We use a sum-of-the-parts (SOTP) method to value AviChina by adding up the market values of the four subsidiaries listed on the A-share market plus the unlisted businesses (10x earnings – based on China’s engineering sector average with a premium owing to an oligopolistic market). We apply a 45% holding company discount to the NAV, vs the 54% long-term average, as we expect the A/H valuation gap to narrow gradually. Our valuation delivers a target price of HK$5.0, implying 10x FY25E PE, which we think is justified as AviChina looks well positioned to enjoy the general aviation development as well as growing military spending.

Key downside risks that could cause the shares to fail to reach our target price include: 1) delays in airspace opening and general aviation development; 2) delays in orders from government and overseas customers; 3) setbacks for the government's military spending; 4) sharp price decline of its four A-share subsidiaries; and 5) unfavorable terms in future M&A.