Action

Upgrade to BUY and raise TP by 50% to Rmb17.

Reasoning

Turning profitable after consolidation of Yiqiao’s financial statement. In 1~3Q16, revenue increased 21.98%YoY to Rmb258mn; net profit came in at Rmb17.41mn, vs. a loss a year ago.

A wholly-owned subsidiary of Yiqiao, together with its partner, established an M&A fund to use leverageto acquire high-quality projects. 1） Shenzhou Yiqiao （Beijing） Fiscal & Taxation Information Technology Co., Ltd., awholly-owned subsidiary of Yiqiao, and Zhongqi Shengyida Investment Co., Ltd. established Shenzhen Yiqiao M&AFund. Total investment is up to Rmb500mn, with Rmb60mn from Zhongqi Shengyida, Rmb20mn from Shenzhou Yiqiao（Beijing）， and the remaining to be raised. 2） The fund will serve core business of Yiqiao, and mainly invests in sectors orenterprises which are related with core business of Yiqiao, may generate economies of scale or has synergy withexisting business, has bright outlook, and enjoy favorable policies.

Yiqiao has accelerated integration of franchisees to strengthen service capabilities and is expected toexplore enterprise data applicat ions. 1） In 1~3Q16, Shenzhou Yiqiao （Beijing） acquired 100% stake in WuxiYiguang Enterprise Management Co., Ltd. for Rmb23.5mn and 100% stake in Wuxi Yizhen Enterprise Management Co.,Ltd. for Rmb25mn. The M&A fund may help Yiqiao accelerate acquisition of premium projects and to expand marketshare; 2） Up to now, Yiqiao has consolidated 134 stores. Based on clients of offline stores, Yiqiao is expected to improveprofitability through better services, explore enterprise data applications such as big data precision analysis.

Earnings forecast and valuation

Raise earnings forecasts and upgrade to BUY: 1） Maintain 2016/17e revenue forecast at Rmb399mn/399mn butraise 2016/17e earnings forecasts by 732%/63% to Rmb40.29mn/51.46mn, or Rmb0.05/0.07 pershare, up 27.7% YoY in 2017. 2） The original shareholder promised that net profit should be Rmb79.99mn for 2016.

Fengdong Thermal Technology which has the most similar business model with Yiqiao now trades at 125x 2016e P/E.

Yiqiao has a valuation of about Rmb10bn at this level. Maintain valuation forecast of Qinghai Gelatin’s traditionalbusiness at Rmb3bn. Raise TP by 54.55% to Rmb17 （market cap of Rmb13bn）。

Risks

1） Traditional manufacturing business drags earnings; 2） cross-regional/-sectoral expansion disappoints; 3） substantialgrowth in offline employees leads to significant cost pressure.