Calculating The Fair Value Of Shanghai International Airport Co., Ltd. (SHSE:600009)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Shanghai International Airport fair value estimate is CN¥37.50
• With CN¥34.20 share price, Shanghai International Airport appears to be trading close to its estimated fair value
• Analyst price target for 600009 is CN¥39.10, which is 4.3% above our fair value estimate

Today we will run through one way of estimating the intrinsic value of Shanghai International Airport Co., Ltd. (SHSE:600009) by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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. 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 Shanghai International Airport

Is Shanghai International Airport Fairly Valued?

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 start off with, we need to estimate 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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥5.36b	CN¥6.02b	CN¥6.86b	CN¥7.49b	CN¥8.04b	CN¥8.52b	CN¥8.95b	CN¥9.35b	CN¥9.72b	CN¥10.1b
Growth Rate Estimate Source	Analyst x1	Analyst x2	Analyst x2	Est @ 9.21%	Est @ 7.32%	Est @ 5.99%	Est @ 5.07%	Est @ 4.42%	Est @ 3.96%	Est @ 3.64%
Present Value (CN¥, Millions) Discounted @ 11%	CN¥4.8k	CN¥4.9k	CN¥5.1k	CN¥5.0k	CN¥4.8k	CN¥4.6k	CN¥4.4k	CN¥4.1k	CN¥3.9k	CN¥3.6k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥45b

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 11%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥10b× (1 + 2.9%) ÷ (11%– 2.9%) = CN¥133b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥133b÷ ( 1 + 11%)¹⁰= CN¥48b

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¥93b. 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¥34.2, the company appears about fair value at a 8.8% discount to where the stock price trades currently. 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.

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Shanghai International Airport 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 11%, which is based on a levered beta of 1.387. 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 Shanghai International Airport

Looking Ahead:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. 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 Shanghai International Airport, we've put together three essential elements you should look at:

1. Financial Health: Does 600009 have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does 600009'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.
3. 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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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.