Resultsbeat expectation

Aoyang announced 1~3Q16 results: revenue was Rmb3.5bn, up24% YoY; net profit attributable to shareholders wasRmb201mn, up 121% YoY, or Rmb0.29/sh. Operating marginrose 3.7ppt YoY thanks to business climate recovery of viscoseindustry and stable profit growth of broad health business.

Trends to watch

Improved supply-demand condit ions of viscose staplefiber helped to improve gross margin. Due to productionsuspension arising from environmental issues in 2015, VSFsupply-demand conditions have clearly improved and prices haverebounded from the bottom. Now VSF has ASP of Rmb16,400/t,up 30% from year-beginning level. This, combined with declinedprices of energy and raw materials, pushed up gross profit pertonne and resulted in sustained gross margin expansion. Aoyanghas attributable VSF production capacity of 230kt （one of thelargest in China） and enjoys broad earnings upside.

Double engines to drive stable earnings growth withentry into broad health business. In 2015, the companyacquired Aoyang Health Industry Investment Holdings whichoperates four hospitals with a total of 2,200 beds. We expectrapid cross-regional replication of the broad health businessthrough chain-based operation of rehabilitation hospitals.

Earnings forecast

We raise 2016e EPS by 10.1% from Rmb0.31 toRmb0.34 and maintain 2017e EPS at Rmb0.64.

Valuation and recommendation

The stock is trading at 33/18x 2016/17e P/E. We maintain ourBUY rating and Rmb15.00 target price, implying 34.17% upside.

Risks

Viscose demand and promotion of healthcare businessdisappoint; average valuations slide.