The shares of Jinke Smart Services Group Co., Ltd. (HKG: 9666) could be 43% lower than their intrinsic value estimate
In this article, we will estimate the intrinsic value of Jinke Smart Services Group Co., Ltd. (HKG: 9666) by taking the company’s future cash flow forecast and discounting it to today’s value. One way to do this is to use the Discounted Cash Flow (DCF) model. Patterns like these may seem beyond a layman’s comprehension, but they are fairly easy to follow.
Remember, however, that there are many ways to estimate the value of a business, and a DCF is just one method. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be of interest to you.
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Is Jinke Smart Services Group valued enough?
We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth and the second stage is lower growth stage. To begin with, we need to get cash flow estimates for the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
Generally, we assume that a dollar today is worth more 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
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF (CN ¥, Million) | CN ¥ 996.6m | CN ¥ 1.52b | CN ¥ 1.85b | CN ¥ 2.51b | CN ¥ 3.02b | CN ¥ 3.45b | CN ¥ 3.82b | CN ¥ 4.12b | CN ¥ 4.37b | CN ¥ 4.57b |
Source of estimated growth rate | Analyst x3 | Analyst x3 | Analyst x1 | Analyst x1 | Est @ 20.11% | Est @ 14.52% | Est @ 10.61% | Est @ 7.87% | Est @ 5.95% | East @ 4.61% |
Present value (CN ¥, million) discounted at 7.1% | CN ¥ 931 | CN ¥ 1.3k | CN ¥ 1.5k | CN ¥ 1.9k | CN ¥ 2.1k | CN ¥ 2.3k | CN ¥ 2.4k | CN ¥ 2.4k | CN ¥ 2.4k | CN ¥ 2.3k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = CN ¥ 19b
It is now a matter of calculating the Terminal Value, which takes into account all future cash flows after this ten-year period. 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 used the 5-year average of the 10-year government bond yield (1.5%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 7.1%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = CN ¥ 4.6b × (1 + 1.5%) ÷ (7.1% – 1.5%) = CN ¥ 82b
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= CN ¥ 82b ÷ (1 + 7.1%)^{ten}= CN ¥ 42b
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total value of equity, which in this case is CN ¥ 61b. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current share price of HK $ 64.0, the company appears to be quite undervalued with a 43% discount to the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
We draw your attention to the fact that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view Jinke Smart Services Group 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 into account debt. In this calculation, we used 7.1%, which is based on a leveraged beta of 1.041. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
To move on :
While a business valuation is important, it shouldn’t be the only metric you look at when researching a business. The DCF model is not a perfect equity valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. Why is intrinsic value greater than the current share price? For Jinke Smart Services Group, there are three key factors you should research further:
- Risks: As an example, we have found 1 warning sign for Jinke Smart Services Group that you need to consider before investing here.
- Future benefits: How does the growth rate of 9666 compare to that of its peers and the wider market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth expectations chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each SEHK share. If you want to find the calculation for other actions, do a search here.
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