Is Yunnan Botanee Bio-Technology Group Co.LTD (SZSE:300957) Trading At A 39% Discount?

Key Insights

• The projected fair value for Yunnan Botanee Bio-Technology GroupLTD is CN¥86.76 based on 2 Stage Free Cash Flow to Equity
• Yunnan Botanee Bio-Technology GroupLTD's CN¥52.72 share price signals that it might be 39% undervalued
• The CN¥63.96 analyst price target for 300957 is 26% less than our estimate of fair value

How far off is Yunnan Botanee Bio-Technology Group Co.LTD (SZSE:300957) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Yunnan Botanee Bio-Technology GroupLTD

Crunching The Numbers

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 start off with, we need to estimate the next ten years of cash flows. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, 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¥1.24b	CN¥1.47b	CN¥1.65b	CN¥1.80b	CN¥1.93b	CN¥2.05b	CN¥2.15b	CN¥2.24b	CN¥2.33b	CN¥2.41b
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ 11.89%	Est @ 9.18%	Est @ 7.28%	Est @ 5.95%	Est @ 5.02%	Est @ 4.37%	Est @ 3.91%	Est @ 3.59%
Present Value (CN¥, Millions) Discounted @ 7.8%	CN¥1.2k	CN¥1.3k	CN¥1.3k	CN¥1.3k	CN¥1.3k	CN¥1.3k	CN¥1.3k	CN¥1.2k	CN¥1.2k	CN¥1.1k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥13b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 7.8%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥2.4b× (1 + 2.9%) ÷ (7.8%– 2.9%) = CN¥50b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥50b÷ ( 1 + 7.8%)¹⁰= CN¥24b

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¥36b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CN¥52.7, the company appears quite undervalued at a 39% 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

The calculation above is very dependent 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 redoing the calculations yourself and playing with them. 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 Yunnan Botanee Bio-Technology GroupLTD 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 7.8%, which is based on a levered beta of 0.987. 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 Yunnan Botanee Bio-Technology GroupLTD

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For Yunnan Botanee Bio-Technology GroupLTD, we've compiled three essential items you should assess:

1. Risks: We feel that you should assess the 4 warning signs for Yunnan Botanee Bio-Technology GroupLTD (1 makes us a bit uncomfortable!) we've flagged before making an investment in the company.
2. Future Earnings: How does 300957'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.