The projected fair value for JA Solar Technology is CN¥21.38 based on 2 Stage Free Cash Flow to Equity
Current share price of CN¥13.71 suggests JA Solar Technology is potentially 36% undervalued
Analyst price target for 2459 is CN¥19.62 which is 8.3% below our fair value estimate
In this article we are going to estimate the intrinsic value of JA Solar Technology Co., Ltd. (SZSE:002459) by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. 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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
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. 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, 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¥4.26b
-CN¥709.5m
CN¥7.03b
CN¥8.00b
CN¥8.73b
CN¥9.36b
CN¥9.92b
CN¥10.4b
CN¥10.9b
CN¥11.3b
Growth Rate Estimate Source
Analyst x1
Analyst x4
Analyst x1
Analyst x1
Est @ 9.13%
Est @ 7.26%
Est @ 5.95%
Est @ 5.04%
Est @ 4.40%
Est @ 3.95%
Present Value (CN¥, Millions) Discounted @ 12%
-CN¥3.8k
-CN¥563
CN¥5.0k
CN¥5.0k
CN¥4.9k
CN¥4.7k
CN¥4.4k
CN¥4.1k
CN¥3.8k
CN¥3.6k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥31b
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 (2.9%) 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 12%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥124b÷ ( 1 + 12%)10= CN¥39b
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¥70b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CN¥13.7, the company appears quite good value at a 36% 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.
SZSE:002459 Discounted Cash Flow June 14th 2024
Important 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 JA Solar Technology 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 12%, which is based on a levered beta of 1.661. 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 JA Solar Technology
Strength
Debt is not viewed as a risk.
Dividend is in the top 25% of dividend payers in the market.
Dividend information for 002459.
Weakness
Earnings declined over the past year.
Opportunity
Annual earnings are forecast to grow faster than the Chinese market.
Good value based on P/E ratio and estimated fair value.
Threat
Paying a dividend but company has no free cash flows.
Revenue is forecast to grow slower than 20% per year.
See 002459's dividend history.
Looking Ahead:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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. What is the reason for the share price sitting below the intrinsic value? For JA Solar Technology, we've compiled three further aspects you should explore:
Risks: Take risks, for example - JA Solar Technology has 3 warning signs (and 1 which is potentially serious) we think you should know about.
Future Earnings: How does 002459'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 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.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
上述计算非常依赖于两个假设。 第一个是折现率,第二个是现金流。如果您不同意这些结果,请自己计算并尝试利用这些假设。DCF也不考虑行业的可能周期性或公司未来的资本需求,因此它不能完全说明公司的潜在表现。鉴于我们是JA Solar Technology的潜在股东,因此使用股本成本率而不是资本成本(或加权平均成本资本WACC),股本成本率为折现率。在这个计算中,我们使用了12%,这是基于1.661的杠杆beta。Beta是一种股票的波动率测量,相对于整个市场。我们从全球可比公司的行业平均beta中获得我们的beta,其中限制在0.8和2.0之间,这是一个稳定业务的合理范围。应该翻译为:上述计算非常依赖于两个假设。第一个是折现率,第二个是现金流。如果您不同意这些结果,请自行计算并玩弄这些假设。DCF也不考虑行业的可能周期性或公司未来的资本需求,因此它不能完全说明公司的潜在表现。鉴于我们是JA Solar Technology的潜在股东,因此使用股本成本率而不是资本成本(或加权平均成本资本WACC),股本成本率为折现率。在这个计算中,我们使用了12%,这是基于1.661的杠杆beta。Beta是一种股票的波动率测量,相对于整个市场。我们从全球可比公司的行业平均beta中获得我们的beta,其中限制在0.8和2.0之间,这是一个稳定业务的合理范围。