Estimating The Fair Value Of Suzhou Wanxiang Technology Co.,Ltd (SZSE:301180)

Key Insights

• Suzhou Wanxiang TechnologyLtd's estimated fair value is CN¥14.63 based on 2 Stage Free Cash Flow to Equity
• Current share price of CN¥13.10 suggests Suzhou Wanxiang TechnologyLtd is potentially trading close to its fair value
• Peers of Suzhou Wanxiang TechnologyLtd are currently trading on average at a 1,258% premium

How far off is Suzhou Wanxiang Technology Co.,Ltd (SZSE:301180) 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 use the Discounted Cash Flow (DCF) model on this occasion. 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. 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 Suzhou Wanxiang TechnologyLtd

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. 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) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥136.1m	CN¥193.9m	CN¥253.2m	CN¥309.7m	CN¥360.8m	CN¥405.6m	CN¥444.5m	CN¥478.2m	CN¥507.9m	CN¥534.4m
Growth Rate Estimate Source	Est @ 59.41%	Est @ 42.47%	Est @ 30.61%	Est @ 22.31%	Est @ 16.50%	Est @ 12.43%	Est @ 9.58%	Est @ 7.59%	Est @ 6.20%	Est @ 5.22%
Present Value (CN¥, Millions) Discounted @ 9.1%	CN¥125	CN¥163	CN¥195	CN¥219	CN¥233	CN¥241	CN¥242	CN¥238	CN¥232	CN¥224

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥2.1b

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. 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 9.1%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥534m× (1 + 2.9%) ÷ (9.1%– 2.9%) = CN¥8.9b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥8.9b÷ ( 1 + 9.1%)¹⁰= CN¥3.7b

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¥5.9b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥13.1, the company appears about fair value at a 10% 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

Now 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 Suzhou Wanxiang 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 9.1%, which is based on a levered beta of 1.093. 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 Suzhou Wanxiang TechnologyLtd

Looking Ahead:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for 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 Suzhou Wanxiang TechnologyLtd, we've compiled three essential elements you should assess:

1. Risks: To that end, you should learn about the 2 warning signs we've spotted with Suzhou Wanxiang TechnologyLtd (including 1 which is a bit concerning) .
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.