Stock Analysis

A Look At The Intrinsic Value Of Ji'an Mankun Technology Co., Ltd. (SZSE:301132)

SZSE:301132
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Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Ji'an Mankun Technology fair value estimate is CN¥17.00
  • Current share price of CN¥20.36 suggests Ji'an Mankun Technology is potentially trading close to its fair value
  • When compared to theindustry average discount of -1,047%, Ji'an Mankun Technology's competitors seem to be trading at a greater premium to fair value

In this article we are going to estimate the intrinsic value of Ji'an Mankun Technology Co., Ltd. (SZSE:301132) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

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.

View our latest analysis for Ji'an Mankun Technology

What's The Estimated Valuation?

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. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, 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) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (CN¥, Millions) CN¥59.6m CN¥84.6m CN¥110.2m CN¥134.5m CN¥156.4m CN¥175.6m CN¥192.3m CN¥206.8m CN¥219.5m CN¥230.8m
Growth Rate Estimate Source Est @ 58.60% Est @ 41.91% Est @ 30.22% Est @ 22.03% Est @ 16.31% Est @ 12.30% Est @ 9.49% Est @ 7.52% Est @ 6.15% Est @ 5.19%
Present Value (CN¥, Millions) Discounted @ 9.2% CN¥54.6 CN¥71.0 CN¥84.7 CN¥94.7 CN¥101 CN¥104 CN¥104 CN¥103 CN¥99.8 CN¥96.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥913m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 9.2%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥231m× (1 + 2.9%) ÷ (9.2%– 2.9%) = CN¥3.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥3.8b÷ ( 1 + 9.2%)10= CN¥1.6b

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¥2.5b. 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¥20.4, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
SZSE:301132 Discounted Cash Flow April 15th 2024

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 Ji'an Mankun 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 9.2%, which is based on a levered beta of 1.103. 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 Ji'an Mankun Technology

Strength
  • Debt is not viewed as a risk.
Weakness
  • Earnings declined over the past year.
  • Dividend is low compared to the top 25% of dividend payers in the Electronic market.
  • Current share price is above our estimate of fair value.
Opportunity
  • 301132's financial characteristics indicate limited near-term opportunities for shareholders.
  • Lack of analyst coverage makes it difficult to determine 301132's earnings prospects.
Threat
  • Paying a dividend but company has no free cash flows.

Next Steps:

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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Ji'an Mankun Technology, we've put together three important factors you should look at:

  1. Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Ji'an Mankun Technology (at least 1 which is significant) , and understanding them should be part of your investment process.
  2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
  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. 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 helping make it simple.

Find out whether Ji'an Mankun Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.