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A Look At The Intrinsic Value Of YanTai Yuancheng Gold Co., Ltd. (SHSE:600766)

Simply Wall St ·  Nov 15, 2023 07:38

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, YanTai Yuancheng Gold fair value estimate is CN¥13.44
  • With CN¥14.14 share price, YanTai Yuancheng Gold appears to be trading close to its estimated fair value
  • Industry average of 501% suggests YanTai Yuancheng Gold's peers are currently trading at a higher premium to fair value

In this article we are going to estimate the intrinsic value of YanTai Yuancheng Gold Co., Ltd. (SHSE:600766) by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

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.

View our latest analysis for YanTai Yuancheng Gold

Crunching The Numbers

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (CN¥, Millions) CN¥57.9m CN¥87.5m CN¥119.8m CN¥151.7m CN¥181.4m CN¥207.8m CN¥230.9m CN¥250.9m CN¥268.3m CN¥283.8m
Growth Rate Estimate Source Est @ 72.01% Est @ 51.30% Est @ 36.81% Est @ 26.66% Est @ 19.55% Est @ 14.58% Est @ 11.10% Est @ 8.66% Est @ 6.96% Est @ 5.77%
Present Value (CN¥, Millions) Discounted @ 9.2% CN¥53.0 CN¥73.4 CN¥92.0 CN¥107 CN¥117 CN¥123 CN¥125 CN¥124 CN¥122 CN¥118

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.1b

The second stage is also known as Terminal Value, this is the business's cash flow after 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 (3.0%) 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 9.2%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥284m× (1 + 3.0%) ÷ (9.2%– 3.0%) = CN¥4.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥4.7b÷ ( 1 + 9.2%)10= CN¥2.0b

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¥3.0b. 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¥14.1, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
SHSE:600766 Discounted Cash Flow November 14th 2023

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. 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 YanTai Yuancheng Gold 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 9.2%, which is based on a levered beta of 1.021. 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 YanTai Yuancheng Gold

Strength
  • Debt is not viewed as a risk.
  • Balance sheet summary for 600766.
Weakness
  • Current share price is above our estimate of fair value.
  • Key risks with investing in 600766.
Opportunity
  • Has sufficient cash runway for more than 3 years based on current free cash flows.
  • Lack of analyst coverage makes it difficult to determine 600766's earnings prospects.
Threat
  • No apparent threats visible for 600766.

Next Steps:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. 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 YanTai Yuancheng Gold, we've compiled three important items you should assess:

  1. Risks: For example, we've discovered 1 warning sign for YanTai Yuancheng Gold that you should be aware of before investing here.
  2. 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!
  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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SHSE every day. If you want to find the calculation for other stocks 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.

The above content is for informational or educational purposes only and does not constitute any investment advice related to Futu. Although we strive to ensure the truthfulness, accuracy, and originality of all such content, we cannot guarantee it.
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