Are Investors Undervaluing Jiayou International Logistics Co.,Ltd (SHSE:603871) By 38%?

Key Insights

• The projected fair value for Jiayou International LogisticsLtd is CN¥35.55 based on 2 Stage Free Cash Flow to Equity
• Jiayou International LogisticsLtd is estimated to be 38% undervalued based on current share price of CN¥22.00
• Analyst price target for 603871 is CN¥23.87 which is 33% below our fair value estimate

How far off is Jiayou International Logistics Co.,Ltd (SHSE:603871) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!

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.

See our latest analysis for Jiayou International LogisticsLtd

Step By Step Through 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 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.

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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥1.09b	CN¥1.28b	CN¥1.42b	CN¥1.55b	CN¥1.65b	CN¥1.75b	CN¥1.83b	CN¥1.91b	CN¥1.98b	CN¥2.05b
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 11.11%	Est @ 8.63%	Est @ 6.90%	Est @ 5.68%	Est @ 4.83%	Est @ 4.24%	Est @ 3.82%	Est @ 3.53%
Present Value (CN¥, Millions) Discounted @ 7.3%	CN¥1.0k	CN¥1.1k	CN¥1.2k	CN¥1.2k	CN¥1.2k	CN¥1.1k	CN¥1.1k	CN¥1.1k	CN¥1.1k	CN¥1.0k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥11b

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 7.3%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥2.1b× (1 + 2.9%) ÷ (7.3%– 2.9%) = CN¥48b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥48b÷ ( 1 + 7.3%)¹⁰= CN¥24b

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¥35b. 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¥22.0, the company appears quite good value at a 38% 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 Jiayou International LogisticsLtd 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 7.3%, which is based on a levered beta of 0.890. 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.

Looking Ahead:

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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For Jiayou International LogisticsLtd, we've compiled three further factors you should assess:

1. Risks: Every company has them, and we've spotted 1 warning sign for Jiayou International LogisticsLtd you should know about.
2. Future Earnings: How does 603871'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.