Estimating The Fair Value Of Guangdong Great River Smarter Logistics Co., Ltd. (SZSE:002930)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Guangdong Great River Smarter Logistics fair value estimate is CN¥11.36
• Current share price of CN¥11.25 suggests Guangdong Great River Smarter Logistics is potentially trading close to its fair value
• The average premium for Guangdong Great River Smarter Logistics' competitorsis currently 331%

How far off is Guangdong Great River Smarter Logistics Co., Ltd. (SZSE:002930) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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.

See our latest analysis for Guangdong Great River Smarter Logistics

Crunching The Numbers

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥538.3m	CN¥545.0m	CN¥554.4m	CN¥565.8m	CN¥578.8m	CN¥593.1m	CN¥608.4m	CN¥624.6m	CN¥641.6m	CN¥659.3m
Growth Rate Estimate Source	Est @ 0.56%	Est @ 1.25%	Est @ 1.73%	Est @ 2.06%	Est @ 2.30%	Est @ 2.46%	Est @ 2.58%	Est @ 2.66%	Est @ 2.72%	Est @ 2.76%
Present Value (CN¥, Millions) Discounted @ 13%	CN¥477	CN¥428	CN¥386	CN¥349	CN¥317	CN¥288	CN¥262	CN¥238	CN¥217	CN¥198

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥3.2b

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 13%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥659m× (1 + 2.9%) ÷ (13%– 2.9%) = CN¥6.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥6.8b÷ ( 1 + 13%)¹⁰= CN¥2.0b

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¥5.2b. 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¥11.3, the company appears about fair value at a 1.0% 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.

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Guangdong Great River Smarter Logistics 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 13%, which is based on a levered beta of 2.000. 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 Guangdong Great River Smarter Logistics

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for 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?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Guangdong Great River Smarter Logistics, there are three additional items you should consider:

1. Risks: Case in point, we've spotted 2 warning signs for Guangdong Great River Smarter Logistics you should be aware of, and 1 of them shouldn't be ignored.
2. Future Earnings: How does 002930'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.