The projected fair value for Aier Eye Hospital Group is CN¥16.64 based on 2 Stage Free Cash Flow to Equity
Aier Eye Hospital Group is estimated to be 44% undervalued based on current share price of CN¥9.36
Our fair value estimate is 14% higher than Aier Eye Hospital Group's analyst price target of CN¥14.63
In this article we are going to estimate the intrinsic value of Aier Eye Hospital Group Co., Ltd. (SZSE:300015) by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.
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.
The Method
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. 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
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (CN¥, Millions)
CN¥4.70b
CN¥5.59b
CN¥6.03b
CN¥6.41b
CN¥6.75b
CN¥7.05b
CN¥7.34b
CN¥7.61b
CN¥7.87b
CN¥8.13b
Growth Rate Estimate Source
Analyst x3
Analyst x3
Est @ 7.84%
Est @ 6.34%
Est @ 5.29%
Est @ 4.56%
Est @ 4.05%
Est @ 3.69%
Est @ 3.44%
Est @ 3.26%
Present Value (CN¥, Millions) Discounted @ 6.8%
CN¥4.4k
CN¥4.9k
CN¥4.9k
CN¥4.9k
CN¥4.8k
CN¥4.7k
CN¥4.6k
CN¥4.5k
CN¥4.3k
CN¥4.2k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥46b
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 6.8%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥210b÷ ( 1 + 6.8%)10= CN¥108b
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¥155b. 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¥9.4, the company appears quite good value at a 44% discount to where the stock price trades currently. 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.
SZSE:300015 Discounted Cash Flow August 27th 2024
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Aier Eye Hospital Group 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 6.8%, which is based on a levered beta of 0.800. 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 Aier Eye Hospital Group
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 300015.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Healthcare market.
Opportunity
Annual revenue is forecast to grow faster than the Chinese market.
Good value based on P/E ratio and estimated fair value.
Threat
Annual earnings are forecast to grow slower than the Chinese market.
What else are analysts forecasting for 300015?
Moving On:
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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For Aier Eye Hospital Group, we've put together three relevant elements you should explore:
Risks: For example, we've discovered 1 warning sign for Aier Eye Hospital Group that you should be aware of before investing here.
Future Earnings: How does 300015'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. Simply Wall St updates its DCF calculation for every Chinese stock every day, so if you want to find the intrinsic value of any other stock 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.
PS. Simply Wall St updates its DCF calculation for every Chinese stock every day, so if you want to find the intrinsic value of any other stock just search here.
7.05亿人民币
人民币7.34亿
增长率估计来源
分析师x3
分析师x3
估值为6.20%
预计增长率为6.34%时
以5.29%的速度计算
以4.56%计,
预计@4.05%
以3.69%估算
预期增长率3.44%
估计 @3.26%
现值(CN¥万)6.8%贴现
人民币4.4k
人民币4.9千元
人民币4.9千元
人民币4.9千元
人民币4.8千元
人民币4.7千元
人民币4.6千元
CN¥4.5k
4.3k元人民币
人民币4.2千元
("Est" = Simply Wall St 估计的自由现金流增长率) 未来10年现金流的现值(PVCF)= CN¥46亿