Estimating The Intrinsic Value Of Asymchem Laboratories (Tianjin) Co., Ltd. (SZSE:002821)

Key Insights

• The projected fair value for Asymchem Laboratories (Tianjin) is CN¥83.99 based on 2 Stage Free Cash Flow to Equity
• Asymchem Laboratories (Tianjin)'s CN¥74.42 share price indicates it is trading at similar levels as its fair value estimate
• Our fair value estimate is 4.8% lower than Asymchem Laboratories (Tianjin)'s analyst price target of CN¥88.26

Does the October share price for Asymchem Laboratories (Tianjin) Co., Ltd. (SZSE:002821) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present 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 would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Asymchem Laboratories (Tianjin)

The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥841.9m	CN¥1.04b	CN¥1.33b	CN¥1.35b	CN¥1.37b	CN¥1.40b	CN¥1.43b	CN¥1.47b	CN¥1.51b	CN¥1.55b
Growth Rate Estimate Source	Analyst x2	Analyst x2	Analyst x1	Est @ 1.34%	Est @ 1.79%	Est @ 2.11%	Est @ 2.33%	Est @ 2.49%	Est @ 2.60%	Est @ 2.67%
Present Value (CN¥, Millions) Discounted @ 6.8%	CN¥788	CN¥910	CN¥1.1k	CN¥1.0k	CN¥987	CN¥943	CN¥903	CN¥867	CN¥832	CN¥800

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥9.2b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 6.8%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥1.5b× (1 + 2.9%) ÷ (6.8%– 2.9%) = CN¥40b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥40b÷ ( 1 + 6.8%)¹⁰= CN¥21b

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¥30b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥74.4, the company appears about fair value at a 11% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

Important 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 Asymchem Laboratories (Tianjin) 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 6.8%, which is based on a levered beta of 0.800. 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 Asymchem Laboratories (Tianjin)

Looking Ahead:

Although the valuation of a company is important, it 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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Asymchem Laboratories (Tianjin), we've put together three important items you should explore:

1. Risks: Case in point, we've spotted 2 warning signs for Asymchem Laboratories (Tianjin) you should be aware of.
2. Future Earnings: How does 002821'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SZSE every day. If you want to find the calculation for other stocks just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.