SonoScape Medical's estimated fair value is CN¥31.31 based on 2 Stage Free Cash Flow to Equity
SonoScape Medical's CN¥34.66 share price indicates it is trading at similar levels as its fair value estimate
The CN¥48.80 analyst price target for 300633 is 56% more than our estimate of fair value
How far off is SonoScape Medical Corp. (SZSE:300633) 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 use the Discounted Cash Flow (DCF) model on this occasion. 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 would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Is SonoScape Medical Fairly Valued?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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.
Generally we assume that a dollar today is more valuable than a dollar in the future, 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¥557.7m
CN¥599.2m
CN¥631.9m
CN¥661.5m
CN¥688.9m
CN¥714.7m
CN¥739.6m
CN¥763.9m
CN¥788.0m
CN¥812.2m
Growth Rate Estimate Source
Analyst x2
Analyst x2
Est @ 5.47%
Est @ 4.68%
Est @ 4.13%
Est @ 3.75%
Est @ 3.48%
Est @ 3.29%
Est @ 3.16%
Est @ 3.07%
Present Value (CN¥, Millions) Discounted @ 7.5%
CN¥519
CN¥519
CN¥509
CN¥496
CN¥481
CN¥464
CN¥447
CN¥430
CN¥413
CN¥396
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥4.7b
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 7.5%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥18b÷ ( 1 + 7.5%)10= CN¥8.8b
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¥14b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥34.7, 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
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 SonoScape Medical 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 7.5%, which is based on a levered beta of 0.925. 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 SonoScape Medical
Strength
Debt is not viewed as a risk.
Dividends are covered by earnings and cash flows.
Dividend information for 300633.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Medical Equipment market.
Expensive based on P/E ratio and estimated fair value.
Opportunity
Annual revenue is forecast to grow faster than the Chinese market.
Threat
Annual earnings are forecast to grow slower than the Chinese market.
What else are analysts forecasting for 300633?
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For SonoScape Medical, we've put together three further aspects you should assess:
Risks: Every company has them, and we've spotted 1 warning sign for SonoScape Medical you should know about.
Future Earnings: How does 300633'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
SonoScape Medical Corp. (SZSE:300633)的內在價值有多遠?通過使用最近的財務數據,我們將查看該股票是否定價合理,方法是將公司的未來現金流預測折現至今天的價值。這裏我們將使用折現現金流(DCF)模型。在您認爲自己無法理解之前,請繼續閱讀! 實際上,它比您想象的要簡單得多。
我們應該注意的是,估值的方法有很多種,就像DCF一樣,每種技術在特定的情況下都有其優點和缺點。對於那些熱愛股權分析的學習者來說,這裏的 Simply Wall St 分析模型可能是一些感興趣的內容。