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Does This Valuation Of Zhejiang Supor Co., Ltd. (SZSE:002032) Imply Investors Are Overpaying?

Simply Wall St ·  May 21 03:57

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Zhejiang Supor fair value estimate is CN¥42.47
  • Zhejiang Supor is estimated to be 35% overvalued based on current share price of CN¥57.25
  • The CN¥61.58 analyst price target for 2032 is 45% more than our estimate of fair value

In this article we are going to estimate the intrinsic value of Zhejiang Supor Co., Ltd. (SZSE:002032) by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. There's really not all that much to it, even though it might appear quite complex.

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.

Is Zhejiang Supor Fairly Valued?

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, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (CN¥, Millions) CN¥2.17b CN¥2.25b CN¥2.43b CN¥2.52b CN¥2.61b CN¥2.70b CN¥2.78b CN¥2.87b CN¥2.96b CN¥3.05b
Growth Rate Estimate Source Analyst x2 Analyst x2 Analyst x2 Est @ 3.84% Est @ 3.56% Est @ 3.36% Est @ 3.22% Est @ 3.13% Est @ 3.06% Est @ 3.01%
Present Value (CN¥, Millions) Discounted @ 9.8% CN¥2.0k CN¥1.9k CN¥1.8k CN¥1.7k CN¥1.6k CN¥1.5k CN¥1.4k CN¥1.4k CN¥1.3k CN¥1.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥16b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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 9.8%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥3.0b× (1 + 2.9%) ÷ (9.8%– 2.9%) = CN¥46b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥46b÷ ( 1 + 9.8%)10= CN¥18b

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¥34b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥57.3, the company appears reasonably expensive at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
SZSE:002032 Discounted Cash Flow May 21st 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 Zhejiang Supor 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 9.8%, which is based on a levered beta of 1.220. 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 Supor

Strength
  • Earnings growth over the past year exceeded its 5-year average.
  • Currently debt free.
  • Dividend is in the top 25% of dividend payers in the market.
  • Dividend information for 002032.
Weakness
  • Earnings growth over the past year underperformed the Consumer Durables industry.
  • Expensive based on P/E ratio and estimated fair value.
Opportunity
  • Annual earnings are forecast to grow for the next 3 years.
Threat
  • Dividends are not covered by earnings and cashflows.
  • Annual earnings are forecast to grow slower than the Chinese market.
  • See 002032's dividend history.

Looking Ahead:

Whilst important, the DCF calculation 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. 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price exceeding the intrinsic value? For Zhejiang Supor, we've compiled three pertinent aspects you should further examine:

  1. Risks: As an example, we've found 1 warning sign for Zhejiang Supor that you need to consider before investing here.
  2. Future Earnings: How does 002032'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.
  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

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.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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