Asia Aroma is a leading domestic natural flavor supplier and capitalizes on the rapid development of the industry by continuously expanding its production capacity and upgrading its product mix. Leveraging its strengths in production and R&D, as well as strong brand barriers, the Company has been consistently consolidating its market-leading position while creating further growth upside. Additionally, it has been proactively building a presence in synthetic biotechnologies by utilizing enzymes and fermentation processes to enhance existing product lines, thereby constantly optimizing its profitability. We forecast its 2023E/24E/25E attributable net profit (ANP) to be Rmb120mn/177mn/248mn. Based on the PE and EV/EBITDA valuation methods, we assign a target price of Rmb45 (implying 20x 2024E PE) and initiate coverage with a "BUY" rating.

Domestic natural flavor leader posted an ANP CAGR of c.27% over 2016-22.

Asia Aroma is mainly engaged in natural flavors, synthetic flavors and coolants, with an annual flavor output at about 3ktpa. It has been focusing on the industry for more than twenty years and has developed into a domestic leading natural flavor supplier with international significance. As a local natural flavor leader, the Company demonstrates strong growth attributes and has posted sustained rapid earnings growth.

The Flavor and fragrance markets grow steadily to offset cyclical fluctuations, presenting broad prospects for natural flavors.

The consumption of flavors and fragrances is concentrated in the non-discretionary category. According to the data from Grand View Research, a market research and consulting company, food & beverages and household and personal care products accounted for 88% in the downstream market, with the global market size of flavors and fragrances posting a CAGR of c.4% over 2016-2022. In recent years, with the gradual growing of the concepts regarding food safety, green and pollution-free, along with the help of policy promotion, the natural flavor market sees broad growth prospects. As the domestic natural flavor leader, Asia Aroma stands well to fully benefit.

The Thailand project under construction may double the Company's capacity, while synthetic biotech may reduce costs and enhance profits.

Driven by capacity expansion and technological innovation, Asia Aroma stands well to post growth in both shipments and profits. In terms of capacity expansion, the Company continues to ramp up its flavor production capability through acquisitions, self-construction, and other strategic approaches. By the end of 2021, the actual scale of self-production capacity has tripled compared to 2018. Moreover, the Company's flavor production capability is likely to double if its planned Thailand investment project, as a part of its overseas expansion, reaches full production. In terms of technological innovation, a new era of synthetic biotechnologies beckons in terms of natural flavor preparation.

Following the successful industrialization of relevant technologies, we expect the Company to effectively optimize its product gross profit margin (GPM) while leveraging its cost advantages to further expand market share.

Potential risks: Large fluctuations in raw material prices; environmental issues and workplace safety incidents; international trade frictions; significant fluctuations in exchange rates; slower-than-expected progress of the Thailand project under construction; the release of domestic production capacity not up to expectations; risks associated with new technologies and product development; intensified industry competition; changes in product classification standards.

Investment recommendation: We forecast Asia Aroma's 2023E-25E ANP to be Rmb120mn/177mn/248mn (implying a 2023-25 CAGR of c.44%), equivalent to EPS forecasts of Rmb1.48/2.19/3.06 respectively. Meanwhile, the 2023E-25E CAGR for the ANP of its comparable companies is averaged at c.26% based on Wind consensus estimates. Considering the Company's leading position in natural flavors, coupled with the likely sustained high earnings growth backed by the completion of its Thailand project and the implementation of synthetic biotechnologies, we combine both PE and EV/EBITDA valuation methods and give certain valuation premiums to the Company. We assign 20x 2024E PE (51x 2024E EB/EBITDA) to derive a target price of Rmb45, corresponding to a target market cap of Rmb3.6bn, and initiate coverage with a "BUY" rating.