Results in line with expectations

Aoyang Technology announced 1H16 results: revenue wasRmb2.2bn, up 17% YoY; net profit attributable to shareholderswas Rmb94.30mn, up 121% YoY, or Rmb0.14 per share. Duringthe period, revenue from viscose business rose 27% YoY toRmb1.4bn thanks to rising viscose prices.

Trends to watch

VSF prices expected to rise.

Double engine to drive growth with entry intohealthcare business. In 2015, Aoyang acquired Aoyang HealthIndustry Investment Holdings, which operates hospitals with atotal of 2,200 beds. We expect it to realize rapid replication ofhealthcare business through chain-based operating ofrehabilitation hospitals.

Earnings forecast

Considering downside surprises in healthcare revenue, welower our earnings forecast by 15.46% from Rmb0.37 toRmb0.31 per share for 2016, and by 9.58% from Rmb0.7to Rmb0.63 per share for 2017. Maintain viscose priceassumption unchanged.

Valuation and recommendation

The stock is trading at 37x 2016e and 18x 2017e P/E. Wemaintain our BUY rating and Rmb15 target price （23x2017e P/E）， implying 29.09% upside room from the currentprice.

Risks

Viscose demand, promotion of healthcare business, fallingaverage valuations.