Calculating The Intrinsic Value Of Joyoung Co.,Ltd (SZSE:002242)

Simply Wall St · 10/15 23:01

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, JoyoungLtd fair value estimate is CN¥9.04
  • Current share price of CN¥10.48 suggests JoyoungLtd is potentially trading close to its fair value
  • Analyst price target for 002242 is CN¥9.91, which is 9.7% above our fair value estimate

Does the October share price for Joyoung Co.,Ltd (SZSE:002242) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for JoyoungLtd

Step By Step Through The Calculation

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over 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 companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Levered FCF (CN¥, Millions) CN¥544.5m CN¥513.5m CN¥498.5m CN¥492.6m CN¥492.7m CN¥497.0m CN¥504.2m CN¥513.7m CN¥524.9m CN¥537.3m
Growth Rate Estimate Source Analyst x2 Analyst x2 Est @ -2.92% Est @ -1.19% Est @ 0.02% Est @ 0.87% Est @ 1.46% Est @ 1.88% Est @ 2.17% Est @ 2.37%
Present Value (CN¥, Millions) Discounted @ 9.2% CN¥499 CN¥431 CN¥383 CN¥347 CN¥318 CN¥294 CN¥273 CN¥255 CN¥238 CN¥223

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥3.3b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have 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 9.2%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥537m× (1 + 2.9%) ÷ (9.2%– 2.9%) = CN¥8.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥8.7b÷ ( 1 + 9.2%)10= CN¥3.6b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥6.9b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CN¥10.5, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
SZSE:002242 Discounted Cash Flow October 15th 2024

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at JoyoungLtd 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 accounts for debt. In this calculation we've used 9.2%, which is based on a levered beta of 1.269. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for JoyoungLtd

Strength
  • Currently debt free.
  • Dividends are covered by earnings and cash flows.
Weakness
  • Earnings declined over the past year.
  • Dividend is low compared to the top 25% of dividend payers in the Consumer Durables market.
  • Expensive based on P/E ratio and estimated fair value.
Opportunity
  • Annual earnings are forecast to grow for the next 3 years.
Threat
  • Annual earnings are forecast to grow slower than the Chinese market.

Moving On:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For JoyoungLtd, we've compiled three further aspects you should explore:

  1. Risks: Every company has them, and we've spotted 1 warning sign for JoyoungLtd you should know about.
  2. Future Earnings: How does 002242's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every Chinese stock every day, so if you want to find the intrinsic value of any other stock just search here.