Our target price for Yunnan Baiyao of Rmb70 is derived from a PE-based sum-of-the-parts analysis of the group’s businesses – Rmb32/sh for TCM manufacturing, Rmb29/sh for consumer goods and Rmb4.1/sh for pharma distribution and Rmb4.9/sh for net cash. Our target PE for the TCM business is based on the 2025E average for TCM sector average (21.5x) with 20% premium given its well-known brand awareness Yunnan Baiyao; for pharma distribution its industry-average PE is at 9x as a regional distribution leader; for the consumer-goods segment, we assign a target 2025E P/E of 30x based on a 20% premium to the average of China consumer stocks, as its Baiyao toothpaste brand is a market leader (highest market share in the China toothpaste market in 2024) with stable sales.

Downside risks that could mean the Yunnan Baiyao shares fail to achieve our target price include: Irrelevant M&As at the parent company level; slower-than-expected sales growth of consumer products; and the rising cost of raw materials in TCM manufacturing.