The projected fair value for Willfar Information Technology is CN¥32.95 based on 2 Stage Free Cash Flow to Equity
Willfar Information Technology's CN¥34.56 share price indicates it is trading at similar levels as its fair value estimate
The CN¥42.97 analyst price target for 688100 is 30% more than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of Willfar Information Technology Co., Ltd. (SHSE:688100) by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
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.
Is Willfar Information Technology 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. 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
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (CN¥, Millions)
CN¥524.0m
CN¥715.0m
CN¥799.8m
CN¥873.0m
CN¥936.4m
CN¥992.0m
CN¥1.04b
CN¥1.09b
CN¥1.13b
CN¥1.17b
Growth Rate Estimate Source
Analyst x1
Analyst x1
Est @ 11.86%
Est @ 9.16%
Est @ 7.26%
Est @ 5.94%
Est @ 5.01%
Est @ 4.36%
Est @ 3.91%
Est @ 3.59%
Present Value (CN¥, Millions) Discounted @ 8.2%
CN¥484
CN¥611
CN¥632
CN¥638
CN¥632
CN¥619
CN¥601
CN¥580
CN¥557
CN¥534
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥5.9b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 8.2%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥23b÷ ( 1 + 8.2%)10= CN¥10b
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¥16b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥34.6, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Willfar Information 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 8.2%, 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 Willfar Information Technology
Strength
Earnings growth over the past year exceeded the industry.
Debt is not viewed as a risk.
Dividends are covered by earnings and cash flows.
Dividend information for 688100.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Electronic market.
Expensive based on P/E ratio and estimated fair value.
What are analysts forecasting for 688100?
Opportunity
Annual earnings are forecast to grow faster than the Chinese market.
Threat
No apparent threats visible for 688100.
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. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Willfar Information Technology, we've put together three important elements you should explore:
Risks: You should be aware of the 1 warning sign for Willfar Information Technology we've uncovered before considering an investment in the company.
Future Earnings: How does 688100'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SHSE 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.
主要见解
Willfar Information Technology的预期公平价值为32.95元人民币,基于2阶段自由现金流对股权的估值
Willfar Information Technology的34.56元人民币的股价表明它与公平价值估计相似的水平交易
688100的42.97元人民币的分析师目标价比我们对公平价值的估计高30%
今天我们将通过一种估算Willfar Information Technology Co., Ltd. (SHSE: 688100)内在价值的方法,即将预期未来现金流折现到今天的价值。使用折现现金流(DCF)模型可以实现这一目标。不管你信不信,从我们的例子中可以看出,这并不太难理解!
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!
人民币632元
638人民币元
人民币632元
619元人民币
601元人民币
580元人民币
("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¥5.9b