Shannon Semiconductor TechnologyLtd's estimated fair value is CN¥29.35 based on 2 Stage Free Cash Flow to Equity
Shannon Semiconductor TechnologyLtd's CN¥29.92 share price indicates it is trading at similar levels as its fair value estimate
When compared to theindustry average discount of -290%, Shannon Semiconductor TechnologyLtd's competitors seem to be trading at a greater premium to fair value
In this article we are going to estimate the intrinsic value of Shannon Semiconductor Technology Co.,Ltd. (SZSE:300475) by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. 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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
The Method
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 start off with, we need to estimate 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) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (CN¥, Millions)
CN¥418.5m
CN¥539.6m
CN¥653.6m
CN¥755.9m
CN¥845.3m
CN¥922.6m
CN¥989.7m
CN¥1.05b
CN¥1.10b
CN¥1.15b
Growth Rate Estimate Source
Est @ 40.08%
Est @ 28.93%
Est @ 21.12%
Est @ 15.65%
Est @ 11.83%
Est @ 9.15%
Est @ 7.27%
Est @ 5.96%
Est @ 5.04%
Est @ 4.40%
Present Value (CN¥, Millions) Discounted @ 8.9%
CN¥384
CN¥455
CN¥506
CN¥537
CN¥551
CN¥553
CN¥544
CN¥530
CN¥511
CN¥490
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥5.1b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 8.9%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥20b÷ ( 1 + 8.9%)10= CN¥8.4b
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¥13b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥29.9, 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.
SZSE:300475 Discounted Cash Flow July 23rd 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 Shannon Semiconductor TechnologyLtd 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 8.9%, which is based on a levered beta of 1.069. 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 Shannon Semiconductor TechnologyLtd
Strength
Debt is well covered by earnings.
Dividends are covered by earnings and cash flows.
Dividend information for 300475.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Machinery market.
Expensive based on P/E ratio and estimated fair value.
Opportunity
Annual revenue is forecast to grow faster than the Chinese market.
Threat
Debt is not well covered by operating cash flow.
Is 300475 well equipped to handle threats?
Looking Ahead:
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. 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. For Shannon Semiconductor TechnologyLtd, we've put together three pertinent items you should further research:
Risks: As an example, we've found 1 warning sign for Shannon Semiconductor TechnologyLtd that you need to consider before investing here.
Future Earnings: How does 300475'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SZSE 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
