Inmyshow Digital Technology(Group)Co.Ltd's estimated fair value is CN¥5.90 based on 2 Stage Free Cash Flow to Equity
Inmyshow Digital Technology(Group)Co.Ltd is estimated to be 34% undervalued based on current share price of CN¥3.89
Our fair value estimate is 16% lower than Inmyshow Digital Technology(Group)Co.Ltd's analyst price target of CN¥7.00
How far off is Inmyshow Digital Technology(Group)Co.,Ltd. (SHSE:600556) 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 their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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. 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.
Is Inmyshow Digital Technology(Group)Co.Ltd Fairly Valued?
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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF (CN¥, Millions)
CN¥165.0m
CN¥282.0m
CN¥379.6m
CN¥475.1m
CN¥562.9m
CN¥640.8m
CN¥708.5m
CN¥767.3m
CN¥818.8m
CN¥864.5m
Growth Rate Estimate Source
Analyst x1
Analyst x1
Est @ 34.63%
Est @ 25.13%
Est @ 18.49%
Est @ 13.83%
Est @ 10.58%
Est @ 8.30%
Est @ 6.70%
Est @ 5.59%
Present Value (CN¥, Millions) Discounted @ 8.4%
CN¥152
CN¥240
CN¥298
CN¥344
CN¥376
CN¥394
CN¥402
CN¥402
CN¥395
CN¥385
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥3.4b
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. 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 3.0%. We discount the terminal cash flows to today's value at a cost of equity of 8.4%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥16b÷ ( 1 + 8.4%)10= CN¥7.3b
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¥11b. 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¥3.9, the company appears quite undervalued at a 34% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Inmyshow Digital Technology(Group)Co.Ltd 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 8.4%, which is based on a levered beta of 0.898. 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 Inmyshow Digital Technology(Group)Co.Ltd
Strength
Debt is well covered by earnings.
Balance sheet summary for 600556.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Media market.
Opportunity
Annual earnings are forecast to grow faster than the Chinese market.
Trading below our estimate of fair value by more than 20%.
Threat
Debt is not well covered by operating cash flow.
Revenue is forecast to grow slower than 20% per year.
Is 600556 well equipped to handle threats?
Moving On:
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For Inmyshow Digital Technology(Group)Co.Ltd, we've put together three fundamental elements you should further research:
Risks: Case in point, we've spotted 2 warning signs for Inmyshow Digital Technology(Group)Co.Ltd you should be aware of.
Future Earnings: How does 600556'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.
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 Chinese stock every day, so if you want to find the intrinsic value of any other stock 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.
关键见解
根据两阶段股权自由现金流,Inmyshow Digital Technology(集团)有限公司的估计公允价值为5.90元人民币
上面的计算在很大程度上取决于两个假设。第一个是贴现率,另一个是现金流。如果你不同意这些结果,那就自己计算一下,试一试假设。DCF也没有考虑一个行业可能的周期性,也没有考虑公司未来的资本需求,因此它没有全面反映公司的潜在表现。鉴于我们将Inmyshow Digital Technology(集团)有限公司视为潜在股东,因此使用股本成本作为贴现率,而不是构成债务的资本成本(或加权平均资本成本,WACC)。在此计算中,我们使用了8.4%,这是基于0.898的杠杆测试版。Beta是衡量股票与整个市场相比波动性的指标。我们的测试版来自全球可比公司的行业平均贝塔值,设定在0.8到2.0之间,这是一个稳定的业务的合理范围。