Our target price for DF of Rmb13.00/share is based on a DCF model, which we believe is a suitable valuation methodology given that cash flows are relatively stable for the power grid equipment industry in China. Our model incorporates our forecasts for cash flows up to 2030E and assumes a terminal growth rate of 4.0%. We apply a cost of equity of 12.5%, derived from a risk-free rate of 5.2%, a market risk premium of 6.8%, and an equity beta of 1.10x (according to Bloomberg). Our target price equates to a 2025E P/E of 21.0x and P/B of 2.7x.

Key downside risks that could cause DF's shares to trade below our target price include: (i) lower-than-expected PRC grid capex; (ii) potential negative free cash flow and limited dividend; and (iii) higher-than-expected raw-material costs.