Using the 2 Stage Free Cash Flow to Equity, Western Regions Tourism DevelopmentLtd fair value estimate is CN¥24.99
Western Regions Tourism DevelopmentLtd's CN¥28.42 share price indicates it is trading at similar levels as its fair value estimate
Western Regions Tourism DevelopmentLtd's peers seem to be trading at a higher premium to fair value based onthe industry average of -1,046%
Today we will run through one way of estimating the intrinsic value of Western Regions Tourism Development Co.,Ltd (SZSE:300859) by taking the expected future cash flows and discounting them to their present value. This will be done using 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.
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. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
What's The Estimated Valuation?
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. 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (CN¥, Millions)
CN¥114.2m
CN¥144.1m
CN¥171.7m
CN¥196.2m
CN¥217.5m
CN¥235.9m
CN¥251.9m
CN¥266.0m
CN¥278.6m
CN¥290.3m
Growth Rate Estimate Source
Est @ 36.18%
Est @ 26.18%
Est @ 19.18%
Est @ 14.28%
Est @ 10.85%
Est @ 8.45%
Est @ 6.77%
Est @ 5.59%
Est @ 4.77%
Est @ 4.19%
Present Value (CN¥, Millions) Discounted @ 8.2%
CN¥105
CN¥123
CN¥135
CN¥143
CN¥146
CN¥147
CN¥145
CN¥141
CN¥137
CN¥132
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥1.4b
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¥5.6b÷ ( 1 + 8.2%)10= CN¥2.5b
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¥3.9b. 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¥28.4, 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.
Important Assumptions
Now 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 Western Regions Tourism DevelopmentLtd 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 1.080. 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 Western Regions Tourism DevelopmentLtd
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 300859.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Hospitality market.
Expensive based on P/E ratio and estimated fair value.
What are analysts forecasting for 300859?
Opportunity
Annual earnings are forecast to grow faster than the Chinese market.
Threat
No apparent threats visible for 300859.
Next Steps:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. 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 Western Regions Tourism DevelopmentLtd, we've compiled three pertinent elements you should consider:
Risks: We feel that you should assess the 2 warning signs for Western Regions Tourism DevelopmentLtd we've flagged before making an investment in the company.
Future Earnings: How does 300859'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 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.
現在,貼現現金流的最重要輸入是貼現率,當然還有實際現金流。投資的一部分是自己對公司未來業績的評估,因此請自己嘗試計算並檢查自己的假設。DCF也沒有考慮一個行業可能的週期性,也沒有考慮公司未來的資本需求,因此它沒有全面反映公司的潛在表現。鑑於我們將Western Regions Tourism DevelopmentLtd視爲潛在股東,因此使用權益成本作爲貼現率,而不是構成債務的資本成本(或加權平均資本成本,WACC)。在此計算中,我們使用了8.2%,這是基於1.080的槓桿測試版。Beta是衡量股票與整個市場相比波動性的指標。我們的測試版來自全球可比公司的行業平均貝塔值,設定在0.8到2.0之間,這是一個穩定的業務的合理範圍。