A look at the intrinsic value of POCO Holding Co., Ltd. (SZSE:300811)

Key findings

• Using the 2-step free cash flow to equity, the estimated fair value of POCO Holding is CN¥42.40.
• With a share price of CN¥41.42, POCO Holding appears to be trading close to its estimated fair value
• The analyst price target of CN¥44.07 for 300811 is 3.9% above our fair value estimate

How far is POCO Holding Co., Ltd. (SZSE:300811) from its intrinsic value? Using the most recent financial data, we will check whether the stock is fairly valued by projecting its future cash flows and then discounting them to today’s value. The Discounted Cash Flow (DCF) model is the tool we will use for this. Models like this may seem incomprehensible to a layperson, but they are relatively easy to follow.

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one of them. For those who enjoy stock analysis, the analysis model presented here by Simply Wall St might be of interest.

Check out our latest analysis for POCO Holding

Processing the numbers

We use a two-stage DCF model which, as the name suggests, considers two stages of growth. The first stage is generally a period of higher growth that stabilizes towards the terminal value, which is captured in the second stage of “steady growth”. The first stage requires us to estimate the company’s cash flows for the next ten years. 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 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.

A DCF is all about the idea that a dollar in the future is worth less than a dollar today. Therefore, we need to discount the sum of these future cash flows to arrive at an estimate of present value:

Estimation of free cash flow (FCF) over 10 years

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 3.6 billion CNY

We now need to calculate the terminal value that takes into account all future cash flows after this ten-year 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 9.0%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥1.2b × (1 + 2.9%) ÷ (9.0% – 2.9%) = CN¥20b

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 20 billion CN¥ ÷ (1 + 9.0%)¹⁰= 8.3 billion CNY

The total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total equity value, which in this case is CNY12 billion. In the final step, we divide the equity value by the number of shares outstanding. Compared to the current share price of CNY41.4, the company seems to be around fair value at a 2.3% discount to the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s better to consider this a rough estimate that isn’t accurate to the last cent.

Important assumptions

The key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and check your own 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 POCO Holding 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 9.0%, which is based on a levered beta of 1.085. 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 POCO Holding

Next Steps:

Although the DCF calculation is important, it should not be the only metric you consider when researching a company. DCF models are not the be-all and end-all of investment valuation. You should preferably apply different cases and assumptions and see how they affect the valuation of the company. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. For POCO Holding, we have compiled three relevant aspects that you should investigate further:

1. Risks: For example, we found 1 warning signal for POCO Holding that you should know before investing here.
2. Future income: How does the growth rate of 300811 compare to its 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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