A Look At The Intrinsic Value Of Newcapec Electronics Co., Ltd. (SZSE:300248)

Key Insights

• Newcapec Electronics' estimated fair value is CN¥7.91 based on 2 Stage Free Cash Flow to Equity
• Current share price of CN¥8.98 suggests Newcapec Electronics is potentially trading close to its fair value
• Newcapec Electronics' peers seem to be trading at a higher premium to fair value based onthe industry average of -741%

In this article we are going to estimate the intrinsic value of Newcapec Electronics Co., Ltd. (SZSE:300248) by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. There's really not all that much to it, even though it might appear quite complex.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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 Newcapec Electronics

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. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥54.0m	CN¥85.0m	CN¥120.0m	CN¥155.5m	CN¥189.1m	CN¥219.3m	CN¥245.7m	CN¥268.6m	CN¥288.3m	CN¥305.6m
Growth Rate Estimate Source	Est @ 80.96%	Est @ 57.53%	Est @ 41.12%	Est @ 29.64%	Est @ 21.60%	Est @ 15.98%	Est @ 12.04%	Est @ 9.28%	Est @ 7.35%	Est @ 6.00%
Present Value (CN¥, Millions) Discounted @ 8.3%	CN¥49.8	CN¥72.5	CN¥94.5	CN¥113	CN¥127	CN¥136	CN¥141	CN¥142	CN¥141	CN¥138

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.2b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 8.3%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥306m× (1 + 2.9%) ÷ (8.3%– 2.9%) = CN¥5.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥5.8b÷ ( 1 + 8.3%)¹⁰= CN¥2.6b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CN¥3.8b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CN¥9.0, the company appears around fair value at the time of writing. 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.

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Newcapec Electronics 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 8.3%, which is based on a levered beta of 1.090. 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 Newcapec Electronics

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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Newcapec Electronics, there are three pertinent items you should explore:

1. Risks: Take risks, for example - Newcapec Electronics has 4 warning signs (and 1 which is a bit concerning) we think you should know about.
2. 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 is out there you may be missing!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

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.

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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.