Key Insights
- Using the Dividend Discount Model, Zhejiang Xinan Chemical Industrial GroupLtd fair value estimate is CN¥9.40
- With CN¥9.56 share price, Zhejiang Xinan Chemical Industrial GroupLtd appears to be trading close to its estimated fair value
- When compared to theindustry average discount of -752%, Zhejiang Xinan Chemical Industrial GroupLtd's competitors seem to be trading at a greater premium to fair value
Does the October share price for Zhejiang Xinan Chemical Industrial Group Co.,Ltd (SHSE:600596) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
View our latest analysis for Zhejiang Xinan Chemical Industrial GroupLtd
Step By Step Through The Calculation
We have to calculate the value of Zhejiang Xinan Chemical Industrial GroupLtd slightly differently to other stocks because it is a chemicals company. Instead of using free cash flows, which are hard to estimate and often not reported by analysts in this industry, dividends per share (DPS) payments are used. Unless a company pays out the majority of its FCF as a dividend, this method will typically underestimate the value of the stock. We use the Gordon Growth Model, which assumes dividend will grow into perpetuity at a rate that can be sustained. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 3.0%. We then discount this figure to today's value at a cost of equity of 9.6%. Compared to the current share price of CN¥9.6, 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.
Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)
= CN¥0.6 / (9.6% – 3.0%)
= CN¥9.4
The Assumptions
We would point out that 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 Zhejiang Xinan Chemical Industrial 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 9.6%, which is based on a levered beta of 1.077. 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 Zhejiang Xinan Chemical Industrial GroupLtd
- Debt is well covered by earnings.
- Dividend is in the top 25% of dividend payers in the market.
- Dividend information for 600596.
- Earnings declined over the past year.
- Annual earnings are forecast to grow faster than the Chinese market.
- Good value based on P/E ratio compared to estimated Fair P/E ratio.
- Debt is not well covered by operating cash flow.
- Dividends are not covered by earnings.
- Is 600596 well equipped to handle threats?
Looking Ahead:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching 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 Zhejiang Xinan Chemical Industrial GroupLtd, there are three additional items you should assess:
- Risks: Be aware that Zhejiang Xinan Chemical Industrial GroupLtd is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...
- Future Earnings: How does 600596'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.
- 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.