Our target price for Angel Yeast of Rmb40.4 is based on a DCF model that employs a WACC of 7.1%, risk-free rate of 2.0%, market risk premium of 8.0%, and equity beta of 0.74 – and assumes a long-term growth rate of 2.0%. Our target price is equivalent to 21x 2025E P/E. We believe a DCF is the appropriate valuation methodology for Angel Yeast given the capital intensity of its business and as growth is capex-driven.

Key downside risks that could prevent the shares from reaching our target price include: 1) potential price competition in the cost downcycle if demand remains weak; 2) hydrolyzed sugar cost may rise if its raw material cost hikes; and 3) further domestic capacity expansion will increase molasses demand.