Calculating the intrinsic value of Renxin New Material Co.,Ltd. (SZSE:301395)

Key findings

• Using the dividend discount model, the fair value of Renxin New Material Ltd. is CN¥11.44.
• Renxin New Material Ltd.’s share price of CN¥ 11.88 suggests that the price is at a similar level to the estimated fair value.
• Renxin New Material Ltd.’s competitors appear to be trading at a higher premium to fair value, based on the industry average of -527%.

Today we’ll run through a valuation method that can be used to estimate the attractiveness of Renxin New Material Co.,Ltd. (SZSE:301395) as an investment opportunity. To do this, we take the expected future cash flows and discount them to today’s value. To do this, we’ll use the Discounted Cash Flow (DCF) model. Before you think you can’t understand it, just keep reading! It’s actually a lot less complex than you think.

We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without its flaws. If you still have some burning questions about this type of valuation, take a look at Simply Wall St’s analysis model.

Check out our latest analysis for Renxin New MaterialLtd

Step by step through the calculation

Because Renxin New Material Ltd. operates in the chemicals sector, we need to calculate intrinsic value a little differently. This approach uses dividends per share (DPS) because free cash flow is difficult to estimate and often goes unreported by analysts. This often underestimates a stock’s value, but it can still be a good comparison to competitors. We use the Gordon Growth Model, which assumes the dividend grows at a sustainable rate over time. The dividend is expected to grow at an annual growth rate equal to the 5-year average 10-year Treasury yield of 2.9%. We then discount that figure to today’s value at a cost of equity of 9.1%. Relative to the current share price of CN¥11.9, the company appears to be about fair value at the time of writing. However, valuations are imprecise tools, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= 0.7 CN¥ / (9.1% – 2.9%)

= 11.4 CN¥

The assumptions

We would like to point out that the key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you disagree with these results, try the calculation yourself and play with the assumptions. DCF also does not take into account the possible 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 consider Renxin New Material Ltd. 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 9.1%, which is based on a leveraged beta of 1.109. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Renxin New MaterialLtd

Looking ahead:

While the DCF calculation is important, it is only one of many factors you need to evaluate a company. 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 Renxin New Material Ltd., there are three other points you should examine:

1. Risks: For example, we found 4 warning signs for Renxin New MaterialLtd that you should know before investing here.
2. Other high-quality alternatives: Like a good all-rounder? Explore our interactive list of high-quality stocks to get a sense of what else you might be missing out on!
3. Other environmentally friendly companies: Are you concerned about the environment and believe that consumers will increasingly buy environmentally friendly products? Browse through our interactive list of companies thinking about a greener future and discover some stocks you may not have thought of yet!

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 based solely on 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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