Investment positives

The viscose sector’s supply-demand conditions are improving. Weare upbeat that the staple fiber in the viscose sector willbottom out and conservatively forecast an average price ofRmb14,000/t in 2016 (+9% YoY) and Rmb15,500/t in2017 (+11% YoY). Aoyang Technology is a bellwether inVSF and should enjoy broad earnings upside, as rising pricesfor viscose products boost its earnings. We estimate that anRmb1,000/t rise in the VSF price will enhance EPS by Rmb0.21.

Full-load operations for VSF; limited new capacity before2018. Sector-wide utilization has reached 93%, and real effectiveutilization has approached 100%, as the remaining capacity remainsidle due to environmental issues. Capacity should expand ~3% over2016~2017, while downstream demand enjoys a stable growth of5% p.a.

Cotton prices to provide support; expectation of RMBdepreciation to boost viscose exports/downstream textiledemand. Venture into healthcare business andtransformation into a leading private healthcare serviceprovider. Aoyang’s healthcare business promises Rmb60mn/72mnprofit in 2016/2017, contributing 23% and 15% net profit.

Financials

We forecast 2016/17e EPS at Rmb0.37 (+88% YoY) andRmb0.70 (+91% YoY), with a contribution of Rmb0.28/Rmb0.60from the viscose business and Rmb0.09/Rmb0.10 from healthcare.The shares are trading at 34x/18x 2016/17e P/E.

Valuation and recommendation

Initiate Aoyang Technology with BUY. Based on an SOTP, weset our TP at Rmb15 (offering 21% upside) by giving theviscose business a 20x 2017e P/E and the healthcarebusiness a 30x 2017e P/E, implying a target market cap ofRmb10.5bn (Rmb8.3bn + Rmb2.2bn).

Risks

Earnings at the healthcare business and consolidation disappoint;viscose prices fall. .