A look at the intrinsic value of Jingjin Equipment Inc. (SHSE:603279)

Key findings

• The estimated fair value of Jingjin Equipment is CN¥20.05 based on the dividend discount model.
• The current share price of CN¥19.70 suggests that Jingjin Equipment may be trading close to its fair value.
• The analyst price target for 603279 is CN¥30.00, which is 50% above our fair value estimate.

In this article, we will estimate the intrinsic value of Jingjin Equipment Inc. (SHSE:603279) by estimating the company’s future cash flows and discounting them to their present value using the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too difficult to follow, as you’ll see from our example!

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 Jingjin Equipment

Step by step through the calculation

We need to calculate the value of Jingjin Equipment a little differently than other stocks because it’s an engineering company. Rather than using free cash flows, which are difficult to estimate and often unreported by analysts in this industry, we use dividend payments per share (DPS). Unless a company pays out the majority of its free cash flow as dividends, this method will typically underestimate the value of the stock. It uses the “Gordon Growth Model,” which simply assumes that dividend payments will continue to grow at a sustainable growth rate forever. 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 number to today’s value at a cost of equity of 9.5%. Compared to the current share price of CN¥19.7, the company appears to be about fairly valued at a 1.7% discount to the current share price. Since the assumptions in any calculation have a major impact on the valuation, it is better to consider this as a rough estimate that is not accurate to the last cent.

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

= 1.3 CN¥ / (9.5% – 2.9%)

= 20.0 CN¥

Important 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 them. 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 Jingjin Equipment 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 9.5% which is based on a leveraged beta of 1.169. 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 Jingjin Equipment

Next Steps:

Although the DCF calculation is important, ideally it should not be the only analysis you look at for a company. It is not possible to get a foolproof valuation using a DCF model. Rather, you should apply different cases and assumptions and see how they affect the valuation of the company. For example, if the growth rate of the terminal value is adjusted slightly, it can change the overall result dramatically. For Jingjin Equipment, we have compiled three important factors for you to consider:

1. Risks: A typical example: We discovered 2 warning signs for Jingjin Equipment You should be aware of these, and one of them may be serious.
2. Future income: How does the growth rate of 603279 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.

Do you have feedback on this article? Are you concerned about the content? Get in touch directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.

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.

Do you have feedback on this article? Are you interested in the content? Contact us directly. Alternatively, send an email to [email protected]