Calculating The Fair Value Of JinkoSolar Holding Co., Ltd. (NYSE:JKS)

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How far off is JinkoSolar Holding Co., Ltd. (NYSE:JKS) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. I will be using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

View our latest analysis for JinkoSolar Holding

The model

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, 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

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

Levered FCF (CN¥, Millions)

CN¥-2.64k

CN¥-1.46k

CN¥641.86

CN¥914.14

CN¥1.19k

CN¥1.46k

CN¥1.70k

CN¥1.90k

CN¥2.08k

CN¥2.24k

Growth Rate Estimate Source

Analyst x1

Analyst x1

Analyst x1

Est @ 42.42%

Est @ 30.51%

Est @ 22.18%

Est @ 16.34%

Est @ 12.26%

Est @ 9.4%

Est @ 7.4%

Present Value (CN¥, Millions) Discounted @ 14.65%

CN¥-2.31k

CN¥-1.11k

CN¥425.91

CN¥529.08

CN¥602.29

CN¥641.84

CN¥651.32

CN¥637.74

CN¥608.55

CN¥570.06

Present Value of 10-year Cash Flow (PVCF)= CN¥1.25b

"Est" = FCF growth rate estimated by Simply Wall St

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 10-year government bond rate (2.7%) 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 14.7%.

Terminal Value (TV) = FCF2029 × (1 + g) ÷ (r – g) = CN¥2.2b × (1 + 2.7%) ÷ (14.7% – 2.7%) = CN¥19b

Present Value of Terminal Value (PVTV) = TV / (1 + r)10 = CN¥CN¥19b ÷ ( 1 + 14.7%)10 = CN¥4.91b

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¥6.17b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value estimate in the company’s reported currency of CN¥142.07. However, JKS’s primary listing is in China, and 1 share of JKS in CNY represents 0.145 ( CNY/ USD) share of NYSE:JKS, so the intrinsic value per share in USD is $20.58. Relative to the current share price of $21.27, 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.

NYSE:JKS Intrinsic value, June 4th 2019
NYSE:JKS Intrinsic value, June 4th 2019

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 JinkoSolar Holding 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 14.7%, which is based on a levered beta of 2. 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.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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 JinkoSolar Holding, I've compiled three important aspects you should look at:

  1. Financial Health: Does JKS have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Future Earnings: How does JKS'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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of JKS? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock just search here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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