Rainbow Digital Commercial's estimated fair value is CN¥4.34 based on 2 Stage Free Cash Flow to Equity
Rainbow Digital Commercial is estimated to be 21% overvalued based on current share price of CN¥5.25
Our fair value estimate is 39% lower than Rainbow Digital Commercial's analyst price target of CN¥7.13
How far off is Rainbow Digital Commercial Co., Ltd. (SZSE:002419) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ 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.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
View our latest analysis for Rainbow Digital Commercial
Step By Step Through The Calculation
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.
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) estimate
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF (CN¥, Millions)
CN¥824.0m
CN¥743.0m
CN¥700.1m
CN¥678.1m
CN¥669.3m
CN¥669.1m
CN¥675.0m
CN¥685.2m
CN¥698.6m
CN¥714.4m
Growth Rate Estimate Source
Analyst x2
Analyst x2
Est @ -5.77%
Est @ -3.14%
Est @ -1.31%
Est @ -0.02%
Est @ 0.88%
Est @ 1.51%
Est @ 1.95%
Est @ 2.26%
Present Value (CN¥, Millions) Discounted @ 15%
CN¥716
CN¥561
CN¥459
CN¥386
CN¥331
CN¥287
CN¥252
CN¥222
CN¥197
CN¥175
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = CN¥3.6b
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 (3.0%) 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 15%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥6.1b÷ ( 1 + 15%)10= CN¥1.5b
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¥5.1b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥5.3, 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.
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Rainbow Digital Commercial 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 15%, which is based on a levered beta of 2.000. 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 Rainbow Digital Commercial
Strength
Earnings growth over the past year exceeded the industry.
Currently debt free.
Dividends are covered by earnings and cash flows.
Dividend information for 002419.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Multiline Retail market.
Expensive based on P/E ratio and estimated fair value.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Threat
Annual earnings are forecast to grow slower than the Chinese market.
What else are analysts forecasting for 002419?
Moving On:
Valuation is only one side of the coin in terms of building your investment thesis, and 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. Why is the intrinsic value lower than the current share price? For Rainbow Digital Commercial, we've compiled three pertinent factors you should further research:
Risks: You should be aware of the 2 warning signs for Rainbow Digital Commercial we've uncovered before considering an investment in the company.
Future Earnings: How does 002419'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.
关键见解
根据两阶段股权自由现金流计算,Rainbow Digital Commercial的公允价值估计为4.34元人民币
根据目前5.25元人民币的股价,Rainbow Digital Commercial的估值估计被高估了21%
我们的公允价值估计比Rainbow Digital Commercial的分析师目标股价7.13元低39%
上面的计算在很大程度上取决于两个假设。第一个是贴现率,另一个是现金流。你不必同意这些输入,我建议你自己重做计算然后试一试。DCF也没有考虑一个行业可能的周期性,也没有考虑公司未来的资本需求,因此它没有全面反映公司的潜在表现。鉴于我们将Rainbow Digital Commercial视为潜在股东,因此使用权益成本作为贴现率,而不是构成债务的资本成本(或加权平均资本成本,WACC)。在此计算中,我们使用了15%,这是基于2.000的杠杆测试版。Beta是衡量股票与整个市场相比波动性的指标。我们的测试版来自全球可比公司的行业平均贝塔值,设定在0.8到2.0之间,这是一个稳定的业务的合理范围。