiangxi Everbright Measurement And Control TechnologyLtd, there are three additional factors you should consider:

1. Risks: Every company has them, and we've spotted 2 warning signs for Jiangxi Everbright Measurement And Control TechnologyLtd (of which 1 doesn't sit too well with us!) you should know about.
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 Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.