Our price target for DQR is Rmb12.70. We value DQR on a probability-weighted approach based on our DCF model – an appropriate method in our view because of the stable cash flow generated from railway passenger and cargo operations. Key DCF assumptions include a WACC of 11.2% and a terminal growth rate of 2%.

We apply the highest probability (90%) to our base case scenario, given DQR's highly predictable cash flows and earnings outlook. We apply a 5% probability to our bull case scenario to reflect the mild possibility of a greater-than-expected recovery in traffic demand.