Using the 2 Stage Free Cash Flow to Equity, Lingyi iTech (Guangdong) fair value estimate is CN¥5.72
Lingyi iTech (Guangdong)'s CN¥7.18 share price signals that it might be 26% overvalued
Analyst price target for 002600 is CN¥7.28, which is 27% above our fair value estimate
Today we will run through one way of estimating the intrinsic value of Lingyi iTech (Guangdong) Company (SZSE:002600) by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
The Model
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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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¥1.30b
CN¥1.82b
CN¥2.53b
CN¥2.62b
CN¥2.70b
CN¥2.78b
CN¥2.86b
CN¥2.95b
CN¥3.03b
CN¥3.12b
Growth Rate Estimate Source
Analyst x1
Analyst x1
Analyst x1
Analyst x1
Est @ 3.08%
Est @ 3.01%
Est @ 2.96%
Est @ 2.93%
Est @ 2.90%
Est @ 2.89%
Present Value (CN¥, Millions) Discounted @ 8.7%
CN¥1.2k
CN¥1.5k
CN¥2.0k
CN¥1.9k
CN¥1.8k
CN¥1.7k
CN¥1.6k
CN¥1.5k
CN¥1.4k
CN¥1.4k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥16b
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 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 8.7%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥55b÷ ( 1 + 8.7%)10= CN¥24b
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¥40b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥7.2, the company appears slightly overvalued at the time of writing. 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.
Important 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 Lingyi iTech (Guangdong) 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 8.7%, which is based on a levered beta of 1.169. 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 Lingyi iTech (Guangdong)
Strength
Debt is not viewed as a risk.
Dividends are covered by earnings and cash flows.
Dividend information for 002600.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Electronic market.
Opportunity
Annual earnings are forecast to grow faster than the Chinese market.
Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat
Revenue is forecast to grow slower than 20% per year.
What else are analysts forecasting for 002600?
Looking Ahead:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a premium to intrinsic value? For Lingyi iTech (Guangdong), we've put together three important items you should explore:
Risks: To that end, you should learn about the 2 warning signs we've spotted with Lingyi iTech (Guangdong) (including 1 which is concerning) .
Future Earnings: How does 002600'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.
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!
人民币3.03十亿
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.
增长率估计来源
分析师x1
分析师x1
分析师x1
分析师x1
预计 @ 3.08%。
债券型@ 3.01%
估计为2.96%
按照2.93%的估算
预计@ 2.90%
预期为2.89%
现值(百万元人民币)以8.7%的折现率折现
人民币1.2千元
人民币1.5千元
人民币2.0k
人民币1.9k
人民币1.8千元
人民币1.7k
CN¥1.6k
人民币1.5千元
CN¥1.4k
CN¥1.4k
("Est" = Simply Wall St 估计的自由现金流增长率) 10年现金流的现值(PVCF)= CN¥16b