Fair value estimate of Changjiang Publishing & Media Co., Ltd (SHSE:600757)

Key findings

• The estimated fair value of Changjiang Publishing & MediaLtd is CN¥8.99 based on the 2-step Free Cash Flow to Equity
• With a share price of CN¥7.82, Changjiang Publishing & Media Ltd. appears to be trading close to its estimated fair value
• Competitors of Changjiang Publishing & MediaLtd are currently trading at an average premium of 727%.

Does Changjiang Publishing & Media Co.,Ltd (SHSE:600757)’s share price in July reflect its actual value? Today we will estimate the stock’s intrinsic value by taking the expected future cash flows and discounting them to today’s value. To do this, we will use the Discounted Cash Flow (DCF) model. This may sound complicated, but it’s actually quite simple!

Companies can be valued in many ways, so we would like to point out that a DCF is not perfect for every situation. If you want to learn more about intrinsic value, you should take a look at Simply Wall St’s analysis model.

Check out our latest analysis for Changjiang Publishing & MediaLtd

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 may have a higher growth rate, and in the second stage, a stable growth rate is usually assumed. First, we need to get estimates of the next ten years of cash flows. Since we don’t have analyst estimates of free cash flow available, we extrapolated the previous free cash flow (FCF) from the company’s last 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 down 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, the sum of these future cash flows is discounted to today’s value:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 4.2 billion CNY

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 7.7%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥665m × (1 + 2.9%) ÷ (7.7% – 2.9%) = CN¥14b

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= CN¥14b÷ ( 1 + 7.7 %)¹⁰= 6.7 billion CNY

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 CNY11 billion. In the final step, we divide the equity value by the number of shares outstanding. Relative to the current share price of CNY7.8, the company appears to be roughly fairly valued at a 13% discount to the current share price. However, valuations are imprecise instruments, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.

Important assumptions

We should point out that 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 Changjiang Publishing & Media Ltd. as prospective 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 7.7%, which is based on a levered beta of 0.861. 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 a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Go on:

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. The best thing to do is to apply different cases and assumptions and see how they affect the company’s valuation. If a company grows differently, or its cost of equity or risk-free rate changes significantly, the outcome may look very different. For Changjiang Publishing & MediaLtd, we have compiled three other elements for you to consider:

1. Risks: For example, we found 1 warning signal for Changjiang Publishing & MediaLtd that you should know before investing here.
2. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!
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. The Simply Wall St app runs a discounted cash flow valuation for every stock on the SHSE every day. If you want to find the calculation for other stocks, 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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