Estimating The Fair Value Of China Shenshan Orchard Holdings Co. Ltd. (SGX:BKV)

Key Insights

• China Shenshan Orchard Holdings' estimated fair value is S$0.36 based on 2 Stage Free Cash Flow to Equity
• Current share price of S$0.35 suggests China Shenshan Orchard Holdings is potentially trading close to its fair value
• Peers of China Shenshan Orchard Holdings are currently trading on average at a 40% premium

Does the March share price for China Shenshan Orchard Holdings Co. Ltd. (SGX:BKV) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for China Shenshan Orchard Holdings

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 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (CN¥, Millions)	CN¥4.19m	CN¥5.43m	CN¥6.59m	CN¥7.61m	CN¥8.48m	CN¥9.21m	CN¥9.82m	CN¥10.3m	CN¥10.8m	CN¥11.1m
Growth Rate Estimate Source	Est @ 41.51%	Est @ 29.64%	Est @ 21.32%	Est @ 15.51%	Est @ 11.43%	Est @ 8.58%	Est @ 6.59%	Est @ 5.19%	Est @ 4.21%	Est @ 3.53%
Present Value (CN¥, Millions) Discounted @ 7.7%	CN¥3.9	CN¥4.7	CN¥5.3	CN¥5.7	CN¥5.9	CN¥5.9	CN¥5.9	CN¥5.7	CN¥5.5	CN¥5.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥54m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 7.7%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = CN¥11m× (1 + 1.9%) ÷ (7.7%– 1.9%) = CN¥198m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥198m÷ ( 1 + 7.7%)¹⁰= CN¥95m

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¥149m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of S$0.3, the company appears about fair value at a 3.0% 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

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 China Shenshan Orchard Holdings 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 7.7%, which is based on a levered beta of 0.800. 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.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For China Shenshan Orchard Holdings, we've put together three additional factors you should look at:

1. Risks: Every company has them, and we've spotted 4 warning signs for China Shenshan Orchard Holdings (of which 1 doesn't sit too well with us!) you should know about.
2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for BKV's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SGX every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.