# Estimating The Fair Value Of Zhejiang Hailide New Material Co.,Ltd (SZSE:002206)

Simply Wall St ·  Apr 3 20:47

### Key Insights

• Zhejiang Hailide New MaterialLtd's estimated fair value is CN¥4.48 based on Dividend Discount Model
• With CN¥4.58 share price, Zhejiang Hailide New MaterialLtd appears to be trading close to its estimated fair value
• When compared to theindustry average discount of -359%, Zhejiang Hailide New MaterialLtd's competitors seem to be trading at a greater premium to fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Zhejiang Hailide New Material Co.,Ltd (SZSE:002206) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

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.

## Step By Step Through The Calculation

We have to calculate the value of Zhejiang Hailide New MaterialLtd slightly differently to other stocks because it is a chemicals company. Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used. Unless a company pays out the majority of its FCF as a dividend, this method will typically underestimate the value of the stock. The 'Gordon Growth Model' is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.9%. We then discount this figure to today's value at a cost of equity of 9.2%. Compared to the current share price of CN¥4.6, the company appears around fair value at the time of writing. 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.

Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)

= CN¥0.3 / (9.2% – 2.9%)

= CN¥4.5

## The 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 Zhejiang Hailide New MaterialLtd 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 9.2%, which is based on a levered beta of 1.110. 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 Zhejiang Hailide New MaterialLtd

Strength
• Debt is not viewed as a risk.
• Dividends are covered by earnings and cash flows.
• Dividend is in the top 25% of dividend payers in the market.
• Dividend information for 002206.
Weakness
• Earnings declined over the past year.
• What are analysts forecasting for 002206?
Opportunity
• Annual earnings are forecast to grow for the next 3 years.
• Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat
• No apparent threats visible for 002206.