Estimation of the intrinsic value of Anhui Golden Seed Winery Co., Ltd. (SHSE:600199)

Key findings

• Using the 2-step free cash flow to return on equity, the estimated fair value of Anhui Golden Seed Winery is CN¥13.82
• The current share price of CN¥12.24 suggests that Anhui Golden Seed Winery may be trading close to its fair value
• Our fair value estimate is 22% below Anhui Golden Seed Winery’s analyst price target of CN¥17.77.

How far is Anhui Golden Seed Winery Co., Ltd. (SHSE:600199) from its intrinsic value? Using the most recent financial data, we will check if the stock is fairly valued 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 is actually not too much involved in it, even though it may seem quite complex.

Companies can be valued in many ways, so we would like to point out that a DCF is not perfect for every situation. For those who enjoy stock analysis, the analysis model from Simply Wall St listed here might be of interest.

Check out our latest analysis for Anhui Golden Seed Winery

Step by step through the calculation

We use the two-stage growth model, which simply means that we consider two stages of the company’s growth. In the early stage, the company might have a higher growth rate, and in the second stage, a stable growth rate is usually assumed. First, we need to estimate the next ten years’ cash flows. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate, over this period. We do this to take into account that growth tends to slow more in the early years than in later years.

In general, we assume that a dollar today is worth more than a dollar in the future. Therefore, we discount the value of these future cash flows to their estimated value in today’s dollars:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 3.1 billion CN¥

After calculating the present value of future cash flows in the first 10-year period, we need to calculate the terminal value that takes into account all future cash flows after the first period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 2.9%. We discount the terminal cash flows to today’s value at a cost of equity of 7.4%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥534m × (1 + 2.9%) ÷ (7.4% – 2.9%) = CN¥12b

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= CN¥12b÷ ( 1 + 7.4 %)¹⁰= 6.0 billion CNY

Total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total value of equity, which in this case is CNY9.1 billion. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CNY12.2, the company seems to be about fair value at an 11% discount to the current share price. However, keep in mind that this is only an approximate valuation and as with any complex formula, where there’s garbage in, there’s garbage out.

The assumptions

The key inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. Part of investing is forming your own view of a company’s future performance, so try the calculation yourself and check your own assumptions. DCF also does not take into account the potential cyclicality of an industry or a company’s future capital needs, and therefore does not provide a complete picture of a company’s potential performance. Since we are viewing Anhui Golden Seed Winery 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 takes debt into account. In this calculation, we used 7.4%, which is based on a leveraged beta of 0.800. Beta is a measure of a stock’s volatility relative to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Anhui Golden Seed Winery

Go on:

While a company’s valuation is important, it is only one of many factors you need to evaluate a business. DCF models are not the be-all and end-all of investment valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would result in the company being undervalued or overvalued. For example, making a small adjustment to the terminal value growth rate can dramatically change the overall result. For Anhui Golden Seed Winery, there are three key points you should investigate further:

1. Risks: For this purpose, you should consult the 1 warning sign we discovered it at Anhui Golden Seed Winery.
2. Future income: How does 600199’s growth rate compare to competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
3. 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 you might be missing out on!

PS. Simply Wall St updates its DCF calculation for each Chinese stock daily, so if you want to find out the intrinsic value of another stock, just search here.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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