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Are Vanchip (Tianjin) Technology Co., Ltd. (SHSE:688153) Investors Paying Above The Intrinsic Value?

Vanchip(天津)テクノロジー株式会社(SHSE:688153)の投資家は、内在価値を超えて支払っていますか?

Simply Wall St ·  08/04 20:05

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Vanchip (Tianjin) Technology fair value estimate is CN¥27.37
  • Vanchip (Tianjin) Technology's CN¥33.40 share price signals that it might be 22% overvalued
  • The CN¥65.73 analyst price target for 688153 is 140% more than our estimate of fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Vanchip (Tianjin) Technology Co., Ltd. (SHSE:688153) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

The Method

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 begin with, we have to get estimates of 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, 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¥345.0m CN¥486.0m CN¥596.4m CN¥696.4m CN¥784.0m CN¥859.8m CN¥925.4m CN¥982.6m CN¥1.03b CN¥1.08b
Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ 22.72% Est @ 16.76% Est @ 12.59% Est @ 9.67% Est @ 7.62% Est @ 6.19% Est @ 5.19% Est @ 4.49%
Present Value (CN¥, Millions) Discounted @ 9.4% CN¥315 CN¥406 CN¥456 CN¥486 CN¥500 CN¥502 CN¥493 CN¥479 CN¥461 CN¥440

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥4.5b

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 9.4%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥1.1b× (1 + 2.9%) ÷ (9.4%– 2.9%) = CN¥17b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥17b÷ ( 1 + 9.4%)10= CN¥6.9b

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¥11b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CN¥33.4, 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.

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SHSE:688153 Discounted Cash Flow August 5th 2024

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Vanchip (Tianjin) 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 9.4%, which is based on a levered beta of 1.315. 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 Vanchip (Tianjin) Technology

Strength
  • Debt is not viewed as a risk.
  • Balance sheet summary for 688153.
Weakness
  • Dividend is low compared to the top 25% of dividend payers in the Semiconductor market.
  • Expensive based on P/E ratio and estimated fair value.
  • What are analysts forecasting for 688153?
Opportunity
  • Annual earnings are forecast to grow faster than the Chinese market.
Threat
  • No apparent threats visible for 688153.

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. 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. What is the reason for the share price exceeding the intrinsic value? For Vanchip (Tianjin) Technology, we've compiled three further elements you should further examine:

  1. Risks: Take risks, for example - Vanchip (Tianjin) Technology has 2 warning signs we think you should be aware of.
  2. Future Earnings: How does 688153'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.
  3. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

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