Gongniu GroupLtd's estimated fair value is CN¥87.88 based on 2 Stage Free Cash Flow to Equity
Current share price of CN¥103 suggests Gongniu GroupLtd is potentially trading close to its fair value
The CN¥124 analyst price target for 603195 is 41% more than our estimate of fair value
How far off is Gongniu Group Co.,Ltd. (SHSE:603195) 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 forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Step By Step Through The Calculation
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate 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, 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
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF (CN¥, Millions)
CN¥3.80b
CN¥4.90b
CN¥5.13b
CN¥5.34b
CN¥5.54b
CN¥5.74b
CN¥5.93b
CN¥6.12b
CN¥6.32b
CN¥6.51b
Growth Rate Estimate Source
Analyst x1
Analyst x1
Est @ 4.65%
Est @ 4.14%
Est @ 3.78%
Est @ 3.53%
Est @ 3.35%
Est @ 3.23%
Est @ 3.14%
Est @ 3.08%
Present Value (CN¥, Millions) Discounted @ 9.2%
CN¥3.5k
CN¥4.1k
CN¥3.9k
CN¥3.8k
CN¥3.6k
CN¥3.4k
CN¥3.2k
CN¥3.0k
CN¥2.9k
CN¥2.7k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥34b
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 9.2%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥107b÷ ( 1 + 9.2%)10= CN¥44b
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¥78b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥103, 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.
SHSE:603195 Discounted Cash Flow March 27th 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 Gongniu GroupLtd 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 9.2%, which is based on a levered beta of 1.113. 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 Gongniu GroupLtd
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 603195.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Electrical market.
Expensive based on P/E ratio and estimated fair value.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Threat
Annual earnings are forecast to grow slower than the Chinese market.
What else are analysts forecasting for 603195?
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. 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 Gongniu GroupLtd, there are three relevant items you should consider:
Risks: Case in point, we've spotted 1 warning sign for Gongniu GroupLtd you should be aware of.
Future Earnings: How does 603195'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.
關鍵見解
根據兩階段股權自由現金流計算,Gongniu GroupLtd的估計公允價值爲87.88元人民幣
目前103元人民幣的股價表明工牛集團有限公司的交易價格可能接近其公允價值
分析師對603195元人民幣的目標股價比我們對公允價值的估計高出41%
Gongniu Group Co. 還有多遠, Ltd.(上海證券交易所代碼:603195)從其內在價值來看?使用最新的財務數據,我們將通過預測的公司未來現金流並將其折扣回今天的價值,來研究股票的定價是否合理。爲此,我們將利用折扣現金流 (DCF) 模型。儘管它可能看起來很複雜,但實際上並沒有那麼多。