Is ZEEKR Intelligent Technology Holding Limited (NYSE:ZK) Trading At A 27% Discount?

Key Insights

• ZEEKR Intelligent Technology Holding's estimated fair value is US$30.08 based on 2 Stage Free Cash Flow to Equity
• ZEEKR Intelligent Technology Holding's US$21.90 share price signals that it might be 27% undervalued
• The CN¥32.06 analyst price target for ZK is 6.6% more than our estimate of fair value

Today we will run through one way of estimating the intrinsic value of ZEEKR Intelligent Technology Holding Limited (NYSE:ZK) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex.

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

Crunching The Numbers

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥5.00b	CN¥7.06b	CN¥3.75b	CN¥5.13b	CN¥4.97b	CN¥4.90b	CN¥4.89b	CN¥4.92b	CN¥4.98b	CN¥5.05b
Growth Rate Estimate Source	Analyst x3	Analyst x3	Analyst x1	Analyst x1	Est @ -3.12%	Est @ -1.43%	Est @ -0.25%	Est @ 0.57%	Est @ 1.15%	Est @ 1.56%
Present Value (CN¥, Millions) Discounted @ 11%	CN¥4.5k	CN¥5.8k	CN¥2.8k	CN¥3.4k	CN¥3.0k	CN¥2.7k	CN¥2.4k	CN¥2.2k	CN¥2.0k	CN¥1.8k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥30b

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 (2.5%) 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)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥5.1b× (1 + 2.5%) ÷ (11%– 2.5%) = CN¥63b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥63b÷ ( 1 + 11%)¹⁰= CN¥23b

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¥53b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$21.9, the company appears a touch undervalued at a 27% 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. 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 ZEEKR Intelligent Technology Holding 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 1.658. 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 ZEEKR Intelligent Technology Holding

Moving On:

Although the valuation of a company is important, 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. What is the reason for the share price sitting below the intrinsic value? For ZEEKR Intelligent Technology Holding, we've put together three pertinent elements you should further research:

1. Risks: We feel that you should assess the 2 warning signs for ZEEKR Intelligent Technology Holding (1 makes us a bit uncomfortable!) we've flagged before making an investment in the company.
2. Future Earnings: How does ZK'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE 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.