Stock Analysis

Calculating The Intrinsic Value Of JW (Cayman) Therapeutics Co. Ltd (HKG:2126)

SEHK:2126
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Key Insights

  • The projected fair value for JW (Cayman) Therapeutics is HK$1.75 based on 2 Stage Free Cash Flow to Equity
  • Current share price of HK$1.92 suggests JW (Cayman) Therapeutics is potentially trading close to its fair value
  • Analyst price target for 2126 is CN¥2.72, which is 55% above our fair value estimate

How far off is JW (Cayman) Therapeutics Co. Ltd (HKG:2126) 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. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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 JW (Cayman) Therapeutics

The Model

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. To begin with, we have to get estimates of 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) estimate

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (CN¥, Millions) -CN¥619.5m -CN¥446.5m -CN¥300.5m -CN¥119.7m CN¥51.0m CN¥77.4m CN¥105.9m CN¥133.8m CN¥159.5m CN¥181.9m
Growth Rate Estimate Source Analyst x2 Analyst x2 Analyst x2 Analyst x2 Analyst x1 Est @ 51.70% Est @ 36.83% Est @ 26.43% Est @ 19.14% Est @ 14.05%
Present Value (CN¥, Millions) Discounted @ 7.8% -CN¥575 -CN¥384 -CN¥240 -CN¥88.6 CN¥35.0 CN¥49.3 CN¥62.6 CN¥73.4 CN¥81.2 CN¥85.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = -CN¥900m

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 (2.2%) 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 7.8%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥182m× (1 + 2.2%) ÷ (7.8%– 2.2%) = CN¥3.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥3.3b÷ ( 1 + 7.8%)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¥654m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of HK$1.9, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
SEHK:2126 Discounted Cash Flow May 3rd 2024

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. 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 JW (Cayman) Therapeutics 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 7.8%, which is based on a levered beta of 1.002. 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 JW (Cayman) Therapeutics

Strength
  • Debt is well covered by earnings.
Weakness
  • Expensive based on P/S ratio and estimated fair value.
Opportunity
  • Forecast to reduce losses next year.
Threat
  • Debt is not well covered by operating cash flow.
  • Not expected to become profitable over the next 3 years.

Moving On:

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. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For JW (Cayman) Therapeutics, we've put together three pertinent aspects you should further examine:

  1. Risks: You should be aware of the 2 warning signs for JW (Cayman) Therapeutics we've uncovered before considering an investment in the company.
  2. Future Earnings: How does 2126'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 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!

PS. Simply Wall St updates its DCF calculation for every Hong Kong 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 JW (Cayman) Therapeutics 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.