Fair value estimate of Jouder Precision Industry (Kunshan) Co., Ltd. (SZSE:300549)

Key findings

• Using the 2-step free cash flow to equity, the fair value of Jouder Precision Industry (Kunshan) is CN¥12.03.
• The current share price of CN¥15.82 suggests that Jouder Precision Industry (Kunshan) may be overvalued by 31%
• The industry average of 301% suggests that Jouder Precision Industry (Kunshan)’s competitors are currently trading at a higher premium to fair value

How far is Jouder Precision Industry (Kunshan) Co., Ltd. (SZSE:300549) from its intrinsic value? Using the most recent financial data, we will check if the stock is fairly valued by estimating the company’s future cash flows and discounting them to their current 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 still have questions about this type of valuation, take a look at Simply Wall St’s analysis model.

Check out our latest analysis for Jouder Precision Industry (Kunshan).

The method

We use the 2-stage growth model, which simply means we consider two stages of company 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 estimate the next ten years’ 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.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today. Therefore, the sum of these future cash flows is discounted to today’s 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) = 634 million CNY

After calculating the present value of future cash flows in the first 10-year period, we need to calculate the terminal value, which takes into account all future cash flows after the first period. For various reasons, a very conservative growth rate is used, which cannot exceed a country’s GDP growth. In this case, we 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 8.6%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥123m × (1 + 2.9%) ÷ (8.6% – 2.9%) = CN¥2.2b

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= CN¥2.2b ÷ ( 1 + 8.6 %)¹⁰= 971 million 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 CNY1.6 billion. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of CNY15.8, the company appears relatively expensive at the time of writing. 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 above calculation relies heavily on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing with it. DCF also doesn’t take into account the possible cyclicality of an industry or a company’s future capital needs and therefore doesn’t provide a complete picture of a company’s potential performance. Since we consider Jouder Precision Industry (Kunshan) 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 8.6% which is based on a leveraged beta of 1.014. 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 Jouder Precision Industry (Kunshan)

Looking ahead:

Although the DCF calculation is important, ideally it should not be the only analysis you examine for a company. It is not possible to get a foolproof valuation using a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. What is the reason for the share price to exceed the intrinsic value? For Jouder Precision Industry (Kunshan), there are three other points you should examine:

1. Risks: Take risks, for example – Jouder Precision Industry (Kunshan) has 5 warning signs (and 1 that is causing a little concern) that we think you should know about.
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. More top analyst tips: Want to know what the analysts think? Take a look at our interactive list of analyst recommended stocks and find out which stocks they think could have attractive future prospects!

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 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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