Songcheng Performance DevelopmentLtd's estimated fair value is CN¥13.65 based on 2 Stage Free Cash Flow to Equity
Songcheng Performance DevelopmentLtd is estimated to be 41% undervalued based on current share price of CN¥8.09
The CN¥13.10 analyst price target for 300144 is 4.1% less than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of Songcheng Performance Development Co.,Ltd (SZSE:300144) by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Crunching The Numbers
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, 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¥1.39b
CN¥1.76b
CN¥2.00b
CN¥2.20b
CN¥2.38b
CN¥2.54b
CN¥2.68b
CN¥2.81b
CN¥2.92b
CN¥3.03b
Growth Rate Estimate Source
Analyst x2
Analyst x2
Est @ 13.65%
Est @ 10.42%
Est @ 8.17%
Est @ 6.59%
Est @ 5.48%
Est @ 4.71%
Est @ 4.16%
Est @ 3.79%
Present Value (CN¥, Millions) Discounted @ 9.0%
CN¥1.3k
CN¥1.5k
CN¥1.5k
CN¥1.6k
CN¥1.5k
CN¥1.5k
CN¥1.5k
CN¥1.4k
CN¥1.3k
CN¥1.3k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥14b
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 9.0%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥51b÷ ( 1 + 9.0%)10= CN¥21b
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¥36b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥8.1, the company appears quite undervalued at a 41% discount to where the stock price trades currently. 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.
SZSE:300144 Discounted Cash Flow July 12th 2024
The 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. 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 Songcheng Performance 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 9.0%, which is based on a levered beta of 1.091. 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 Songcheng Performance DevelopmentLtd
Strength
Earnings growth over the past year exceeded its 5-year average.
Debt is not viewed as a risk.
Balance sheet summary for 300144.
Weakness
Earnings growth over the past year underperformed the Hospitality industry.
Dividend is low compared to the top 25% of dividend payers in the Hospitality market.
Opportunity
Annual earnings are forecast to grow faster than the Chinese market.
Trading below our estimate of fair value by more than 20%.
Threat
Dividends are not covered by earnings.
Revenue is forecast to grow slower than 20% per year.
See 300144's dividend history.
Next Steps:
Whilst important, the DCF calculation 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. 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value higher than the current share price? For Songcheng Performance DevelopmentLtd, we've put together three fundamental factors you should assess:
Risks: Take risks, for example - Songcheng Performance DevelopmentLtd has 3 warning signs we think you should be aware of.
Future Earnings: How does 300144'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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
